Test Bank For Economics Today The Macro View 20th Edition By Roger LeRoy Miller by ACADEMIAMILL

TEST BANK Economics Today the Macro View 20th Edition by Roger LeRoy Miller Economics Today, 20e (Miller) Chapter 1 The Nature of Economics 1.1 The Power of Economic Analysis 1) The economic way of thinking will help you A) make decisions in financing your home. B) analyze solutions to economic problems. C) make better decisions concerning your education. D) all of these Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 2) Economic analysis is used A) only by instructors and students in economics to understand the world. B) only by business people to raise profits. C) only by policy makers to make policy decisions. D) in decision making. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 3) Economic analysis is a tool that A) aids decision making. B) helps us understand why people make mistakes. C) helps us forgive selfish people. D) makes everyone rich. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

4) Economics is best defined as the A) study of how people make choices to satisfy their wants. B) study of individual self-interests. C) study of why people do not react to incentives. D) process by which goods are sold in free markets. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 5) Economics can be described as the study of how people use ________ resources to satisfy ________ wants. A) unlimited; unlimited B) unlimited; limited C) limited; unlimited D) limited; limited Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 6) Which statement most accurately describes economics? A) Economics is the study of how people make money. B) Economics is the study of how people make choices to satisfy their wants. C) Economics is the study of social values a society should choose. D) Economics is the study of how to eliminate scarcity. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

7) In economic analysis, people's resources are A) limited and their wants are unlimited. B) unlimited and their wants are also unlimited. C) limited and their wants are also limited. D) unlimited and their wants are limited. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 8) In economics, items that are used to produce goods and services are known as A) wants. B) needs. C) outputs. D) resources. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 9) In economics, all the items that people would consume if they had unlimited income are known as A) wants. B) aggregates. C) outputs. D) needs. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

10) In economics, ________ are limited but ________ are unlimited. A) wants; resources B) resources; wants C) money; ideas D) ideas; money Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 11) Economics is the study of how A) people become selfish. B) preferences are determined. C) psychology influences preferences. D) people make choices. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 12) A fundamental aspect of economics is to A) ensure that every firm makes a profit. B) analyze how choices are made. C) satisfy all our wants. D) make sure that we always have sufficient resources. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 13) Economics is the study of A) how to get rich. B) how people allocate their limited resources to satisfy their unlimited wants. C) how people spend their income. D) why people want certain goods and services rather than other goods and services. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 4 Copyright © 2021 Pearson Education, Inc.

14) Economics is the study of A) nonhuman phenomena. B) the determinants of preferences. C) scarce resources and unlimited wants. D) the physical sciences. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 15) Economics deals with A) how to profit from the stock market. B) how to satisfy limited human wants. C) how society allocates unlimited resources. D) how individuals allocate scarce resources to satisfy unlimited human wants. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 16) Economics is the study of A) how to own as many resources as possible. B) ceteris paribus. C) the way people think rather than the way they act. D) how people allocate their limited resources to satisfy their unlimited wants. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

17) Economic resources are A) all the items that people would purchase if they had limited wants. B) all the unlimited items that people would purchase with limited income. C) items of value that are used to make other things that satisfy people's wants. D) the total planned expenditures throughout the nation. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 18) Economics deals with choices A) that involve the wants of individuals. B) that involve what people only need to survive. C) that people make without self-motivated interest. D) that people normally do not make. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 19) Economics is a social science that involves the study of how individuals A) develop their tastes and preferences. B) develop their goals and objectives in life. C) pursue happiness. D) choose among alternatives to satisfy their unlimited wants. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 20) Economics is a part of the A) social sciences. B) natural sciences. C) biological sciences. D) hard sciences. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

21) Wants are A) another term for needs. B) the things people would consume if they had unlimited incomes. C) the things people consume with their income. D) all the things people really need in order to live comfortably. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 22) The primary purpose of economics is to understand how people make A) money. B) mistakes. C) choices. D) a comfortable living. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 23) The primary objective of economics is A) to learn how to create more resources. B) to study how people make choices with limited resources. C) to learn how to make the most profits with a given amount of resources. D) to study why some people are never happy with the resources they have. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

24) The basic economic problem is a situation of A) limited resources and unlimited wants. B) both limited resources and limited wants. C) limited incomes and unlimited choices. D) unlimited incomes and limited choices. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 25) Economics is the study of how people make A) subjective judgments. B) life easy. C) money. D) choices. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 26) Economics is a A) hard science. B) physical science. C) natural science. D) social science. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 27) Economics is a study of A) how to make money in the stock market. B) how to run a business successfully. C) the allocation of scarce resources. D) personal finance. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 8 Copyright © 2021 Pearson Education, Inc.

28) Economics is the study of A) the allocation of scarce resources to satisfy unlimited wants. B) why some people want certain goods and services. C) earning the most income. D) ways to use fewer resources. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 29) Resources are A) unlimited. B) able to be replicated in large quantities. C) what people would buy if their income was unlimited. D) used to produce goods and services to satisfy people's wants. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 30) ________ are the things that are used to produce items that satisfy people's wants. A) Concepts B) Production possibilities curves C) Resources D) Costs Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

31) Economics is most precisely defined as A) a study of what people need to survive. B) a study of how culture evolves in different geographic areas. C) the same as the study of finance and management. D) the study of how people make choices. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 32) Economics A) is a social science. B) is concerned with limited resources. C) is concerned with unlimited wants. D) all of these are correct. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 33) Which of the following is NOT a focus of the study of economics? A) how individual preferences are formed B) unemployment C) inflation D) prices in particular markets Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 34) Because resources are scarce relative to wants, the study of economics concerns A) how money is important to people. B) how individuals, businesses, and governments make choices. C) how money is used to buy what people want. D) None of these are correct. Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

35) In economics A) both resources and wants are limited. B) both resources and wants are unlimited. C) resources are limited but wants are unlimited. D) resources are unlimited but wants are limited. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 36) Which of the following is a characteristic of economics? A) allocation of limited resources in an effort to satisfy potentially unlimited wants B) the focus on how people behave not in their own self-interest C) the way society deals with people's needs D) all of these Answer: A Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 37) Microeconomics is defined as that part of economic analysis that A) studies the behavior of the economy as a whole. B) includes the problems of inflation and unemployment. C) studies individual decision making by households and firms. D) concerns aggregate production and consumption. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 38) Macroeconomics is the study of A) aggregate economic variables. B) output in particular industries. C) how individuals make important decisions. D) all of these. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 11 Copyright © 2021 Pearson Education, Inc.

39) Microeconomics is the study of A) the behavior of the economy as a whole. B) a nation from the perspective of the whole world. C) how individuals and firms make decisions. D) the effect that money has in the economic system. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 40) Macroeconomics is best defined by which of the following statements? A) Macroeconomics is the study of how firms attempt to maximize profits. B) Macroeconomics is the study of the behavior of the economy as a whole. C) Macroeconomics is the study of individual households. D) Macroeconomics is the study of how the prices of individual goods are determined. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 41) Macroeconomics deals with ________ while microeconomics deals with ________. A) choices important to people; choices not important to people B) economywide choices; choices of individuals C) choices that involve money; choices that does not involve money D) choices of rich people; choices of poor people Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 42) Macroeconomics deals with A) aggregates within the economy. B) specific sectors within the economy. C) only large households in a country. D) decisions made by firms. Answer: A Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking

43) Which of the following would most likely NOT be taught in a microeconomics course? A) changes in prices of automobiles B) the effects of a gas tax on gas purchases C) the effect of an increase in wheat prices on farmers' behavior D) changes in unemployment across the nation Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 44) Which of the following would most likely NOT be taught in a macroeconomics course? A) price changes in the world's oil markets B) factors leading to different economic growth rates among countries C) government actions in response to a slowdown in the economy D) the relationship between the inflation rate and the unemployment rate Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 45) A macroeconomist would study A) the price changes of smart phones. B) the cost problems at several airlines. C) the economy's total income level. D) none of these Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 46) A microeconomist would study all of the following issues EXCEPT A) the impact of a change in consumer income on the sales of corn. B) the impact of a snowstorm on the sales of snow shovels. C) the most efficient means for General Motors to produce an automobile. D) the effect of a change in income taxes on the nation's rate of unemployment. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

47) A macroeconomist would most likely study A) the effects of changing grape prices on the market for oranges. B) the effects of an increase in wage rates on a woman's decision to enter the labor force. C) the effects of a lower income tax rates on the nation's total production of goods and services. D) the effect of increased union wages on the cost of producing automobiles. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 48) The impact of higher taxes would be examined by A) a microeconomist. B) a macroeconomist. C) both a macroeconomist and a microeconomist. D) neither a macroeconomist nor a microeconomist. Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 49) One topic of study for a microeconomist would be the A) causes of inflation. B) causes of a nation's unemployment level. C) effects of a gasoline price increase on consumer behavior. D) effects of an increase in government spending on overall economic activity. Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 50) A friend wants to learn how a nation's unemployment rate is calculated and how it changes over time. He asks you which economics course to take and you advise him to enroll in A) macroeconomics. B) microeconomics. C) either micro- or macroeconomics. They both concentrate equally on those issues. D) political science because economics doesn't address those topics in its courses. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

51) Which of the following would likely be studied in a macroeconomics course? A) the unemployment rate B) total output in an economy C) the inflation rate D) all of these Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 52) Macroeconomics is concerned with A) individual consumers. B) government decision making concerning farm price supports. C) aggregates. D) the effects on a corporation of a strike by the United Auto Workers. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 53) Macroeconomics often relies on microeconomic analysis because A) microeconomics is older than macroeconomics. B) microeconomic theory can be tested and macroeconomic theory cannot be tested. C) all aggregates are made up of individuals and firms. D) the effects of macroeconomic subjects such as inflation and unemployment are independent of individual consumers and firms. Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 54) Microeconomics is concerned with studying which of the following? A) the determinants of national unemployment B) the effects of monetary policy C) the study of a nation's workforce D) none of these Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

55) Microeconomics is concerned with the study of A) the effects of inflation. B) the effects of government spending. C) the effects on individual producers of higher wages paid to workers. D) aggregates. Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 56) Microeconomics focuses on A) individual decision makers. B) decisions only on small expenses. C) small changes in an economy. D) satisfying the specific needs of a community. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 57) Macroeconomics is concerned with A) individual business firms. B) specific markets. C) individual consumers. D) a nation's economy. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 58) Microeconomics examines the A) total household expenditures. B) behavior of the economy as a whole. C) aggregate business spending. D) decision making undertaken by individual households. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 16 Copyright © 2021 Pearson Education, Inc.

59) Macroeconomics is concerned with studying the A) behavior of individual decision makers. B) performance of the economy as a whole. C) prices of specific companies' stocks. D) wants of individual consumers. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 60) Macroeconomics would be concerned with A) implications of changes in unemployment and inflation. B) the effects on individual consumers of changes in the price of gasoline for a business. C) the effects of a tax on beer. D) the effects of wage increases on steel manufacturers. Answer: A Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 61) The study of an individual's choice about what type of computer to buy is a subject of A) macroeconomics. B) microeconomics. C) an aggregate concept. D) not a concern for economic analysis. Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 62) The study of the aggregate economic variables is A) macroeconomics. B) microeconomics. C) positive economics. D) normative economics. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking

63) In economics, the word "aggregate" refers to A) the government. B) how individual households differ from each other. C) the public sector itself. D) an economy as a whole. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 64) The distinction between microeconomics and macroeconomics is A) clearly drawn, and there is no overlap between them. B) determined by economists in a clear and concise manner. C) narrowly drawn, and microeconomic analysis often relies on macroeconomic tools. D) often blurred because aggregates are made up of individuals and firms. Answer: D Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 65) Modern economists are increasingly using microeconomic analysis in macroeconomics because A) microeconomic theory is more scientific. B) aggregate outcomes stem from decisions made by individuals, business firms and government. C) macroeconomic subjects such as inflation affect all individuals. D) macroeconomics is older and more outdated. Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 66) Which of the following is NOT studied in microeconomics? A) the effect of an increase in gasoline taxes on the purchase of gasoline B) the impact of government spending on the unemployment rate C) the impact of firms' hiring choices on their employees' wages D) the impact of higher fuel prices on the cost of airline tickets Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 18 Copyright © 2021 Pearson Education, Inc.

67) All of the following are examples of macroeconomic problems EXCEPT A) inflationary pressures caused by an increase in the cost of petroleum. B) unemployment caused by a fall off in the level of residential construction. C) a decline in the rate of overall economic growth. D) consumers deciding to buy more fish and less beef because of concerns about a healthier diet. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 68) Macroeconomics is concerned primarily with A) large firms or multinational corporations. B) production and prices in particular markets. C) aggregate economic variables. D) normative issues. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 69) Microeconomics studies A) decisions made by individual consumers and firms. B) the changes in economic theory brought about by changes in the nationwide economy. C) how changes in the nation's birth rate affect its labor force. D) how changes in the money supply affect how much households consume. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 70) Which of the following terms identifies something that macroeconomists would study but that microeconomists would NOT? A) incentives B) resources C) rationality D) aggregates Answer: D Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

71) Which of the following would likely be considered as a topic of microeconomics? A) a nation's unemployment rate B) Gross Domestic Product C) the price of apples D) the effects of fiscal policy on the economy Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 72) Macroeconomics might study which of the following? A) the causes of domestic unemployment B) decision making undertaken by firms C) decision making undertaken by households D) determinants of the prices of rare goods (e.g., diamonds) Answer: A Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 73) Which of the following is NOT a characteristic or focus of microeconomics? A) individual consumers. B) analysis of aggregate economic variables C) firm behavior D) individual markets Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 74) Which of the following is a microeconomic concern? A) the rate of economic growth in a small nation of Cuba B) the current unemployment rate in the United Kingdom C) consumer behavior in the smartphone market D) national output of Canada Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 20 Copyright © 2021 Pearson Education, Inc.

75) Which of the following is a macroeconomic concern? A) the unemployment rate in a specific industry B) the national output of the United States C) wage levels in specific industries D) the operation of an individual firm Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 76) The study of how a particular firm might choose to maximize its profits would fall into what type of analysis? A) macroeconomics B) microeconomics C) political economics D) aggregate economics Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 77) What type of economics would most typically deal with aggregates? A) macroeconomics B) microeconomics C) normative economics D) financial economics Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 78) Which of the following is a microeconomic topic? A) the increase in the amount of imports from China to the United States B) the rate at which the cost of living has increased in Canada C) the marketing strategy of the Apple Computer company D) the increase in the employment level of the United States in the past year Answer: C Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 21 Copyright © 2021 Pearson Education, Inc.

79) Which of the following topics is a macroeconomic subject? A) a proposed merger between two companies B) the level of sales at a particular department store C) increases in the overall price level of a nation D) the pricing decision of a firm Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 80) Which of the following is an aggregate? A) the number of shoes in one man's closet B) the bushels of apples one farmer sells C) the price of a particular textbook D) the total production of all goods and services Answer: D Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 81) All of the following are aspects of microeconomics EXCEPT A) monopolies. B) a firm maximizing profit. C) a worker choosing one job over another. D) the average level of prices of all goods and services produced in a country in a year. Answer: D Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 82) The impact of an increase in the gasoline tax on sales of electric vehicles is A) a macroeconomics topic because it deals with taxes. B) a microeconomics topic because it deals with one industry. C) not an economic issue, but rather a political issue. D) a normative issue and so it is not an economic topic. Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

83) Which of the following would most likely be part of the study of microeconomics? A) how General Motors makes decisions regarding its production goals B) national income C) the total economic output of our domestic economy D) overall price stability in the United States Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 84) All of the following are aspects of macroeconomics EXCEPT A) the U.S. unemployment rate. B) the production decisions of a pharmaceutical firm. C) the budget deficit of the United States. D) foreign trade. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 85) Individual decision making by consumers and producers is the focus of A) macroeconomics. B) microeconomics. C) aggregate measures. D) any economic model. Answer: B Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 86) Aggregate measures are A) anything to do with economics. B) a total measure of a variable in the economy. C) used only by policymakers but not by firms. D) determined by the government. Answer: B Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking

87) Microeconomics is the study of A) aggregate measures of the economy. B) economic issues for an entire region. C) federal budget details. D) individual decision making. Answer: D Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 88) An example of a microeconomic decision is a situation in which A) a central bank considers how much to increase the money supply during the coming month in an effort to constrain the rate of inflation. B) Congress and the president seek to reach a compromise on how much to increase government spending in an effort to influence national expenditures. C) a firm evaluates how much to reduce the price of its product in an effort to influence sales and boost its profits. D) a government contemplates buying foreign currencies in an effort to influence exchange rates and the country's demand for goods and services. Answer: C Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 89) Artificial intelligence (AI) technologies A) produce large volumes of data that make decision making more complicated. B) free businesses, governments, and consumers from making decisions. C) often reveal economic relationships that do not actually exist. D) can enable individuals to make more informed decisions. Answer: D Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

90) An example of artificial intelligence (AI) technologies is A) machine learning. B) bounded rationality. C) economic theory formation. D) a false reality technique. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 91) When a company applies data-analytics techniques to large amounts of information on product prices, quality features and quantities sold, the company is dealing with A) microeconomic issues. B) macroeconomic issues. C) non-economic issues. D) aggregate economic issues. Answer: A Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 92) What is the economic way of thinking, and why is it important? Answer: The economic way of thinking provides a framework for analyzing solutions to economic problems. Since economic problems confront all of us much of the time, knowledge of economics will enable one to arrive at better decisions, and enable one to evaluate many public policy questions in a systematic manner. Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 93) What is economics and what does it try to explain? Answer: Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. Therefore, it is the study of how people make choices. Economics tries to explain real-world behavior, especially as it relates to interactions of people confronting limited resources. Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 25 Copyright © 2021 Pearson Education, Inc.

94) Explain the study of economics. Answer: Economics is the study of how people allocate their limited resources in an attempt to satisfy their unlimited wants. Because of this contrast between limited resources and unlimited wants, economics is the study of how people make choices. Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 95) Is inflation a macroeconomic or a microeconomic question? Why? Answer: Inflation is a macroeconomic question because it deals with an economy-wide phenomenon. The price increase of a specific product, such as gasoline, would be a microeconomic matter. Since inflation deals with prices in the economy as a whole, it is a macroeconomic concern. Diff: 2 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Macro-1: Define macroeconomics and identify its basic concerns AACSB: Analytical thinking 96) Distinguish between macroeconomics and microeconomics. Answer: Macroeconomics is concerned with the behavior of the economy as a whole, while microeconomics is concerned with the choices of individual decision-makers, such as households and firms. Macroeconomics deals with aggregates, such as the total output of the economy or unemployment, while microeconomics deals with how many hours a person chooses to work or how many people a firm decides to hire. Diff: 1 Topic: 1.1 The Power of Economic Analysis Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers 1) An economic system is A) the universe of all resources. B) a way to create new resources. C) a mechanism to allocate scarce resources. D) an organization that generates profits. Answer: C Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

2) The way that a society allocates resources to satisfy human wants is called A) an economic system. B) an assumption. C) realism. D) ceteris paribus. Answer: A Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 3) The questions that an economic system attempts to solve include A) what to produce. B) how to produce items. C) for whom items are produced. D) all of these. Answer: D Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 4) Which of the following is NOT one of the basic questions that an economic system attempts to answer? A) How to identify what people need? B) What to produce? C) How will goods and services be produced? D) For whom will goods and services be produced? Answer: A Diff: 2 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

5) What is the type of economic system that relies on one central authority to make economic decisions? A) free market B) price system C) command and control D) mixed economic system Answer: C Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 6) What is the type of mechanism that answers the basic economic questions through a decentralized decision making process? A) market system B) dictatorship C) command and control D) mixed economic system Answer: A Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 7) Central planning is a key characteristic of which economic system? A) free market B) price system C) command and control D) mixed economic system Answer: C Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

8) Under a pure price system, the decision of resource allocation is made by A) the head of the government. B) those who have the right to vote in government elections. C) individuals who own the resources. D) no one. Answer: C Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 9) In a market system, the what, how and for whom questions in economics are determined by A) those who are not in the market. B) buyers and sellers together. C) the central authority. D) no one. Answer: B Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 10) Prices provide signals about resource allocation to all individuals in a ________ system. A) market B) command and control C) central planning D) political Answer: A Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

11) In a market system, ________ provide signals about whether resources are relatively scarce or abundant. A) prices B) buyers alone C) government officials D) scientists Answer: A Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 12) The United States is best known as a A) pure market system. B) dictatorship. C) command and control system. D) mixed economic system. Answer: D Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 13) A mixed economic system is best described as an economy with a mix of A) state and federal governments. B) domestic and foreign firms. C) free markets and government control. D) for-profit organizations and not-for-profit organizations. Answer: C Diff: 1 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

14) Distinguish between a command-and-control economic system and a price system. Answer: In a command-and-control economic system, economic decisions about resource allocation are made by a central authority, such as a central government or a king or queen. Under command and control, this central authority decides what items will be produced, how will the items be produced, and who will obtain those items. In a price or market system, the what, how and for whom issues are determined via decentralized decision making among buyers and sellers in the market. Diff: 2 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 15) Describe the signaling aspect of the price system regarding the three basic economic questions. Answer: In the price system, prices provide information to individual buyers and sellers about what and how many items should be produced, how production of items should be organized, and who will choose to buy the produced items. Prices basically serve as signals to everyone within the system which resources are relatively scarce and which are relatively abundant. Diff: 2 Topic: 1.2 The Three Basic Economic Questions and Two Opposing Sets of Answers Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 1.3 The Economic Approach: Systematic Decisions 1) In his book, An Inquiry into the Nature and Causes of the Wealth of Nations, economist Adam Smith argued that individuals A) always tend to act in an altruistic manner. B) always consider the impact of their actions on the welfare of others. C) are motivated by self-interest. D) are never rational. Answer: C Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

2) Economists assume that people are motivated by A) benevolence. B) altruism. C) greed. D) rational self-interest. Answer: D Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 3) One major assumption of economics is that people A) act as if they systematically pursue self-interest. B) behave randomly without any predictable pattern. C) are sometimes rational and sometimes irrational. D) always pursue the interests of others. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 4) If people act as if they systematically pursue their own self-interest, then they will most likely A) respond irrationally to any incentive. B) respond to a given incentive in a random manner. C) respond predictably to a given incentive. D) not respond to any incentive. Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 5) When studying individuals' economic behavior, economists assume that A) individuals understand the rationale for all their actions. B) individuals act as if they were rational. C) only educated people act as if they were rational. D) self-interest is of limited relevance in predicting an individual's actions. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 32 Copyright © 2021 Pearson Education, Inc.

6) The assumption that people do NOT intentionally make decisions that would leave them worse off is known as A) the rationality assumption. B) the false assumption. C) the ceteris paribus assumption. D) the normative assumption. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 7) When the text refers to rational self-interest, it means A) your looking out for what is best for you as an individual. B) your focus on your own contributions to society. C) behavior that makes society better off. D) behavior that hurts other people. Answer: A Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 8) In economics, the concept that individuals are motivated by self-interest and respond predictably to opportunities is known as A) rational behavior. B) altruism. C) normative bias. D) empiricism. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

9) Economists assume people behave rationally, which means that people A) never make a mistake. B) do not intentionally make decisions that make themselves worse off. C) have the necessary information to always make correct decisions. D) always understand the consequences of their decisions. Answer: B Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 10) Sara looks into her closet and discovers a pair of like-new shoes she no longer wears because they are out of fashion. From the economist's perspective, was Sara behaving rationally when she bought those shoes? A) No. If any of a person's decisions have poor results, that person is irrational. B) Yes, Sara didn't buy those shoes when they were out of fashion. C) No. The rationality assumption states that rational people never make mistakes. D) It's not clear because psychology, not economics, deals with the rationality assumption. Answer: B Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 11) Do economists analyze people's thought processes or do they look at what people actually do? A) Economists focus only on people's thought processes. B) Economists focus on what people do, not their thought processes. C) An economist's focus is about half-and-half between actions and thought processes. D) Macroeconomists focus on thought processes while microeconomists focus on actions. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

12) When people donate money to a charity, they behave A) rationally if the act gives them satisfaction. B) irrationally because the act does not benefit anyone. C) in an unpredictable manner because the act involves bounded rationality. D) in a way that only makes themselves worse off. Answer: A Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 13) The potential rewards that are available to an individual if a particular activity is undertaken are known as A) greed. B) irrational thought processes. C) incentives. D) intrinsic values. Answer: C Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 14) Father says, "Earn an A on your next report card and I'll help you buy a car." An economist would say that this parent is providing his child a(n) A) study disincentive. B) reason to slack off and not worry about her grades. C) bribe. D) incentive. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

15) Some pet owners are using an "invisible fence" to keep their animals from straying. Every time the animal steps over the edge of the property, it gets a mild shock. A social scientist would call the shock A) a price signal. B) a reward. C) a disincentive. D) a normative incentive. Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 16) Which of the following is TRUE of incentives? A) Different people are motivated by different incentives. B) Money is the only measure of incentives. C) All of the people in a particular nation are motivated by the same incentives. D) In economics, people are assumed to respond to disincentives instead of incentives. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 17) Economists assume people are motivated by A) unlimited resources. B) pride. C) self-interest. D) social justice. Answer: C Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

18) Self-interest relates to A) only monetary objectives. B) both monetary and nonmonetary objectives. C) the ceteris paribus assumption. D) normative economic analysis and not positive economic analysis. Answer: B Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 19) Economists assume people behave A) instinctively. B) rationally. C) irrationally. D) greedily. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 20) Which of the following is always TRUE of rational behavior? A) It always entails pursuing one's own best interest. B) It always yields the best possible outcome for all individuals. C) It never involves the pursuit of greedy self-interest. D) It never involves taking into account the interests of others. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

21) John has a math test tomorrow. He has decided to go to the gym today and then study math for several hours. Which of the following statements is TRUE? A) John did not use the economic way of thinking because his decision on how to allocate his time did not involve money. B) John's decision on how to allocate his time is inconsistent with the rationality assumption since he has decided to go to the gym. C) John's decision on how to allocate his time is consistent with the rationality assumption since the decision is intended to make him better off. D) John's decision does not involve his pursuit of self-interest. Answer: C Diff: 3 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 22) People behave rationally when they A) follow the advice of government leaders. B) never have regrets about their decisions. C) make decisions they think will make themselves better off. D) make decisions with a focus only on financial outcomes. Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 23) Which of the following is a TRUE statement about the economic assumption of rationality? A) Individuals who are rational necessarily ignore the interests of others. B) Individuals generally act as though they are rational. C) Individual behavior may be irrational but group behavior is always rational. D) People make decisions as if they are most selfish in the world. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

24) A decision made by a rational person A) is intended to make the person worse off. B) would always make the person wealthier. C) is identical to a decision that would be made by any other person facing the same choices. D) is intended to make the person better off. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 25) The assumption that individuals will not intentionally make decisions that will leave them worse off is known as A) microeconomic analysis. B) macroeconomic analysis. C) a model or theory. D) the rationality assumption. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 26) The rationality assumption says that A) people do not intentionally make decisions that would leave them worse off. B) people never make decisions that would leave them worse off. C) people do not respond to incentives since incentives require scarce resources. D) all economic analysis must be normative. Answer: A Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

27) Jose is rational if he A) does not intentionally make decisions that would leave him worse off. B) never makes a mistake in his life. C) only responds to rewards that involve money. D) always uses a model or mathematical formula to help him make a decision. Answer: A Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 28) A possible rational reason why older people, on average, show less interest in learning how to use new technologies is because A) older people are not as smart as (today's) young people. B) they are acting irrationally. C) they have fewer years to gain a return from learning how to use new technologies. D) the financial cost for older people is greater than the cost to younger people. Answer: C Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 29) Incentives are A) potential rewards available if a particular activity is undertaken. B) ineffective as a device to get people to behave in a certain fashion. C) inappropriate ways to obtain a certain kind of behavior. D) useless when people behave rationally. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

30) Which of the following would provide an incentive to increase the amount of beef consumed? A) a decrease in the price of beef B) a tax on beef sales C) promotion of chicken consumption D) a ban on beef sales by the Food and Drug Administration Answer: A Diff: 3 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 31) People respond to incentives A) by ignoring negative incentives and responding to positive incentives only. B) only when they are irrational. C) as they never intentionally make decisions that would leave them worse off. D) when they have low incomes. Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 32) The threat of a large fine for failure to pay income taxes is an example of A) the excessive power of the Internal Revenue Service. B) the ineffectiveness of incentives to get people to pay their taxes. C) a negative incentive to get all people to pay taxes. D) people failing to consider all the benefits the government provides them. Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

33) A politician says that the government should tax behavior they want less of and subsidize behavior they want more of. This is an example of A) cynical behavior in modern democracies. B) failing to consider the alternatives available to the government. C) a concern that people are not rational when they make decisions. D) using incentives to alter behavior. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 34) Which of the following ways to recruit soldiers utilizes incentives? A) a draft B) universal service C) higher salaries D) waging a war on another country Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 35) Self-interest A) implies that a person must try to increase wealth at all times. B) implies that people will not give away wealth. C) is consistent with many goals that people pursue, including betterment of others. D) applies only to people in market settings. Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

36) Self-interest A) relates strictly to material well-being, such as a person's stock of wealth at a point in time. B) is measured entirely based on an individual's income, whether earned from labor or inherited. C) is inconsistent with economic analysis, which suggests that self-interest is irrational. D) can involve any action that makes a person feel better off, such as charitable contributions. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 37) Kelly's mother gives her a laptop for her graduation from high school, but Kelly wants a smartphone. This implies that A) Kelly's mother is not acting out of self-interest because she knows that Kelly really wants a smartphone. B) Kelly's mother is acting out of self-interest because she wants to give Kelly something more expensive. C) Kelly is not acting out of her self-interest by wanting something different from what her mother gives her. D) Kelly is not rational by asking for a smartphone instead of a laptop. Answer: B Diff: 3 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 38) Charitable donations to the Red Cross A) can be explained by the rational ignorance theory. B) can be explained by the rational self-interest theory. C) cannot be explained by the rational self-interest theory. D) prove that there is no scarcity in the United States. Answer: B Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

39) A five-cent deposit on soda bottles A) provides a positive incentive because it rewards people for recycling. B) provides a negative incentive because it punishes people who do not recycle. C) is an irrational policy, because it adds to the prices of soda. D) is an irrational policy, because it fails to take into account self-interest. Answer: A Diff: 3 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 40) If a teacher tells a student that those who attend the study session typically score higher on the final exam, A) the student has a positive incentive to attend the study session because she may get a higher grade. B) the student has a negative incentive to attend the study session because she will be punished if she does not go. C) the student has no greater incentive to attend because there is no guarantee she will get a higher grade on the exam. D) a "C" student will be making an irrational decision if she decides to skip the study session since she has plenty of time to go. Answer: A Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 41) Consider the case of a teacher who tells students that those who miss more than three classes for any reason will automatically receive a lower grade. A) This is an example of a positive incentive for students to attend class. B) This is an example of a negative incentive for students to attend class. C) The teacher is assuming that students are irrational, and she must force them to attend class. D) Students who miss more than three classes are irrational. Answer: B Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

42) If the government offers to reduce your property taxes by 10 percent if you install solar heating for your home, this would be an example of A) a violation of the rational assumption. B) incentives. C) disincentives. D) ceteris paribus. Answer: B Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 43) Economists assume that people are motivated by A) a desire to please others. B) the interests of the community at large. C) self-interest. D) morally correct behavior. Answer: C Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 44) When we say that an individual behaves according to "rational self-interest," we mean that this individual A) is motivated by greed. B) will always buy the most fashionable items available. C) never considers the well-being of any other individual. D) is making choices that he or she believes will leave him or her better off. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

45) Rational behavior for an economist means that individuals A) are motivated by self-interest. B) never change their minds. C) always value societal needs more than their own needs. D) are self-sacrificing. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 46) According to economists, when two people make exactly the opposite decision A) one of them is acting irrationally. B) each person evaluates the situation according to his/her individual self-interest. C) one of them is acting out of spite. D) one of them should compromise. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 47) It is assumed in economics that people make decisions based upon A) altruism. B) rational self-interest. C) tradition. D) perfect information about every aspect of the world. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 48) An incentive is a A) need. B) want. C) reward for desired behavior. D) concept that does not actually affect people's behavior. Answer: C Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

49) The assumption that individuals do NOT intentionally make decisions that would leave them worse off is referred to as A) the premium assumption. B) the law of comparative advantage. C) the rationality assumption. D) a ceteris paribus assumption. Answer: C Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 50) The author of the book An Inquiry into the Nature and Causes of the Wealth of Nations is A) Thorstein Veblen. B) Adam Smith. C) Donald Trump. D) Janet Yellen. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 51) Rational self-interest means A) always increasing your wealth. B) pursuing what makes you better off. C) pursuing activities that maximize income. D) always pursuing activities that are consistent with your faith. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

52) The rationality assumption states that A) all actions taken by consumers are based on what is good for society. B) people make decisions regardless of how the outcome will affect them. C) people make decisions to buy only those goods that they need rather than goods that they want. D) people do not intentionally make decisions that would leave them worse off. Answer: D Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 53) Economic theory predicts that people make choices in a manner that A) makes them well liked by others. B) makes them better off. C) reflects the fact that resources are unlimited. D) shows that they do not respond to monetary incentives. Answer: B Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 54) How could Adam Smith's comment about the butcher, the brewer, and the baker be accurately rephrased in modern terms? A) The butcher, the brewer, and the baker give us our dinner because they want to be well liked in the community. B) The butcher, the brewer, and the baker give us our dinner because they will be sued if they don't do so. C) The butcher, the brewer, and the baker give us our dinner because they each earn a living by doing so. D) The butcher, the brewer, and the baker give us our dinner because they view doing so as a public service. Answer: C Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

55) According to economic theory, how do people make decisions? A) They make decisions in the same manner as their parents did. B) They make decisions by looking at what others have done in the same situation and then doing the opposite. C) They make decisions by looking at what others have done in the same situation and then doing the same. D) They make decisions based on their own self-interest. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 56) The assumption underlying economic theory is that A) people respond only to negative incentives, not to positive ones. B) choices are affected by incentives. C) value judgments do not play a role in the economic decisions people make. D) money is the only incentive that matters. Answer: B Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 57) High gasoline prices give people all of the following incentives EXCEPT A) to drive less. B) to car pool. C) to buy a hybrid car. D) to take vacations that require driving more miles. Answer: D Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

58) The idea that people will not consciously make decisions that make them worse off is known as A) rationality assumption. B) the decision duality. C) Adam Smith's doctrine. D) incentive assumption. Answer: A Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 59) Explain what economists mean when they apply the rationality assumption. Answer: The rationality assumption means that people do not intentionally make themselves worse off. It does not deal with the interior reasoning of a person or the psychology of a person. Instead, rationality applies to the way people actually behave in a world of scarcity. Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 60) "Economists assume people are selfish." Do you agree with this statement or not? Explain. Answer: Economists do not assume people are selfish, although clearly some people are. Selfinterest does not necessarily mean selfishness. People have many goals, some of which may be self-centered and some of which may be more altruistic. Charity is consistent with self-interested behavior. Diff: 2 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 61) "Rational, self-interested people would never end up worse off by any decision they make. Obviously, people often make mistakes or have regrets. Therefore, people do not act rationally or out of self-interest." Do you agree with these statements? Why or why not? Answer: No. People may make mistakes because they often do not have enough information to make the best decision or because they are wrong about the effect of their actions. When they make a decision, given their circumstances and the information they have, they make the best choice for themselves. Diff: 3 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 50 Copyright © 2021 Pearson Education, Inc.

62) What assumption about human motivation is made in economics? Explain. Answer: Economists assume that people act as if motivated by self-interest. People respond predictably to opportunities for gain. That is, people look out for their own self-interest and do so in a rational manner. Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 63) What is meant by the term "incentives," and why are they important? Answer: Incentives are rewards for engaging in particular activities. Much of human behavior can be explained in terms of incentives. For example, grades in school are an incentive, as are paychecks for work. Incentives are important because rational human beings seeking to promote their own welfare will respond to incentives in predictable ways. Diff: 1 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 64) During the Middle Ages, heretics were often burned at the stake. Were the heretics violating the assumption of rational self-interest? Explain. Answer: For someone today, or even many people living at that time, it would seem the heretics' behavior was irrational and not in their own self-interest. But, in their own eyes, they may have been acting rationally and with self-interest. Given their goals, dying rather than recanting their views was in their self-interest, especially if they believed such a death guaranteed them eternal life. They believed they would have been worse off had they recanted their views. The benefit of dying for their cause was greater to them than the cost of dying. Diff: 3 Topic: 1.3 The Economic Approach: Systematic Decisions Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

1.4 Economics as a Science 1) Another term for "economic models" is A) economic systems. B) economic theories. C) economic science. D) economic institutions. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 2) A simplified representation of the real world that is used to explain economic phenomena is a(n) A) viewpoint. B) model. C) assumption. D) implication. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 3) Economics is an empirical science, which means that economists A) must use laboratory experiments to test their theories. B) evaluate a model or theory by whether its assumptions are consistent with the real world. C) try to prove their models are true by referring to logic. D) look for evidence to determine whether the model is useful or not. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

4) Both the social sciences and the natural sciences employ ________ to help them understand the world around them. A) models B) experiments C) traditional thinking D) implications Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 5) Which is NOT true about the use of economic models? A) Economic models are simplified representations of the real world. B) Economists do not typically use experiments in science laboratories to test their theories. C) Economists use what has already happened in the real world to test their theories. D) Economists are employed to explain economic phenomena but are never used to predict what might happen next. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 6) Which of the following statements is FALSE? A) Economists empirically test their models. B) Economic models are not used to make predictions. C) An economic model should capture only the key relationships that are sufficient to analyze the particular problem being studied. D) Economic models relate to behavior rather than to individual thought processes. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

7) Economists develop models to A) capture every detail of the real world. B) make their arguments more realistic. C) justify the assumptions they make about people's behavior. D) help us understand economic phenomena in the real world. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 8) Which of the following statements concerning economic models is FALSE? A) Economic models must provide usable predictions. B) Economic models are based on data alone and no assumptions. C) Economic models are tested empirically. D) Economic models relate to how people behave. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 9) Which of the following statements about economic models is TRUE? A) Economic models are not empirically testable. B) The predictive power of models is not as important as they serve the preferences of economists. C) Economic models are designed so that every detail of the real world can be analyzed. D) Every economic model is based on a set of assumptions. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

10) Economic models A) are used to explain how people think. B) are used to explain how people behave. C) are essential representations of the real world. D) are used to explore the thought processes of individuals or groups. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 11) One reason why economists often use models in their analysis is that A) a model helps us to understand, explain, and predict economic phenomena in the real world. B) a model accurately pictures every detail of the real world economy. C) a model relates to individual thought processes rather than behavior. D) it is relatively easy to perfectly specify a model. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 12) An economic model should capture A) the essential relationships that help to analyze the problem. B) all possible variables that apply to the problem. C) variables that are not related. D) all information in the world. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 13) One problem with constructing a perfectly complete realistic economic model is that A) it would be too simplistic to have any value. B) it would be far too complicated to analyze. C) it would not serve the needs of economists who builds that model. D) None of these is true. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 55 Copyright © 2021 Pearson Education, Inc.

14) Which of the following statements is TRUE? A) No economic model captures every detail that affects a problem. B) Economic models always make accurate predictions about behaviors. C) Economic models must fully reflect reality. D) Economic models use economists' opinions with no use of data. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 15) A map is an example of a model because a map A) realistically describes an area. B) is always as complex as space will permit. C) is two-dimensional. D) is a simplified representation of reality. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 16) Holding all variables constant but one and assessing the impact of the one variable that has changed is an example of using A) the ceteris paribus assumption. B) an economic model based on unrealistic assumptions. C) a flawed economic model. D) an untestable proposition. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

17) The term ceteris paribus means A) the greatest good for all. B) the study of scarcity and choice. C) all other things remaining constant or equal. D) value-free and testable. Answer: C Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 18) In order to study how changing price affects consumer decisions, we must assume all other factors, such as income and the prices of other goods are constant. This assumption is best know as A) rationality. B) ceteris paribus. C) normative economics. D) behavioral economics. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 19) Which of the following is an example of an application of the ceteris paribus assumption? A) an analysis of how price changes affect how much of a good people will purchase when all other factors are held constant B) an analysis of how people purchase more goods when prices decline and income increases C) After reading an article on the dangers of high-fat diets, an individual buys less red meat when prices increase. D) an analysis of how worker productivity increases when a firm invests in new machines and training programs Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

20) Ceteris paribus means A) making all the necessary changes. B) other things constant. C) the assumption of rational behavior D) as realistic as it can be Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 21) The ceteris paribus assumption is important in economics because A) all empirical data are equal. B) it would be impossible to relate the changes in one variable to another variable without holding other variables constant. C) economic data move very slowly over time and so they can always be considered constant. D) models are always complex and require as many variables as possible. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 22) The assumption that "other things are constant" is also known as the A) ceteris paribus assumption. B) rational self-interest assumption. C) distinguishing characteristic of economics as a science. D) relationships assumption. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

23) Mary says she plans to return to college next semester assuming her car keeps running, tuition fees don't go up, and she will still have a student loan. An economist would say that Mary plans to return to college next semester A) caveat emptor. B) ceteris paribus. C) laissez faire. D) post hoc ergo propter hoc. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 24) Professor's economics students are constructing models for how gasoline prices change. Maria's model has very realistic assumptions and is quite complex. Anna's model is less complicated and less realistic. Maria's model correctly predicts gas price increases 5% of the time. Anna's model predicts correctly 15% of the time. On the basis of usefulness or "goodness," Professor will give which student's model the higher grade and why? A) Maria's model gets the higher grade because it is more complex. B) Anna's model gets the higher grade because it is simpler. C) Maria's model gets the higher grade because it is more realistic. D) Anna's model gets the higher grade because it predicts accurately more often. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 25) Why is economics called an empirical science? A) because economics has been used to both create and destroy empires B) because economics uses math to evaluate the usefulness of its models C) because economics relies on real-world data to determine the usefulness of a model D) because economics utilizes only assumptions to evaluate how accurate a model is Answer: C Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

26) An appropriate test of the effectiveness of an economic model is A) the number of variables contained within the model. B) the model's ability to predict future economic activity. C) the number of economists who have worked on the model. D) the number of assumptions which the economist has made. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 27) A useful economic model A) utilizes only the two most important factors to analyze the problem under consideration. B) generates statements that are incapable of refutation. C) represents every detail of the real world. D) yields usable predictions and implications for the real world. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 28) The usefulness of a model is determined by A) whether it helps to explain or predict real world phenomena. B) whether it possesses realistic assumptions. C) how well it uses the ceteris paribus assumption. D) how many of the possible relationships that exist are included in the model. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 29) The use of data in economic models is important because A) the models' predictive value rests on supportive evidence from real-world data. B) the models are always complex in nature. C) models must analyze every possible angle of the problem. D) social problems analyzed by economists require long streams of data. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 60 Copyright © 2021 Pearson Education, Inc.

30) If two competing models are offered to explain a certain economic phenomenon, the better model is the one A) that is the newest since newer models are better than old models. B) with the fewest unrealistic assumptions. C) that more often predicts with most accuracy. D) that is not subject to empirical verification. Answer: C Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 31) To be useful, a model must A) predict accurately all of the time. B) predict more accurately than other models that have been developed. C) have assumptions that have been verified by empirical testing. D) predict the behavior of every individual. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 32) Economics is called an empirical science because A) economists study real-world evidence to test their models. B) economists use assumptions to test their models. C) economic models have no predictive power. D) economic analysis is only useful in a pure market economy. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

33) Which of these social sciences deals most with models of behavior rather than with thought processes? A) psychology B) sociology C) political science D) economics Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 34) Which of the following best describes how economists test the empirical predictions of economic models? A) Economists survey individuals to learn about how people think through decisions about how much to purchase or to produce. B) Economists collect and analyze real-world observations of people's actions to discern if those actions accord with theories' predictions. C) Based on theories about thought processes, economists seek to determine which thought processes predominate in determining how a person decides what actions to take. D) Recognizing that people always do what they say they will do, economists rely exclusively on information gleaned from polls and surveys conducted by poll takers and market researchers. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 35) When constructing economic models, economists are more concerned with A) what people say than what they do. B) what people think than what they need. C) what people do than what they say. D) what people say than how they act. Answer: C Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

36) Behavioral economics is an approach to the study of consumer behavior A) that emphasizes psychological limitations and complications that potentially interfere with rational decision making. B) that emphasizes the capabilities of individuals to succeed in attaining all their unlimited wants utilizing limited resources. C) that, in contrast to standard approaches in economics, utilizes the ceteris paribus assumption. D) that, in contrast to standard approaches in economics, relies on real-world data to evaluate the usefulness of economic models. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 37) The hypothesis that people are nearly, but not fully rational, cannot possibly fully examine every available choice, and utilize simple rules of thumb in making decisions is known as the A) irrationality hypothesis. B) ceteris paribus hypothesis. C) individual aggregation hypothesis. D) bounded rationality hypothesis. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 38) According to the bounded rationality hypothesis, an individual confronting a large number of complicated choices is most likely to respond by A) using a simple rule of thumb to choose among a subset of easiest-to-evaluate options. B) using the ceteris paribus assumption to assist in simplifying and examining each of the possible options. C) utilizing readily available empirical evidence to assist in evaluating every option. D) assessing every available choice by developing sophisticated theories regarding each option. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

39) An economic theory is also known as an economic A) model. B) prediction. C) conclusion. D) assumption. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 40) Economic models are A) always based on laboratory methods similar to natural sciences. B) a simplified representations of the real world. C) used only in conducting experiments about how people behave. D) used in macroeconomic analysis but not in microeconomic analysis. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 41) Economic models are NOT used to A) explain economic phenomena. B) predict economic phenomena. C) understand economic phenomena. D) describe all economic phenomena in finest detail. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 42) To test their theories, economists usually have to A) set up careful laboratory experiments with all variables controlled. B) first examine theory and compare it with what happened in the past in the real world. C) use only models that have a proven record of success. D) conduct experiments that involve people who do not behave rationally. Answer: B Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

43) A difference between biology and economics is that A) economists use models and biologists use theories. B) biologists often use laboratory experiments and economists do less often. C) economics explains events while biology predict events. D) biologists use the scientific method while economists do not. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 44) Models must A) be able to yield useable predictions. B) be totally realistic in every detail. C) be a complete reproduction of the real world. D) include every relationship that exists. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 45) A good economic model A) cannot be refuted. B) describes the real world completely and in detail. C) captures the essential relationships of the problem under consideration. D) captures all relationships about the problem under consideration. Answer: C Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

46) Which of the following statements is NOT true? A) Economics is a social science. B) Economics is an empirical science. C) Economics does not use theories. D) Economics is the study of how people allocate their limited resources to satisfy their unlimited wants. Answer: C Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 47) A characteristic of a good model is that A) its predictions can be tested using real-world data. B) it is useful for making irrefutable predictions. C) it applies to all situations. D) it predicts perfectly. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 48) In an economic model, assumptions A) must be applicable to all real-world situations. B) must be eliminated before being used to make sure the model is realistic. C) are not important in determining the usefulness of the model. D) define the set of circumstances in which the model is most likely to be applicable in the real world. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

49) Because models are used to explain economic behavior, A) the assumptions must be complex while the models themselves are simple. B) models must be complex. C) models must be simple. D) models can be either simple or complex so long as it explains economic behavior. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 50) "Ceteris paribus" assumption means A) the role of rational self-interest in the economy. B) that nothing else changes except the variables under consideration. C) relying on real-world data in evaluating the usefulness of a model. D) analysis that is strictly limited to making purely positive statements. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 51) If economists are making the assumption that business people try to maximize profits, the best way to determine whether this assumption is useful or not is to A) see whether it generates accurate predictions about the choices of business people. B) ask business people whether it is true or not. C) find out whether U.S. businesses are more profitable than European businesses. D) take a survey of people and see if they agree with this assumption. Answer: A Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

52) The assumption that nothing changes EXCEPT the variables being studied is A) the ceteris paribus assumption. B) the rationality assumption. C) positive economic analysis. D) normative economic analysis. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 53) "Ceteris paribus" means A) "invisible hand." B) "other things equal." C) "making all the necessary changes." D) "at the aggregate level." Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 54) A scientist who is studying earthquakes includes the impact of wind when performing some tests of damages to structures. This is an example of A) failing to understand how to do scientific methodology. B) irrational behavior in noneconomic situations. C) accounting for every possible phenomena that may affect the problem under examination. D) failing to hold all other things constant. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

55) Economics is an empirical science, which means that economists A) look at evidence to see whether or not the model is applicable. B) test their models by utilizing unknown variables. C) do only laboratory experiments. D) refuse to test their models since the usefulness of a model is determined by whether it is logical or not. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 56) Which expression below matches most closely the way economists go about testing their models? A) "Consistency is the hobgoblin of small minds." B) "Seeing the results is the only way to know if you are right." C) "A bird in the hand is worth two in the bush." D) "In the long run, we are all dead." Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 57) Economic models relate to A) people's choices. B) how people think about something. C) choice. D) the reasons people give for donating to charity. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

58) A poll conducted by a national firm finds that most Americans say they care more about safety when buying a car than about fuel efficiency. As a result, a car maker produces a car with many safety features, but it doesn't sell well. This behavior A) contradicts economic theory because the people didn't do what they said they would do. B) contradicts economic theory because it is irrational not to purchase safer cars. C) does not contradict economic theory because economists focus on what people do rather than on what they say. D) does not contradict economic theory because economic theory only relates to prices and not to features such as safety. Answer: C Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 59) According to proponents of behavioral economics, because every possible choice cannot be considered, an individual will tend to fall back on methods of making decisions that are simpler than trying to sort through every single possibility, known as A) rules of thumb. B) rational options. C) irrational choices. D) normative decisions. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 60) Which of the following is NOT an alleged "unrealistic" assumption that proponents of behavioral economics suggest are commonly utilized in traditional economic models based on the rationality assumption? A) unbounded selfishness B) unbounded rationality C) unbounded will power D) unbounded resources Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

61) If psychological limitations and other complications cause people to be unable to examine and think through every possible choice available to them and rely instead on rules of thumb, then these individuals exhibit A) completely irrational behavior. B) normative thinking. C) bounded rationality. D) positive thinking. Answer: C Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 62) A theory or a model A) is a simplified, abstract view of reality. B) is based on each economist's value judgments. C) is a detailed analysis of what ought to be. D) captures all aspects of the real world. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 63) Ceteris paribus means A) "all variables are independent." B) "other things being constant." C) "some assumptions are unrealistic." D) "some theories are not rational." Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

64) The ceteris paribus assumption means A) favors are returned in kind. B) this is the proof of the matter. C) from many, one. D) other things are equal. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 65) In building a model the assumption that allows economists to study only the factors being analyzed is the A) rationality assumption. B) ceteris paribus assumption. C) the self-interest assumption. D) the scarcity assumption. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 66) Ceteris paribus means A) other variables are held constant. B) almost certainly. C) only if everything works just right. D) perhaps. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

67) In constructing models, economists A) consider all factors that can change. B) include all available information. C) attempt to duplicate the real world. D) make simplifying assumptions. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 68) In building a model to analyze economic situations, one of the important assumptions is A) ceteris paribus. B) scarcity. C) conversion abstraction. D) cognitive dissonance. Answer: A Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 69) Assumptions are necessary to A) make economics a social science. B) define a set of circumstances where a model is most likely to apply. C) define the relationship between wants and resources under all circumstances. D) define the specific cause and effect relationship that is being explained by social sciences. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

70) Ceteris paribus means A) all men are created equal. B) wage parity between men and women is a worthy goal. C) there are an infinite number of factors affecting each human decision and they change all the time. D) economists isolate one or two factors that change when analyzing human decisions. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 71) Economic models are used to A) simplify reality to predict outcomes. B) exactly replicate reality. C) predict all possible outcomes of a study. D) determine the thoughts of individuals. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 72) Economic models A) must capture every detail or interrelationship that exists. B) are simplified representations of the real world. C) must use laboratory experiments. D) All of these are correct. Answer: B Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

73) Economics may be referred to as a(n) ________ science, meaning that data is looked at to see whether assertions are correct. A) empirical B) exact C) natural D) soft Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 74) The term ceteris paribus is an economic assumption that means A) let the buyer beware. B) logical common sense. C) the detail is in the interrelationship. D) other things being equal. Answer: D Diff: 1 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 75) The value of a model is determined by A) the usefulness of its predictions in the real world. B) the extent of the profit earned by applying it. C) the realism of its assumptions. D) the model's attention to real world details. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

76) Assumptions in models tend to make A) the model predict what the scientist wants the results to be. B) the model more realistic. C) the model more applicable to specific circumstances. D) the model always predict the future accurately. Answer: C Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 77) What would lead an economist to conclude that Theory A is superior to Theory B? A) Theory A predicts real-world events better than does Theory B. B) The assumptions underlying Theory A are more realistic than are the assumptions underlying Theory B. C) Theory A explains how people think, whereas Theory B only explains what they do. D) Theory A is based on the assumption that an individual typically cannot determine what is in his or her own best interest, whereas Theory B assumes that each person knows what is in his or her own best interest and acts accordingly. Answer: A Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 78) Why do economists test their hypotheses? A) to see whether people are motivated by self-interest B) to see whether their models predict the choices people will make C) to determine whether government policies have effectively achieved their goals D) to learn what people are thinking when they make the choices they do Answer: B Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

79) Which of the expressions below best describes the aim of economic theory? A) to predict how people think about money B) to understand why money motivates some people more than others C) to predict the choices people will make D) to learn what we can do to prevent people from having unrealistic wants Answer: C Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 80) Based on your understanding of your roommate's preferences, you predict that he will select the spaghetti for his lunch at the cafeteria, but instead he chooses the gyros. How do you describe this event in terms of economic theory? A) Your roommate is irrational. B) Your roommate does not know what is in his own best interests. C) You roommate does not know his own preferences as well as you do. D) You constructed a model that made a prediction, and the prediction was refuted. Answer: D Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 81) Which of the following statements about economic models is TRUE? A) The best economic models must be most complex. B) A good model does not rely on any assumptions. C) Every model is based on a set of assumptions. D) Economic models are designed to explain what people need. Answer: C Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

82) A common approach that economists use to understand, explain and predict economic phenomena is to A) form a theory or model. B) conduct experiments in a science lab. C) ask what people think. D) examine people's thought processes. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 83) By using the ceteris paribus assumption in conjunction with a model, economists can A) suspend the rationality assumption. B) avoid having their model depend on any additional assumptions. C) hold certain factors constant. D) be sure that the model will predict correctly. Answer: C Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 84) What is meant by saying that economics is an empirical science? A) Economic theories will be tested by seeing how well they correspond to people's declared preferences. B) Economic theories cannot be tested because there is no means of measuring economic variables with adequate precision. C) Economic theories cannot be tested because economic variables change too quickly. D) Economic theories will be tested by seeing how well they correspond to real-world phenomena. Answer: D Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

85) The combination of psychology and economics to determine individual decision making is known as A) behavioral economics. B) psychonomics. C) neuronomics. D) positive analysis. Answer: A Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 86) Behavioral economics deals with A) the assumption that people are always selfish. B) bounded rationality. C) unbounded willpower. D) only theories without justification from empirical evidence. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 87) Which of the following is a behavioral implication of bounded rationality? A) unbounded selfishness B) a rule of thumb C) a rational mistake D) a nervous breakdown Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

88) Which of the following describes that people cannot examine every possible choice available to them but instead use simple rules of thumb to sort among the alternatives that happen to occur to them? A) self-interest B) bounded rationality C) ceteris paribus D) normative economics Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 89) According to behavioral economists, traditional economic models assume all the following characteristics EXCEPT A) unbounded selfishness. B) unbounded resources. C) unbounded willpower. D) unbounded rationality. Answer: B Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 90) What does it mean to say economics is an empirical science, and how is this related to the question of deciding on the usefulness of a model? Answer: Economists examine evidence to test whether a model is useful or not. That is, realworld data are studied to see if they conform to the predictions of the model. A model is useful if it generates testable predictions and implications for the real world. A model that predicts better is generally considered a better model. Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

91) "To be useful, a model must be completely realistic." Evaluate. Answer: This statement is incorrect. To be useful, a model must capture key real-world elements but cannot account for every detail of the real world. The model should capture the essential relationships that enable us to analyze the problem with which we are concerned. A model is useful so long as it sheds light on the central forces at work. Diff: 2 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 92) Suppose a survey is taken concerning car safety. According to the survey, people strongly desire safer cars and indicate they are willing to pay substantially more for safer cars. Using this information, one auto firm adds numerous safety features to its car, raising the price by several thousand dollars. Sales drop sharply, and the firm loses profits. What went wrong? Answer: The automaker was relying on what people say rather than on what they do. An economic model would have tried to predict whether the expected gains from driving safer cars would have been great enough for consumers to pay the higher price. Economic models are models of behavior and not models about how people think or whether people's views directly affect their actions. Also, they did not account for other factors Diff: 3 Topic: 1.4 Economics as a Science Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 1.5 Positive versus Normative Economics 1) Normative economic statements A) violate the ceteris paribus assumption. B) contain value judgments. C) are usually irrational. D) are easily testable. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

2) Normative economics involves A) a statement of fact. B) a statement of "what should be." C) a statement of "what is." D) a statement that is purely descriptive. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 3) "If event A occurs then event B will follow" is a A) positive statement. B) normative statement. C) non-testable statement. D) statement lacking in logic. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 4) "If the United States enters a war with Iran, U.S. output will go down." This statement is an example of A) a positive statement. B) an irrational statement. C) a normative statement. D) a realistic statement. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

5) Which of the following is an example of a positive economic statement? A) In order to reduce the budget deficit, tax rates should be increased. B) In order to increase employment, the minimum wage must be decreased. C) If payroll taxes are raised, then the government budget will show a surplus. D) If gas prices fall, consumers should purchase more gas. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 6) "No individual should have less than $20,000 income in the United States in 2017" is an example of A) a normative statement. B) a positive statement. C) an illogical and refutable statement. D) a truism. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 7) Which of the following is a normative statement? A) An increase in consumer income will lead to increased sales of beef. B) A decrease in the rate of unemployment will lead to upward pressure on consumer prices. C) An increase in the income tax will cause a greater reduction in savings than an increase in the sales tax. D) An economy with high unemployment can be worse off than an economy with high inflation. Answer: D Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

8) Which of the following is a positive economic statement? A) No individual should live in poverty. B) The unemployment rate of males exceeds that of females. C) Unemployment is a more serious societal problem than inflation. D) Economic considerations are less relevant than ethical issues in deciding national policy. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 9) "The government should eliminate income inequality" is an example of A) a positive statement. B) a realistic argument. C) a factual statement. D) a normative statement. Answer: D Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 10) When the president says that "Income inequality is a much more serious economic problem than high unemployment rates," it is an example of A) a normative statement. B) an empirically proven fact. C) a positive statement. D) an irrational argument. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

11) Which of the following statements is a positive economic statement? A) The number of families living in poverty in the United States is too high. B) One in every five children in the United States is living in poverty. C) Government programs to help the poor are just making problems worse. D) The government should eliminate poverty in the country. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 12) Which of the following statements is a positive economic statement? A) The Congress should pass the president's tax package. B) The U.S. tax system always gives too much favor to rich people. C) The President's budget included an increase in unemployment insurance payments. D) None of these Answer: C Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 13) Which of the following statements is a normative as opposed to a positive economic statement? A) Consumer spending helps to create jobs. B) If the price of cars goes up, people buy fewer cars. C) Labor unions should be allowed to organize in every country. D) When a government prints too much money, inflation tends to rise. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

14) Whenever statements embodying values are made, we enter the realm of A) positive economics. B) normative economics. C) microeconomics. D) macroeconomics. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 15) Positive economic analysis is said to be A) true. B) always accurate. C) value-laden. D) objective. Answer: D Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 16) Positive statements contain mostly A) opinions and conditions. B) facts and predictions. C) bias. D) logical arguments mixed with statements of opinion. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 17) Normative economic analysis involves A) positive analysis. B) value judgments. C) if-then statements. D) objective descriptions of the way things are. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

18) Which of the following statements is an example of positive economic analysis? A) The inflation rate is too high. B) The government should worry less about inflation and more about unemployment. C) If the government increases the rate of growth of the money supply, the inflation rate will increase, ceteris paribus. D) The elderly live on a fixed income, so the government has an obligation to keep inflation rates low. Answer: C Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 19) Which of the following is a normative economic statement? A) An increase in corporate income taxes will cause the unemployment rate to increase. B) The costs of medical care are increasing faster than the incomes of U.S. citizens. C) Teenage unemployment is over 12 percent today. D) Teenage unemployment is too high for the United States. Answer: D Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 20) Which of the following is an example of a normative economic statement? A) Lower income tax rates will generate greater income tax revenue to the government. B) Income tax rates should be lower because that will increase government revenue. C) Lower income tax rates yield a larger federal government deficit. D) The federal budget deficit has increased every year for the last twenty years. Answer: B Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

21) Which of the following statements concerning the distinction between positive and normative economics is TRUE? A) Positive statements are concerned with what is, while normative statements are concerned with what someone thinks should be. B) Positive statements are concerned with what people think, while normative statements are concerned with what people do. C) Positive statements are true while normative statements are false. D) Positive statements are concerned with what is while normative statements are concerned with what will be. Answer: A Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 22) Positive economic analysis is supposed to be A) true. B) free of value judgments. C) just and fair. D) moral and honest. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 23) It has been noted that when the price of a good increases, people purchase less of the good. This is an example of A) macroeconomic analysis. B) irrational behavior. C) normative economic analysis. D) positive economic analysis. Answer: D Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

24) Normative economics is A) analysis involving value judgments about economic policies; or a statement of "what ought to be." B) analysis that is strictly limited to making either purely descriptive statements or scientific predictions. C) analysis of the behavior of the economy as a whole. D) decision making undertaken by households and business firms. Answer: A Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 25) Normative economic analysis involves A) true statements of facts only. B) testable hypotheses by scientists. C) value judgments and opinions. D) purely descriptive statements. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 26) Which of the following is an example of a positive statement? A) It is too hot to go jogging. B) Ceteris paribus, a teacher should award a higher grade if you study more hours for an economics test. C) When the price of an item increases, people respond by reducing their consumption of the item. D) The government should balance the budget. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

27) Which of the following is a statement with positive economic analysis? A) Lower wages increase employment and reduce the unemployment rate. B) Slower money growth reduces inflation. C) A reduction in the size of the budget deficit will reduce interest rates. D) All of these Answer: D Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 28) Which of the following is NOT a normative economic statement? A) The minimum wage should be eliminated so unemployment can be reduced. B) Increases in the minimum wage cause increases in unemployment. C) The inflation rate should fall to increase individuals' well-being. D) Taxes on cigarettes should be increased to reduce smoking. Answer: B Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 29) Which of the following is an example of a positive economic statement? A) The unemployment rate last month was 5.4 percent. B) The unemployment rate last month was too high. C) Because of the high unemployment rate last month the government should increase government spending. D) The unemployment rate should be measured differently because it doesn't include students who can't find jobs. Answer: A Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

30) Normative economic analysis tends to A) generate testable hypotheses. B) include the way someone thinks things should be or ought to be. C) involve descriptive statements. D) lead to empirical testing of data. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 31) Which of the following statements is TRUE regarding the textbook used in this course? A) The textbook presents only economic theory, so no value judgments are involved in the text. B) The textbook does not include normative statements. C) The microeconomic section of the book includes only positive analysis while the macroeconomic section includes normative analysis. D) The selection of topics included in the book involves value judgments as well as economic theory. Answer: D Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 32) Analysis that involves value judgments about economic policies is A) positive economics. B) normative economics. C) microeconomics. D) macroeconomics. Answer: B Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

33) Analysis that is limited to making either purely descriptive statements or scientific predictions is A) positive economics. B) normative economics. C) microeconomics. D) macroeconomics. Answer: A Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 34) The term or phrase most likely to indicate a normative statement is A) "ceteris paribus." B) "factual." or "what is" statement. C) "holding other things constant." D) "should" or "ought to." Answer: D Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 35) Jane is currently developing a model to explain the national unemployment rate. This is an example of A) a microeconomic topic. B) normative analysis. C) positive analysis. D) how people act in an irrational manner. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

36) How does the science of economics deal with the fact that we all have different values? A) by assuming that values don't play a role in economic behavior B) by seeking to discover the sources of different value systems C) by using positive analysis D) by surveying the public to see what the most common values are, and then incorporating those as assumptions into their models Answer: C Diff: 3 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 37) Which of the following is a positive statement? A) An unemployment rate of 5.8 percent is too high. B) The unemployment rate is 5.8 percent. C) The unemployment rate should be below 5.8 percent. D) The unemployment rate should never be above 5.8 percent. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 38) Which of the following is NOT a positive statement? A) The unemployment rate is 5.8 percent. B) The inflation rate for 2002 was 2.3 percent. C) The national debt is too high. D) The federal government budget for 2004 is $2.2 trillion. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

39) The difference between positive statements and normative statements is that A) a positive statement involves a value judgment and a normative statement is a statement of fact. B) a positive statement is a statement of fact and a normative statement involves value judgments. C) value judgments are made in normative statements but assumed in positive statements. D) normative statements are provable while positive statements are not. Answer: B Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 40) Which one of the following is an example of a normative statement? A) A smart phone costs more than a laptop computer. B) Most smart phones sold in the United States are imported from other countries. C) Every student in college should have a smart phone. D) More people will buy smart phones as their prices decline. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 41) Which one of the following is an example of a normative statement? A) A vacation in Colorado is better than a vacation in Hawaii. B) Hotels in Colorado are more expensive than are hotels in Hawaii. C) The hotel vacancy rate in Hawaii will increase as airfares to Hawaii increase. D) The busiest tourist month in Colorado is July. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

42) Which one of the following is an example of a positive statement? A) Farmers need some type of government aid. B) State governments should provide economic assistance to farmers. C) The federal government should provide economic assistance to farmers. D) The amount of financial assistance given to farmers is higher this year than it was 10 years ago. Answer: D Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 43) Which one of the following is an example of a normative statement? A) Public school teachers are not paid enough. B) The average public school teacher earns less than the average truck driver. C) The average public school teacher earns more than the average truck driver. D) Students in smaller classes perform better on standardized tests. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 44) Normative economics A) is never studied at the undergraduate level. B) involves value judgments. C) is always objective. D) cannot be applied to all economic problems. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

45) The President's statement that "to encourage economic growth, taxes should be cut" A) would be an example of a normative statement. B) would be an example of a positive statement. C) would be an example of a microeconomic statement. D) would be a statement of mercantilist economic philosophy. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 46) The headline in the local paper today is "College tuition next fall rise by 6 percent." This statement is an example of A) a normative statement. B) a positive statement. C) an invalid statement. D) ceteris paribus. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 47) Positive economics A) always gives an optimistic spin to economic news. B) is concerned with the economic policies that should be implemented. C) is objective. D) was not used by nineteenth century economists. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

48) Which of the following is a normative economic statement? A) Few auto mechanics are women. B) Men and women should earn the same salary if they perform the same job. C) Auto mechanics typically earned more than waitresses in the United States in 2017. D) Most wait staff are women. Answer: B Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 49) Economics seeks to use only positive analysis to A) provide a value-free analysis. B) seek the best answer. C) explain what is wrong with people. D) provide normative values. Answer: A Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 50) Which of the following is a positive economic statement? A) Policymakers should strive to eliminate government budget deficits. B) The President of the United States should promote high employment growth in the United States. C) If the price of eggs increases, the quantity demanded of eggs will fall. D) We should try to eliminate poverty in the United States. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

51) Normative economic statements A) are statements of "what ought to be." B) are statements of "what is." C) are statements that may be tested by referring to facts and data. D) do not involve value judgments. Answer: A Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 52) Which of the following is a normative economic statement? A) If the government increases spending, unemployment will fall. B) The government should increase spending during times of economic recession. C) If banks create more money, unemployment will decrease. D) If the price of gasoline rises, car-pooling will increase. Answer: B Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 53) "The U.S. government should not use my tax dollars to subsidize people on welfare" A) is a positive economic statement because it simply describes one person's opinion. B) is a normative economic statement because it involves a value judgment about an economic policy. C) is a positive economic statement because it predicts that my tax dollars will go to welfare. D) is a normative economic statement because it is a scientific fact. Answer: B Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

54) All of the following are positive statements EXCEPT A) the President of the United States in 2016 was Barack Obama. B) California is in the United States. C) migratory birds fly south for the winter. D) a dog is man's best friend. Answer: D Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 55) Positive analysis can be described as A) the study of whether people respond to positive incentives. B) the study of whether people respond to negative incentives. C) a value-free approach to inquiry. D) a study that is not tested empirically. Answer: C Diff: 1 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 56) A positive economic statement is one that A) can be refuted. B) is free of the ceteris paribus assumption. C) is based on a value judgment. D) asserts something about the role of moral behavior in building a strong economy. Answer: A Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 57) Which of the following is a positive statement? A) We need to carefully protect our borders. B) Inflation is the most damaging thing that can occur in an economy. C) When tax revenues are less than government spending there is a budget deficit. D) Foreign aid should be reduced to help reduce the national debt. Answer: C Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 99 Copyright © 2021 Pearson Education, Inc.

58) Which of the following is a normative statement? A) The Gross Domestic Product is the dollar value of all goods and services produced in a country in a year. B) Fiscal policy is determined by the Congress and the president. C) Tax cuts ought to be enacted for the good of the economy. D) Monetary policy is determined by the Federal Reserve System. Answer: C Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 59) "A positive economic statement is always true and a normative economic statement is always false." Do you agree or disagree with this statement? Explain. Answer: Disagree. A positive statement is one that is either descriptive or makes a prediction of the type "if A, then B." A descriptive statement can be false. For example, the statement, "It is raining today," may be either true or false. A prediction can also be false. A normative statement cannot appeal to evidence. The statement, "It shouldn't rain today," cannot be evaluated as either true or false by looking to see if is raining or not. Diff: 2 Topic: 1.5 Positive versus Normative Economics Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 1.6 Appendix A: Direct and Inverse Relationships 1) A relationship between two variables in which one variable increases at the same time as the other decreases is called A) nonlinear. B) constant. C) negative. D) direct. Answer: C Diff: 1 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking

2) A direct relationship occurs when A) the two variables being compared change in opposite directions, or when one goes up the other goes down. B) a change in one of the variables causes a change in the other variable in any direction. C) the two variables being compared change in the same direction, or when one goes up the other also goes up. D) the two variables have no identifiable relationship with each other. Answer: C Diff: 2 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 3) If an increase in one variable causes a decrease in another variable, this is A) a direct relationship. B) a dependent relationship. C) an independent relationship. D) a negative relationship. Answer: D Diff: 2 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 4) A relationship between two variables in which one variable increases at the same time that the other increases is called A) nonlinear. B) constant. C) inverse. D) direct. Answer: D Diff: 1 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking

5) When two variables have an inverse relationship, the slope is A) negative. B) positive. C) infinity. D) zero. Answer: A Diff: 1 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking

6) In the above graphs, an inverse relationship is shown by A) Graph A. B) Graph B. C) Graph C. D) Graph D. Answer: A Diff: 2 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 7) In the above graphs a direct relationship is shown by A) Graph A. B) Graph B. C) Graph C. D) Graph D. Answer: B Diff: 2 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking

8) When two variables have a direct relationship, the slope is A) negative. B) positive. C) zero. D) infinity. Answer: B Diff: 1 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 9) An inverse relationship will be graphed as A) a line that is upward sloping. B) a line that is downward sloping. C) a loop. D) a U-shaped curve. Answer: B Diff: 1 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 10) In an inverse relationship, A) one variable rises while the other falls. B) both variables rise together. C) both variables fall together. D) the two variables has not related to each other. Answer: A Diff: 1 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 11) Which of the following is an example of an inverse relationship? A) hours of study and test grade B) calories eliminated from diet and weight loss C) the number of hours working while not studying for a test and test grade D) amount of snowfall and profits of ski resorts Answer: C Diff: 1 Topic: 1.6 Appendix A: Direct and Inverse Relationships Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Application of knowledge 103 Copyright © 2021 Pearson Education, Inc.

1.7 Appendix A: Constructing a Graph 1) Consider the statement, "The number of hours you slept the night before a test affects your test grade." In this statement, A) the number of hours slept is the dependent variable and test grade is the independent variable. B) the number of hours slept is the independent variable and test grade is the dependent variable. C) both the number of hours slept and test grade are dependent variables. D) both the number of hours slept and test grade are independent variables. Answer: B Diff: 2 Topic: 1.7 Appendix A: Constructing a Graph Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Application of knowledge 2) The "paired observation" of (12, 6) means A) x = 12, y = 6. B) x = 6, y = 12. C) x = any multiple of 12, y = any multiple of 6. D) the origin is at 12 and 6. Answer: A Diff: 2 Topic: 1.7 Appendix A: Constructing a Graph Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 3) The "paired observation" of (-10, -6) means A) x = -10, y = -6. B) x = -6, y = -10. C) that the distance between the two points will be 16. D) the origin is at -10 and -6. Answer: A Diff: 2 Topic: 1.7 Appendix A: Constructing a Graph Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking

4) The intersection of the x axis and the y axis is called the A) "meeting point." B) origin. C) "zero" point. D) corresponding point. Answer: B Diff: 1 Topic: 1.7 Appendix A: Constructing a Graph Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 1.8 Appendix A: Graphing Numbers in a Table 1) The relationship between the number of hours a student studies for an exam and the exam grade is most likely graphed as A) a horizontal or flat line. B) a line sloping down from upper left to lower right. C) a line sloping up from lower left to upper right. D) a line sloping up from lower right to upper left. Answer: C Diff: 2 Topic: 1.8 Appendix A: Graphing Numbers in a Table Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Application of knowledge 2) Suppose that on average there are four more car accidents for every extra inch of snowfall in a certain region. If snowfall is graphed on the y axis and car accidents on the x axis, then if we graph this relationship, the slope of the line will be A) 3. B) 4. C) 1/4. D) 1/3. Answer: C Diff: 2 Topic: 1.8 Appendix A: Graphing Numbers in a Table Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Application of knowledge

3) If the slope of a curve is 1/3, we know that A) the relationship is linear, and the line moves from lower left to upper right. B) the relationship is non-linear, and the line moves from lower left to upper right. C) the relationship is linear, and the line moves from upper left to lower right. D) the relationship is non-linear, and the line moves from upper left to lower right. Answer: A Diff: 3 Topic: 1.8 Appendix A: Graphing Numbers in a Table Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 1.9 Appendix A: The Slope of a Line (A Linear Curve) 1) A negative slope A) represents an inverse relationship, such as beers consumed and test score. B) represents a direct relationship, such as snow fall and car accidents. C) indicates that there is no relationship between two variables, such as women's wages and likelihood of sunshine. D) means that the line crosses below the x-axis. Answer: A Diff: 2 Topic: 1.9 Appendix A: The Slope of a Line (A Linear Curve) Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 2) The slope of a straight line A) is the same at all points along that line. B) cannot be defined. C) changes from one point to the next on that line. D) is always equal to zero. Answer: A Diff: 1 Topic: 1.9 Appendix A: The Slope of a Line (A Linear Curve) Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking

3) The slope of a nonlinear curve A) is constant. B) is always negative. C) changes along the various points of the curve. D) is always equal to 1. Answer: C Diff: 1 Topic: 1.9 Appendix A: The Slope of a Line (A Linear Curve) Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 4) The slope of a nonlinear curve is ________ when the curve is rising, and ________ when the curve is falling. A) negative, positive B) negative, negative C) positive, negative D) positive, positive Answer: C Diff: 1 Topic: 1.9 Appendix A: The Slope of a Line (A Linear Curve) Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 5) If a straight line crosses the y-axis at 5 and crosses the x-axis at 10, we can conclude that the slope of the line is A) positive. B) negative. C) zero. D) infinity. Answer: B Diff: 2 Topic: 1.9 Appendix A: The Slope of a Line (A Linear Curve) Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Application of knowledge

6) The slope of a line is the A) change in the values along the x-axis divided by the change in the values along the y-axis. B) values on the x-axis divided by the values on the y-axis. C) change in the values along the y-axis divided by the change in the values along the x-axis. D) values on the y-axis divided by the values on the x-axis. Answer: C Diff: 2 Topic: 1.9 Appendix A: The Slope of a Line (A Linear Curve) Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 7) Given a linear curve, the value on the y-axis changes from 120 to 100 when the value on the x-axis changes from 5 to 10, then the slope of that curve is A) -20. B) +20. C) -4. D) +4. Answer: C Diff: 2 Topic: 1.9 Appendix A: The Slope of a Line (A Linear Curve) Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Application of knowledge

Economics Today, 20e (Miller) Chapter 2 Scarcity and the World of Trade-Offs 2.1 Scarcity 1) Scarcity arises because A) resources are limited and are inadequate to meet all human wants. B) shortages always occur. C) natural resources are abundant. D) some people do not behave in a rational manner. Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 2) Scarcity refers to A) a shortage in a good or service. B) the ability of society to consume all that it produces. C) the inability of society to satisfy all human wants because of limited resources. D) the inability of an individual to purchase a good or service due to her limited income. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 3) Which of the following statements is TRUE about scarcity? A) Both rich and poor people face the problem of scarcity. B) Scarcity exists only when supply is insufficient to meet demand. C) Scarcity exists only when a shortage exists. D) Scarcity can be eliminated when people earn sufficient incomes. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

4) The problem of economic scarcity applies A) only in countries with no markets to meet people's wants. B) only in underdeveloped countries, because there are no productive resources in these nations. C) only to nations with few resources. D) to the economies of all nations, regardless of their levels of development. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 5) In every economic system, choices must be made because resources A) are unlimited, but human desires and wants are limited. B) are limited, but human desires and wants are unlimited. C) are unlimited, and so are human desires and wants. D) are limited, and so are human desires and wants. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 6) In the production of goods and services, trade-offs exist because A) not all production is efficient. B) society has only a limited amount of productive resources. C) we have abundant resources to choose from. D) human wants and needs are limited at a particular point in time. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 7) Which of the following statements about economic scarcity is FALSE? A) Scarcity occurs among the poor and the rich. B) Scarcity only occurs if there are shortages and people wait in line to buy things. C) Scarcity results from not having enough resources to produce all the things we want. D) Scarcity results in the necessity to make choices. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) Which of the following statements is FALSE? A) Economic goods are available in desired quantities at a zero price. B) A good is anything that gives satisfaction or happiness to individuals. C) Services are intangible goods such as dry cleaning, hospital care, and restaurant meal preparation. D) Wants are unlimited and include all material and nonmaterial desires. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 9) Which of the following statements about scarcity is TRUE? A) Scarcity occurs only among less developed countries. B) Scarcity exists in all societies. C) Scarcity is a problem only for greedy people. D) Scarcity is a problem only in countries that do not use markets to organize economic activity. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 10) In 2020, tornadoes damaged parts of the U.S. Midwest, destroying homes, businesses, schools, and infrastructure. In strictly economic terminology, these tornadoes are said to have caused A) scarcity, because the damages made food and shelter scarce. B) scarcity, because some goods were difficult to get. C) shortages, because supplies were cut off and goods were destroyed. D) trade-offs, because some areas of the country were damaged when others were not. Answer: C Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

11) Scarcity implies that people must A) be irrational. B) be selfish. C) make choices. D) earn as much as income as they are able to. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 12) Scarcity A) does not exist in the United States. B) applies only to developing countries. C) can be reduced with more efficient production methods. D) cannot be avoided in the world. Answer: D Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 13) The difference between scarcity and a shortage is that A) scarcity is caused by poverty and shortages are caused by natural disasters. B) shortages are a type of scarcity caused by natural disasters while scarcity is caused by human errors. C) scarcity always is a part of human life while shortages usually are temporary. D) shortages are always part of human life while scarcity is usually temporary. Answer: C Diff: 3 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

14) Which of the following is the best example of scarcity? A) The Talking Teddy is a surprise holiday hit, resulting in long lines of consumers trying to purchase the limited number of available Teddies. B) Fred only gets a one-hour lunch break and each day must decide between working out at the gym or socializing with his colleagues. C) The local market's buy-one-get-one-free sale on strawberries results in more people wanting the berries than producers are able and willing to supply. D) Pokemon Go is the most popular cell-phone app that can be downloaded free from an app store. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 15) Scarcity is caused by A) unlimited wants running up against limited economic resources. B) a company's slow production speed. C) an individual's budget that is insufficient to cover the expenses of certain goods or services. D) shortages. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 16) Human resources that perform the functions of organizing, managing, and assembling the other factors of production are called A) physical capital. B) venture capital. C) entrepreneurs. D) productive capital. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

17) In economic terminology, when a resource is used to produce output it is referred to as A) an intangible. B) a factor of production. C) a service. D) a fifth element. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 18) All of the following are examples of physical capital EXCEPT A) buildings. B) machinery. C) stocks and bonds. D) computer equipment. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 19) Entrepreneurs are important to market economies because A) they engage in risk taking and innovation. B) they make up a large portion of low-skilled labor. C) they take few risks and thereby, suffer fewer bankruptcies. D) they represent the bulk of employment at large corporations. Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

20) Which of the following are considered factors of production? I. Land II. Labor III. Physical capital IV. Entrepreneurship A) I and II only B) I and III only C) I, II and III only D) I, II, III and IV Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 21) All of the following are economic resources, or factors of production EXCEPT A) land. B) physical capital. C) money. D) entrepreneurship. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 22) In economic terminology, the accumulated training and education that workers receive to increase their productivity is referred to as A) entrepreneurship. B) human capital. C) labor. D) physical capital. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

23) Physical capital is distinguished from human capital because A) physical capital refers to trained people. B) physical capital refers to equipment and machinery, whereas human capital refers to trained people. C) human capital refers only to day laborers. D) physical capital refers to trained people, whereas human capital refers to equipment and machinery. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 24) In economics, the term physical capital A) refers to funds used by businesses to acquire goods and services. B) refers to all manufactured resources used for production. C) refers to the process of raising funds through the stock market. D) refers to the stock of merchandise already produced. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 25) Human capital is A) what people get from physical capital. B) the accumulation of skills, training and education of workers. C) the value of funds that entrepreneurs obtained from other people. D) the human resources that perform the function of raising capital. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

26) The conversion of resources into consumer goods or services is called A) human capital. B) production. C) opportunity cost. D) consumption. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 27) Services can be thought of as A) unvalued goods. B) unwanted goods. C) inferior goods. D) intangible goods. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 28) Economic goods are defined as A) tangible items only. B) services only. C) anything from which an individual derives satisfaction. D) any item which is available in sufficient quantity at zero price. Answer: C Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

29) If the quantity desired of something exceeds the amount available at zero price, that item is called A) capital. B) an economic good. C) an intangible good. D) a bad. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 30) Which is the best example of an intangible good? A) the car you dream of owning but cannot afford B) the suit you hope will make a good impression when you go on job interviews C) the textbook study guide you hope will prepare you to perform well on examinations D) the advice and expertise provided by the music store clerk who sold you that CD Answer: D Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 31) At a zero price, which of the following conditions is TRUE for an economic good? A) Its quantity supplied exceeds its quantity demanded. B) Its quantity demanded exceeds its quantity supplied. C) Its quantity demanded equals its quantity supplied. D) Scarcity disappears. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

32) The most basic concept in economics is A) wealth. B) income. C) scarcity. D) human need. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 33) Scarcity A) exists in all human societies. B) is a problem for less-developed nations only. C) used to be a problem, but is not an issue for modern industrial nations. D) afflicts greedy people only. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 34) Scarcity affects A) only rich people. B) only poor people. C) only middle income people. D) all people. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

35) Scarcity is A) a shortage of goods and services. B) poverty and misery. C) a situation in which the resources for producing the goods and services that people desire are sufficient to satisfy people's desires. D) a situation in which the resources required to produce the goods and services that people desire are insufficient to satisfy all wants. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 36) Scarcity implies that A) people should limit their wants, since shortages exist. B) firms should be more efficient when producing goods. C) people must make choices. D) nonrenewable resources should never be used. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 37) Economic goods are A) abundant goods, about which we must constantly make decisions about their best use. B) all intangible items from which individuals derive satisfaction or happiness. C) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price. D) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at any price. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

38) Scarcity exists because A) the majority of people in the world are poor. B) people are too greedy and refuse to share what they have with others. C) human wants exceed what can be produced with the limited resources available. D) not enough new technology is being used to eliminate scarcity. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 39) A drought has destroyed orange crops in California. The drought has caused A) scarcity because there are less oranges now than people want. B) scarcity because people have to switch to oranges grown in Florida. C) a shortage because people cannot obtain as many oranges as they wish to buy at the predrought price. D) a shortage because orange growers will have less income. Answer: C Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 40) The existence of scarcity means that A) there are not enough resources to satisfy unlimited human wants. B) firms will increase their production to eliminate the scarcity. C) the government will step in to eliminate the scarcity. D) firms working with the government will allocate resources to eliminate the scarcity. Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

41) David has just ordered a smartphone only to be told that he will have to wait one month for it to be delivered. Which of the following statements is TRUE? A) The smartphone is not a scarce good. B) The smartphone is an economic good. C) The smartphone is human capital. D) The smartphone is an intangible good. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 42) Scarcity and shortages differ in that A) scarcity is caused by natural disasters and shortages are caused by mistakes people make. B) scarcity is a condition of human life while shortages are usually temporary phenomena related to an imbalance between the amount desired and the amount produced. C) scarcity is a type of shortage but shortage is a broader concept. D) shortages apply to resource markets while scarcity applies to product markets. Answer: B Diff: 3 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 43) There are not enough of four goods to satisfy the wants of people. For good A, this is true when the price is $100. This is true for good B at a price of $10, for good C at a price of $1, and for good D at a price of zero. Which situation reflects scarcity rather than shortage? A) A B) B C) C D) D Answer: D Diff: 3 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge

44) Production refers to A) physically producing material goods only. B) any activity of a firm, whether a corporation, partnership, or sole proprietorship. C) any activity that results in the conversion of resources into goods or services that can be consumed. D) any activity that causes a material conversion of manufactured goods. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 45) Which of the following activities are production? A) combining flour, milk, and eggs to make cookies B) moving crude oil from one part of Texas to an oil refinery near the Texas coast C) taking ice cubes from a tray to put in a drink D) All of these are production. Answer: D Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 46) In economics, resources are also known as A) minerals. B) factories. C) factors of production. D) human capital. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

47) Which type of resource will improve through more education and training by workers? A) money B) physical capital C) natural resources D) human capital Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 48) A tractor used to prepare land for planting is called A) land. B) labor. C) physical capital. D) human capital. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 49) Naturally occurring diamonds are an example of A) land. B) labor. C) physical capital. D) human capital. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 50) A man-made resource such as a building or a machine is an example of which resource? A) entrepreneurial ability B) labor C) physical capital D) human capital Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 16 Copyright © 2021 Pearson Education, Inc.

51) Which of the following is NOT an economic resource? A) company stock share B) low-skilled labor C) coal D) an economist Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 52) Bonnie volunteers to help make floral arrangements at a flower shop. She is an example of A) entrepreneurial ability. B) labor. C) physical capital. D) human capital. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 53) Bonnie is self-employed. She makes floral arrangements in a building she rents. She owns the delivery vehicle and has hired a delivery driver. She is an example of A) entrepreneurial ability. B) labor. C) physical capital. D) human capital. Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

54) Amy goes to college to become a nurse. This is an example of an A) investment in physical capital. B) investment in human capital. C) increase in entrepreneurship. D) increase in labor. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 55) An irrigation system is installed on a farm in Idaho. This is an example of which factor of production? A) labor B) land C) human capital D) physical capital Answer: D Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 56) Which of the following is NOT an example of investment in human capital? A) a business student's internship B) a mobile device for work C) A mechanic attends a training workshop on a new type of engine. D) Johnny learns how to read. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

57) Bonnie has just opened a new business selling pet food online. A) Bonnie is an entrepreneur. B) Bonnie is not providing economic goods since people purchase the goods. C) Bonnie is not providing economic goods since pet food is not being sold in a store. D) Bonnie is not an entrepreneur since there are other businesses that sell pet food. Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 58) Which of the following is a TRUE statement? A) All goods are economic goods. B) All economic goods are goods, but not all goods are economic goods. C) Economic goods and goods mean the same thing. D) Economic goods do not include services while goods do include services. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 59) Which of the following is NOT an economic good? A) a haircut B) broccoli C) garbage D) a textbook Answer: C Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 60) John has decided to watch the sunrise tomorrow morning. The sunrise is an example of A) a good. B) an economic good. C) a service. D) an economic bad. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

61) A typical economic good has which one of the following characteristics? A) The desired quantity exceeds the quantity available at a zero price. B) The quantity available exceeds the desired quantity at a zero price. C) It uses no resources to produce. D) It is never scarce. Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 62) A waitress brings a loaf of bread without charge when you sit down in a restaurant. This loaf of bread is A) a service because the waitress carried it instead of making it. B) a good, but not an economic good because there is no price charged for the bread. C) a bad because there is no price charged for the bread. D) an economic good because the bread is a scarce resource, even if it is free to you. Answer: D Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 63) Which of the following is NOT a service? A) physical labor purchased by a producer B) things purchased by a consumer that do not have physical characteristics C) a diamond used in an engagement ring D) tasks performed by someone else Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

64) When an employee at a grocery store scans the price of your items, bags the groceries, and collects your paper, the individual has provided A) physical capital. B) entrepreneurship. C) a service. D) land. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 65) The most basic concept of economics is A) money. B) scarcity. C) bounded rationality. D) shortage. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 66) Scarcity exists because A) there is a temporary disruption in the market supply. B) there is a shortage of goods caused by a natural disaster. C) there are not enough resources available to produce all the goods that people want. D) there is a shortage of labor throughout the world. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

67) Which of the following is the LEAST scarce? A) college education B) medicine C) gold deposits D) air Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 68) The fact that our wants are unlimited but our resources are limited implies that A) we should limit our wants. B) entrepreneurship has failed as an economic system. C) we have to make choices. D) the only way to make someone better off is to make someone else worse off. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 69) Which of the following items would be considered scarce? A) water B) diamonds C) plastic D) All of these are scarce. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 70) The basic problem in economics is A) limited needs. B) scarcity. C) differences in people's tastes and preferences. D) unlimited resources. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 22 Copyright © 2021 Pearson Education, Inc.

71) Scarcity implies that A) the satisfaction of one person's want means another person's want can also be satisfied. B) the satisfaction of one person's want means another person will be more than satisfied. C) the satisfaction of one person's want means another person's want cannot be satisfied. D) no person's wants can be satisfied. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 72) Which of the following is NOT a factor of production? A) land B) labor C) a product D) entrepreneurship Answer: C Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 73) Which of the following would be categorized as "land"? A) timber B) human capital C) buildings D) entrepreneurship Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

74) Education and training of workers would best be categorized as A) land. B) labor. C) physical capital. D) human capital. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 75) Which factor of production includes crude oil deposits? A) physical capital B) human capital C) land D) entrepreneurship Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 76) Education increases the stock of which factor of production? A) physical capital B) human capital C) land D) entrepreneurship Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 77) In economics, physical capital includes A) money. B) bank deposits. C) machinery. D) shares of company stock. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 24 Copyright © 2021 Pearson Education, Inc.

78) Which of the following is NOT considered to be an economic resource? A) an engineer B) a company truck C) a local gas station D) a view of the moon on a clear night Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 79) Natural gas found in Oklahoma is an example of A) physical capital. B) land. C) human capital. D) labor. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 80) An example of an entrepreneur would be A) the owner of a Mexican restaurant. B) the cafeteria employee who won the employee of the month award. C) a local bus driver. D) the cashier at your local supermarket. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

81) Economic goods are items that A) are used only by economists. B) provide satisfaction to users. C) cannot be sold at any price in the market. D) individuals would pay to get rid off. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 82) The term "labor" for an economist includes A) all skilled workers, but not the unskilled workers. B) all productive contributions of humankind. C) only the value of the work done by scientists. D) all employees who have high school diplomas. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 83) Scarcity is A) a situation of shortage after a hurricane. B) a permanent human condition relative to the nearly limitless nature of human desires. C) represented by long lines at stores. D) the same thing as poverty. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 84) The accumulated training and education that you have is A) physical capital. B) entrepreneurship. C) economic goods. D) human capital. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 26 Copyright © 2021 Pearson Education, Inc.

85) The tasks performed by the chef at your favorite restaurant could be categorized as A) a good. B) an economic good. C) a service or intangible good. D) All of these are correct. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 86) Economic bads are items A) for which the produced quantity is less than the amount desired at a positive price. B) for which the desired quantity is less than what nature provides at a zero price. C) that individuals desire but which receive social disapproval. D) that receive social approval but which governments dislike. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 87) Activities designed to convert resources into goods and services is known as A) supply. B) consumption. C) production. D) scarcity. Answer: C Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

88) All of the following are resources EXCEPT A) doctors because they perform services. B) the land the Statue of Liberty sits on. C) the computer in the student computer lab. D) money. Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 89) A company office can be thought of as A) a land and labor combination. B) a trade-off with land. C) physical capital. D) a type of entrepreneurship. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 90) From the economist's point of view A) wants and needs are exactly the same. B) a want is a lifesaving necessity. C) needs are objectively undefinable. D) we all have wants but only very poor people have needs. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

91) A friend says, "I really, really need a new car." As an economist, you're thinking, A) Right! Everyone needs a new car. B) This is an example of how objectively undefinable needs are. Many would argue that this friend could get along just fine with a reliable used car. C) If this friend says she needs a new car, then we must all agree that a new car is a need and not just a want. D) A new car can only be considered a need if at least 51% of the public agrees. Answer: B Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Application of knowledge 92) Why is it that all of our wants cannot be satisfied? A) because of shortages B) because we cannot seem to decide what we really want C) because other people try to change your mind about what you want D) because limited resources mean all the goods we want cannot be obtained Answer: D Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 93) Wants A) is another term for needs. B) refer to services while needs refer to goods. C) is the term used by economists instead of needs because needs are not objectively definable. D) are used by economists and refer to the same thing as needs when used by psychologists. Answer: C Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

94) Human beings A) have unlimited wants. B) think they have unlimited wants, but really have limited needs. C) have limited wants, but unlimited needs. D) know what their needs are, but do not know what their wants are. Answer: A Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 95) Economists are concerned with an individual's A) needs because needs are most important to an individual's well-being. B) needs because economists define needs to be the goods people need to survive. C) wants because wants always lead to shortages in the economy. D) wants because the existence of wants leads to scarcity. Answer: D Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 96) To an economist, the term "needs" A) refers only to material desires but not nonmaterial desires. B) is objectively undefinable. C) identifies the purchases of basic goods and services. D) refers to the purchase of goods by the poor. Answer: B Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 97) "Wants" as an economic concept includes A) both material and nonmaterial desires. B) only the purchase of necessary basic goods. C) only the desire for luxury goods. D) only goods and services that consumers need but cannot afford to buy. Answer: A Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 30 Copyright © 2021 Pearson Education, Inc.

98) What is production? What economic factors are involved in production? Answer: Production involves any activity that converts resources into goods and services that can be consumed. Production requires the use of all kinds of resources—natural resources, capital, and human resources, so the owners of all these resources are involved with production. Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 99) Briefly explain the difference between the concepts of scarcity and shortage. Answer: Scarcity is not a shortage. Scarcity occurs when we cannot obtain all that we want at a zero price. We can eliminate a shortage but we cannot eliminate scarcity because it always exists as a result of limited resources relative to our unlimited wants. Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 100) Briefly explain the factors of production and give an example of each. Answer: The factors of production are resources used as inputs in the production of the things we want. There are five factors of production. Land encompasses all the nonhuman gifts of nature, including timber, water, fish, minerals, and the original fertility of land. It is often called the natural resource. Labor is the human resource, which includes productive contributions made by individuals who work, such as Web page designers, ballet dancers, and professional football players. Physical capital consists of the factories and equipment used in production. It also includes improvements to natural resources, such as irrigation ditches. Human capital is the economic characterization of the education and training of workers. An example is a worker's skills. Entrepreneurship is the component of human resources that performs the functions of organizing, managing, and assembling the other factors of production to create and operate business ventures. Diff: 3 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

101) Explain why even the most affluent people, businesses and counties never solve the problem of scarcity. Answer: Scarcity is a problem that is never completely solved. Scarcity means that we do not ever have enough of everything, including time, to satisfy our every desire. Thus even the most affluent have limited resources and unlimited wants even though they may have solved more of their wants with their larger amount of resources. Diff: 3 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 102) Labor, human capital, and entrepreneurship are resources related to human beings. Distinguish among the three resources. Answer: Labor is the work done by human beings. Human capital refers to the worker education and training that makes human beings more productive. Whenever a worker's skills increase, there has been an improvement of human capital. Entrepreneurship refers to the use of human beings in organizing, managing, and assembling the other factors of production to make business ventures. Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 103) Distinguish between scarcity and shortages. Answer: Scarcity exists because the wants of human beings are unlimited while resources are limited. The meaning of a shortage is not the same as scarcity. A shortage exists when people have to wait in line for things, especially on a temporary basis. Scarcity relates to the poor but also to the rich; scarcity is a fact of life that affects everyone. A shortage occurs when the quantity of a good desired exceeds the quantity available at a positive price. Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 104) Are all goods economic goods? Are all economic goods also goods? Explain. Answer: Not all goods are economic goods. Economic goods are a subset of all goods, and are produced from scarce resources. Sunlight is an example of a good that is not an economic good. Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

105) "Economics is the study of how people eliminate scarcity." Do you agree or disagree? Why? Answer: Disagree. Economics is the study of how people make choices because of scarcity. Scarcity cannot be eliminated because people do not ever have enough of everything to satisfy their every desire. Scarcity is a fact of life for both rich and poor. Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 106) What does scarcity have to do with the fact that people must make choices? Answer: Scarcity implies that people cannot have everything they want. This implies that ways must be found to determine which of the many goods that people want will actually be produced. Further, since any person cannot have everything he or she wants, the person must decide which specific things to acquire. That is, the person must make choices. Diff: 2 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 107) "Economics deals with human needs." Do you agree or disagree? Why? Answer: Disagree. The concept of needs is difficult to define objectively for each person, so that economists consider people's unlimited wants instead of their needs. Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking 108) Explain the difference between human needs and wants. Answer: Needs are objectively undefinable. Needs are the essentials of life: food, clothing, water and shelter. They are basics of life you can't live without. Needs are things you have to have, items you can't do without. Wants are things you desire to increase your level of happiness. They are not absolutely necessary. Humans have unlimited wants, and so they cannot have all of them given limited resources. Diff: 1 Topic: 2.1 Scarcity Learning Outcome: Micro-1: Identify the basic principles of economics and explain how to think like an economist AACSB: Analytical thinking

2.2 Opportunity Cost, Trade-Offs, and Choices 1) The opportunity cost of attending college might best be described as A) the money that must be paid in order to attend college. B) the lowest-valued alternative use of the student's time. C) the highest-valued alternative use of the student's time. D) the value that the student attaches to not working. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 2) The value of the best alternative sacrificed to obtain something you want is referred to as A) explicit cost. B) opportunity cost. C) accounting cost. D) tangible cost. Answer: B Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 3) Opportunity cost A) can only be measured as a paid cost. B) is always the value of the next best forgone opportunity. C) does not exist since there are no receipts. D) is always the lowest valued alternative. Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

4) Opportunity cost is defined as A) the value of the next-best alternative that must be sacrificed to attain a want. B) the least-costly means to produce output. C) the value of the output currently received by an individual or a corporation. D) the return from a given unit of labor. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 5) One opportunity cost associated with going to college is A) paying for the costs of food prepared at home. B) paying tuition. C) giving up employment possibilities while in college. D) paying for room, board, and other living expenses. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 6) Bill Bonecrusher graduates from college with a choice of playing professional football at $2 million a year or coaching for $50,000 a year. He decides to play football, but eight years later he quits football to make movies for $3 million a year. His opportunity cost at graduation was ________ and eight years later was ________. A) $50,000; $2 million B) $2 million; $2 million C) $2 million; $3 million D) $50,000; $50,000 Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

7) Jack and Jill both decide to go to a movie with free tickets. We know that A) both bear an opportunity cost since they could have done other things instead of watching a movie. B) both bear the same opportunity cost since they are doing the same thing. C) the cost of going to the movie is greater for the one who had more choices to do other things. D) neither bears an opportunity cost because the tickets were free. Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 8) Opportunity cost is A) the intrinsic value of an economic good. B) the total value of all the alternatives given up when a choice is made. C) the value of the opportunity selected when a need is satisfied. D) the value of the next highest ranked alternative that must be sacrificed to obtain a want. Answer: D Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 9) Suppose you have three choices—go to a movie, read a book, or sleep. You choose to go to a movie. The opportunity cost of the movie is A) the value of the book not read. B) the value of sleeping which you enjoy the least. C) the value of the concert that you didn't attend. D) the value of the activity that you would have selected if you hadn't gone to the movie. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

10) For every choice a person makes it can be assumed that A) the chooser has full knowledge of the situation. B) some opportunity cost was involved. C) there is a fifty-fifty chance the choice was the wrong one. D) a good is involved and satisfaction is gained. Answer: B Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 11) The opportunity cost of going to college for a student receiving a scholarship A) is the income that she would have earned if she did not go to college. B) is the risk of dropping out. C) is the expenses for food and clothing that she purchases while in college. D) is zero because she does not have to pay tuition. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 12) The concept of opportunity cost exists because A) resources are scarce. B) goods have different prices. C) shortages occur. D) the value of services is hard to determine. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

13) Opportunity cost is A) the cost of producing all goods and services in the United States. B) the value of the next-best alternative that must be sacrificed to satisfy a want. C) the fixed cost of production. D) the value of the most useful alternative that must be sacrificed to obtain something or satisfy a want. Answer: B Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 14) Which of the following statements is FALSE about opportunity cost? A) Opportunity cost is always foregone opportunity. B) Opportunity cost is the next best alternative. C) When a person buys two items, the concept of opportunity cost applies even though she can afford to buy both items. D) Opportunity cost exists only for goods with monetary values. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 15) Opportunity cost is A) the combined value of all the alternatives not selected. B) the same thing as the money price of a good. C) the value of the next best alternative which was given up. D) based on the intrinsic value of the good itself. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

16) Anthony and Kelly decide to watch a movie on Netflix using a promotion code so they do not need to pay for that movie. We know that A) both bear the same opportunity cost because they are seeing the same thing. B) both bear the same opportunity cost because the tickets have the same face value. C) both bear an opportunity cost that depends on what each person is giving up to watch the movie. D) neither bears an opportunity cost since neither needs to pay for the movie. Answer: C Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 17) Sherri has decided that with the two hours in between classes she can do one of 3 things. She has ranked her choices, from highest to lowest as, (1) chat with her friends, (2) study history or (3) take a nap. The opportunity cost of chatting with her friends is A) the combined value of studying history and taking a nap. B) the value of studying history, the next best use of time. C) the value of chatting with her friends. D) zero since she does not pay her friends to talk to her. Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 18) Hailey has decided to eat lunch between classes. She has ranked her choices, from highest to lowest as, (1) turkey sandwich, (2) tuna sandwich, (3) slice of cheese pizza, (4) fish taco. The opportunity cost of the eating turkey sandwich is A) the combined value of the tuna sandwich, cheese pizza and fish taco. B) the value of tuna sandwich, the next best choice. C) the value of the fish taco. D) zero since she has satisfied a want. Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

19) Which of the following is a TRUE statement? A) Opportunity cost is always measured in the nation's currency. B) Opportunity cost is an objective measure since the cost of an activity is the same for everyone. C) The fewer alternatives there are the greater the opportunity cost. D) Opportunity cost is always a foregone opportunity. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 20) Opportunity cost exists because A) resources in this world are scarce. B) prices must adjust to eliminate shortages. C) production could not occur without the opportunity cost of using resources. D) the value of economic goods is positive while the value of goods is zero. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 21) The opportunity cost of a decision is the A) value of the best alternative not chosen. B) value of all the alternatives not chosen. C) cost of making the wrong choice. D) cost incurred by others who are unhappy with your decision. Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

22) The saying that "You cannot have your cake and eat it too" illustrates the economic concept of A) a positive statement. B) a normative statement. C) physical capital. D) opportunity cost. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 23) On an afternoon that a class meets, you could alternatively study for an exam that will take place in another class the next morning, go to a movie with a friend, or, most desirable to you at present, take a nap. The opportunity cost of attending the afternoon class is A) forgoing the nap. B) missing seeing the movie with your friend. C) giving up the time to study for the next morning's exam. D) being unable to engage in all three of the above activities. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 24) Opportunity cost is best defined as A) the sum of the dollar values of all alternatives given up when choices are made. B) the cost of producing the purchased goods. C) the next highest valued alternative when a choice is made. D) the dollar price of the purchased item. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

25) You have the option of consuming one can of soda or two cookies or three apples. You picked the can of soda. Therefore the opportunity cost of this can of soda is A) the price of the can of soda. B) the difference in the prices of these three products. C) the price of the cookies as they are not usually consumed with soda. D) either the cookies or the apples, whichever you like more. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 26) The opportunity cost of going to college full time away from home includes A) the income you could have earned from a full-time job. B) the funds you would have saved if you had not paid the tuition. C) the time you could have spent with parents back home. D) All of these are correct. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 27) A student has a job that pays a wage rate of $20 per hour. The night before an economics exam, the student has set aside four hours to study for the exam, estimating that for each hour spent studying, her grade will rise by 5 points. That night, she gets a call from her employer to come to work for a wage rate of $15 per hour for that night. She decides to work for three hours and earn an extra $45. The next day she takes the test and gets a grade of 75. The opportunity cost for her work is A) the $45 she earned. B) the 15 extra points she estimates that she could have earned on the exam if she had studied the extra three hours. C) the three hours she did not study. D) the entire four hours she set aside for studying. Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

28) Opportunity cost can best be defined as A) the interest cost of financing a business loan at the bank. B) the value of all of the alternatives sacrificed. C) the value of the next-highest-ranked alternative. D) There is no real definition for opportunity cost. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 29) If Christina goes surfing for two hours instead of earning $20 per hour for those two hours, her opportunity cost is A) the good time spent surfing. B) the minimum wage that some other people would earn. C) the travel time to the beach. D) $40. Answer: D Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 30) Opportunity cost exists because of A) poverty. B) scarcity. C) greed. D) self-interest. Answer: B Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

31) You like to sleep until 9:00 am during the semester. What is the opportunity cost of attending an 8:00 am class? A) nothing, since you can go back to bed later B) sleep C) obtaining the notes from the 8:00 am class D) the credit hours earned from the 8:00 am class Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 32) Opportunity costs arise from A) choices. B) poverty. C) mistakes. D) income inequality. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 33) Even though mass transit systems such as buses are available in most cities in the United States, many residents decide to drive to work in their own vehicles because A) the opportunity cost of riding a bus is too high for them. B) there is no opportunity cost of them to drive. C) they are not rational. D) they do not behave according to the economic way of thinking. Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

34) Which of the following sets of terms describes the problem of scarcity in economics? A) goods, land, and needs B) labor, needs, and opportunity costs C) choices, opportunity costs, and trade-offs D) production, consumption, and wants Answer: C Diff: 3 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

35) In the above figure, the opportunity cost of moving from producing 75 guitars and 25 ukuleles to producing 50 guitars and 50 ukuleles is A) 25 ukuleles. B) 50 guitars. C) 100 guitars. D) 25 guitars. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

36) In the above figure, the opportunity cost of moving from producing 50 guitars and 50 ukuleles to producing 25 guitars and 75 ukuleles is A) 25 guitars. B) 75 ukuleles. C) 25 ukuleles. D) 50 guitars. Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 37) In the above figure, as more ukuleles are produced, the opportunity cost in terms of guitars is A) decreasing. B) increasing. C) constant. D) zero. Answer: C Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 38) In the above figure, moving from producing 50 guitars and 50 ukuleles to producing 25 guitars and 75 ukuleles, the opportunity cost of one ukulele is A) 25 guitars. B) 75 ukuleles. C) 25 ukuleles. D) 1 guitar. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

39) In the above figure, the opportunity cost of moving from producing 75 guitars and 25 ukuleles to producing 25 guitars and 75 ukuleles is A) 25 guitars. B) 75 ukuleles. C) 25 ukuleles. D) 50 guitars. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 40) Opportunity cost is illustrated on the production possibilities curve by a A) bowed-out shape of the curve. B) shift to the right of the curve. C) shift to the left of the curve. D) movement along the curve. Answer: D Diff: 3 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

41) A farmer has 100 acres of land on which he can grow soybeans or corn. An acre of land yields 200 bushels of soybeans or 100 bushels of corn. The above figure refers to the farmer's A) production possibilities curve. B) substitution options curve. C) demand curve. D) opportunity cost curve. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 42) In the above figure, how many bushels of corn are produced at point "a"? A) 10,000 B) 2,500 C) 1,000 D) 0 Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

43) In the above figure, what is the opportunity cost of one bushel of soybeans? A) 1 bushel of corn B) 0.5 bushels of corn C) 2 bushels of corn D) unable to determine Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 44) In the above figure, what is the opportunity cost of one bushel of corn? A) 1 bushel of soybeans B) 0.5 bushel of soybeans C) 2 bushels of soybeans D) unable to determine Answer: C Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 45) If opportunity costs are constant, then A) the production possibilities curve does not exist. B) the production possibilities curve bows outward. C) the production possibilities curve is a negatively sloped straight line. D) factors of production must not be fully employed. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

46) The production possibilities curve represents the maximum feasible production combinations resulting from A) the mix of current resources that utilizes all available inputs using current technology. B) a fixed amount of demand by consumers. C) the lack of trade-offs in production. D) the lack of technology used in production. Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 47) The production possibilities curve represents A) the maximum amount of labor and capital available to society. B) the combinations of goods and services among which consumers are indifferent. C) the maximum combination of goods and services that can be produced with fixed resources and technology, given efficient use of the resources. D) the maximum rate of growth of capital and labor in a country. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 48) If all resources were perfectly adaptable for alternative uses, the production possibilities curve would A) be bowed out. B) be a loop. C) be a straight line. D) not exist. Answer: C Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

49) A straight-line production possibilities curve takes this shape because A) the opportunity cost of producing a good is constant. B) the opportunity cost of producing more of a good is decreasing. C) resources are better suited for producing one output than another. D) resources are fixed. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

The above table shows the daily production possibilities for a bakery. Currently the bakery bakes 60 pizzas and 180 loaves of bread, that is at alternative C. 50) Using the above table, what is the opportunity cost of moving from alternative C to alternative D? A) 60 loaves of bread B) 2 loaves of bread C) 30 loaves of bread D) 1/2 loaf of bread Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 51) Using the above table, what is the opportunity cost of moving from alternative C to alternative B? A) 1/2 a pizza pie B) 60 pizza pies C) 90 pizza pies D) 30 pizza pies Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

52) Using the above table, moving from alternative C to alternative B, what is the opportunity cost of one loaf of bread? A) 1 pizza pie B) 30 pizza pies C) 2 pizza pies D) 0.5 pizza pie Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 53) Using the above table but now the bakery bakes 30 pizzas and 240 loaves of bread (alternative B), moving from alternative B to alternative D, what is the opportunity cost of one pizza pie? A) 2.5 loaves of bread B) 2 loaves of bread C) 0.5 loaf of bread D) 150 loaves of bread Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 54) People always face trade-offs because A) they always have more than one use for their time and money. B) they can always afford to buy different goods and services. C) trading takes place in a market economy. D) they can make themselves better off through trade. Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

55) Which of the following statements indicates the idea of trade-offs? A) "There is no such thing as a free lunch." B) "The devil made me do it." C) "You've got me under your spell." D) "Always give it the best that you can." Answer: A Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 56) The production possibilities curve represents A) the total amount of stocks and bonds that exist in the economy. B) the trade-off between human capital and physical capital that exists. C) all possible combinations of total output that can be produced. D) society's needs. Answer: C Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 57) The curve that represents all possible combinations of goods that can be produced is called A) the production possibilities curve. B) the resource allocation curve. C) the efficiency curve. D) the supply curve. Answer: A Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

58) Refer to the above figure. A farmer has 50 acres of land on which to grow wheat or beans. An acre of land yields 400 bushels of beans or 800 bushels of wheat. Which of the following is a possible combination of beans and wheat that can be grown, assuming the land is farmed efficiently? A) 30,000 bushels of each B) 20,000 bushels of beans and 40,000 bushels of wheat C) 5,000 bushels of beans and 5,000 bushels of wheat D) 16,000 bushels of beans and 8,000 bushels of wheat Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 59) Refer to the above figure. A farmer has 50 acres of land on which to grow wheat or beans. An acre of land yields 400 bushels of beans or 800 bushels of wheat. Which of the following is a possible combination of beans and wheat that can be grown, assuming the land is farmed efficiently? A) 30,000 bushels of each B) 15,000 bushels of beans and 10,000 bushels of wheat C) 25,000 bushels of beans and 25,000 bushels of wheat D) 20,000 bushels of beans and 40,000 bushels of wheat Answer: B Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

60) In the above figure, the farmer faces a trade-off between beans and wheat equal to A) one-to-one. B) three-to-one. C) one-to-two. D) one-to-four. Answer: C Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 61) The above figure is referred to as a A) supply-demand curve. B) consumption curve. C) production possibilities curve. D) scarcity-shortage curve. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 62) Refer to the above figure. If the farmer has 50 acres of land, the farmer is producing at point a, and an acre of land yields 400 bushels of beans or 800 bushels of wheat, how much land is devoted to the production of wheat? A) 8.5 acres B) 10 acres C) 12.5 acres D) 15 acres Answer: C Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

63) The production possibilities curve demonstrates which of the following concepts? A) scarcity B) choice C) trade-offs D) all of these Answer: D Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 64) The production possibilities curve shows all possible combinations of A) two goods that are desired by society. B) two goods that can be efficiently produced with a given set of resources. C) two goods that can be purchased given the prices of the goods. D) two goods that two countries can trade with each other. Answer: B Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 65) A straight-line production possibilities curve has A) an increasing opportunity cost between the two goods. B) a decreasing opportunity cost between the two goods. C) a constant opportunity cost between the two goods. D) no opportunity cost between the two goods. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 66) Which of the following would result in a movement along the production possibilities curve? A) a fall in the unemployment rate B) growth in the capital stock C) population growth D) a change in the outputs of two goods that a society chooses to produce Answer: D Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 56 Copyright © 2021 Pearson Education, Inc.

67) A movement along the production possibilities curve would imply that A) the labor force has grown. B) productivity has increased. C) society has chosen a different set of outputs. D) productivity has declined because workers are demanding more leisure. Answer: C Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

68) Which of the following statements about a movement along the production possibilities curve in the above figure is FALSE? A) An additional computer can be produced only if fewer televisions are produced. B) The trade-off between computers and televisions is not constant. C) Society cannot have more of both goods at the same time. D) There are no opportunity costs involved in choosing one point on the curve over all other points. Answer: D Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

69) If the production possibilities curve is a downward-sloping straight line, then A) resources are highly specialized, making it difficult to use them for alternative uses. B) technological change has increased. C) production is efficient only when producing at the mid-point. D) all resources must be perfectly adaptable for alternative uses. Answer: D Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 70) A graphical representation which shows the trade-off that occurs when more of one output is obtained at the expense of another is called A) a scarcity curve. B) a production possibilities curve. C) a growth curve. D) a supply curve. Answer: B Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 71) Suppose an acre of land yields 100 bushels of corn and that one bushel of corn provides enough seed for one-quarter of an acre of land. The opportunity cost of consuming another 100 bushels of corn today is A) 100 bushels of corn next year. B) 25 bushels of corn next year. C) 10 bushels of corn next year. D) 2.5 bushels of corn next year. Answer: B Diff: 3 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 72) Briefly explain why people make choices. Answer: People make choices because of scarcity. Scarcity exists because resources are insufficient to satisfy people's every desire. Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 58 Copyright © 2021 Pearson Education, Inc.

73) Briefly explain the concept of opportunity cost. What is the opportunity cost of attending college? Answer: The opportunity cost of an action is the value of the next best alternative that a person has to give up when making a choice. The opportunity cost of attending college is what the college student would give up by going to school, such as the income she could have earned if she did not go to school. Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 74) How are scarcity, choice, and opportunity cost related? Answer: Since resources are scarce, we cannot have everything we want. This implies that we must make choices. But when we choose one thing, we're prevented from choosing one or more other things. The highest-valued alternative good that we don't choose is the opportunity cost of the good we did select. Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 75) Suppose that nuclear power plants are banned. What are examples of the opportunity costs of this decision? Answer: Electricity must be produced by some method, so if there are fewer nuclear plants, there will be more plants that use fossil fuels. There will be an increase in coal mining and petroleum production. Coal mining is hazardous and will increase the number of injuries and deaths, and the increased use of oil may generate more oil spills. Diff: 3 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 76) Suppose you order a slice of pepperoni pizza and a soda at a shopping mall food court. What are examples of the opportunity costs of this decision? Answer: The opportunity cost of an action is the value of the next best alternative that a person has to give up when making a choice. The opportunity cost of the pizza and soda is what you would give up by consuming these things, such an alternative food choice like a hamburger and a bottle of water could have been consumed if you did not consume the pizza and soda. Diff: 3 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 59 Copyright © 2021 Pearson Education, Inc.

77) It is not uncommon for people to say something like, "If we can put someone on the moon we should be able to . . . ," followed by the person's favorite project. What response can an economist make to this person? Answer: Society must make choices, and when it chooses one thing, it must give up something else. Resources were used to get people to the moon, and these resources are not available to do other useful things. The fact that we put someone on the moon means that there are some other things we cannot do. Diff: 3 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 78) Both an NBA basketball player and a fast-food cook are going to graduate school. Who has a higher opportunity cost? Explain. Answer: The opportunity cost is the income lost while going to graduate school. An NBA basketball player typically earns much more than does a fast-food cook so that the opportunity cost of going to graduate school is likely to be higher for the NBA basketball player than for the fast-food cook. Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 79) What does the slope of the production possibilities curve represent? Explain. Answer: It represents the trade-off between two goods from two points on the PPC. Specifically, as we move from one point to another, in order to produce more of one good, we must trade-off or give up the other good. If the trade-off is constant, then the slope is constant along the PPC and the PPC is a straight line. If the trade-off increases, then the slope is increasing along the PPC and the PPC is bowed outward. Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 80) What does a production possibilities curve show? Answer: A production possibilities curve shows the combinations of maximum outputs that can be produced with a fixed amount of resources that are fully employed, and fixed technology. Diff: 1 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 60 Copyright © 2021 Pearson Education, Inc.

81) How can the concepts of opportunity costs, scarcity and choice be illustrated by the production possibilities curve? Answer: The concept of opportunity cost is illustrated by movements along the production possibilities curve, meaning that producing more of one good necessarily means less production of another good. Because of scarcity, we can select a point on the PPC but are unable to reach points beyond the PPC due to limited resources. Choice is represented by the actual point chosen on the PPC from all the possible production points on the PPC. Diff: 2 Topic: 2.2 Opportunity Cost, Trade-Offs, and Choices Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 2.3 The Economic Choices a Nation's People Face

1) If the farmer is producing 5000 bushels of soybeans at point "b" in the above figure, we know that A) the farmer is not using his resources efficiently. B) the farmer is using his land to produce a crop other than soybeans or corn. C) the farmer must be using more land than was used in constructing the production possibilities curve. D) the farmer is using his resources efficiently. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

2) In the above figure, which of the following points indicates the efficient use of resources? A) a B) f C) g D) h Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 3) Which of the following would NOT allow society to move to point "h" in the above figure? A) an improvement in technology B) more efficient use of current resources C) an increase in quantity of labor D) an increase in quantity of capital Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

4) The shape of the production possibilities curve in the above figure indicates that A) production of corn is characterized by increasing costs while the production of cloth is characterized by decreasing costs. B) production of both corn and cloth is characterized by increasing costs. C) production of both corn and cloth is characterized by constant costs. D) production of corn is characterized by constant costs and the production of cloth is characterized by increasing costs. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 5) Between points "b" and "c" in the above figure, the opportunity cost of 250 more bushels of corn is A) 200 yards of cloth. B) 250 yards of cloth. C) 600 yards of cloth. D) 800 yards of cloth. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 6) If an economy is operating at a point inside the production possibilities curve, then A) society's resources are being inefficiently utilized. B) the curve will move to the left. C) society's resources are being used to produce too many consumer goods. D) economic policy must implemented to slow growth of the economy further. Answer: A Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

7) A country operates inside its production possibilities curve; this may be caused by A) unemployed resources. B) total efficiency in industry. C) a new resource being discovered. D) a lack of modern products being produced. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 8) The production possibilities curve bows out because A) production is efficient. B) of the law of increasing additional cost. C) production is inefficient. D) resources are not being fully utilized. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 9) When deriving the production possibilities curve, it is assumed that A) the amount of each good that is to be produced is fixed. B) the prices of resources are fixed along the curve. C) most resources can be used to produce only one good. D) resources are efficiently used. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 10) All points inside the production possibilities curve indicate A) a lack of sufficient supply. B) inefficiency in production. C) the law of increasing relative cost. D) the law of decreasing relative cost. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

11) Refer to the above figure. If the farmer is growing 8,000 bushels of beans and 8,000 bushels of wheat, then we know that A) the farmer is not using resources efficiently. B) the farmer is using more land for wheat than for beans. C) the farmer should increase the amount of wheat grown and reduce the amount of beans. D) the farmer cannot be using the amount of land that was used to construct the curve. Answer: A Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 12) Refer to the above figure. If the farmer is producing 4,000 bushels of beans and 38,000 bushels of wheat, then we know the farmer A) is using resources efficiently. B) is producing too much wheat. C) is inefficient because point a is the most efficient point on the curve. D) must be using more resources than were assumed available in constructing the graph. Answer: D Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

13) How does an economy represented by a straight-line production possibilities curve differ from one represented by a traditional production possibilities curve with a bowed shape? A) In the economy represented by a straight-line production possibilities curve, there is no opportunity cost. B) In the economy represented by a straight-line production possibilities curve, neither good is scarce. C) In the economy represented by a straight-line production possibilities curve, the law of increasing relative cost does not apply. D) In the economy represented by a straight-line production possibilities curve, changing the amount of resources devoted to the production of each good will not alter the amount of each good actually produced. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 14) Look at the following production possibilities table for smartphones and tablets. The table shows the maximum combination of smartphones and tablets that can be produced, when all resources are fully employed.

Good

Production Possibilities A B C D

Based on the above information, A) there is no trade-off between smartphones and tablets. B) the opportunity cost of producing 30 instead of 20 smartphones is 120 tablets. C) the opportunity cost of producing 40 instead of 30 smartphones is 30 tablets. D) the opportunity cost of producing 90 instead of 50 tablets is 50 smartphones. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

15) A bowed Production Possibilities Curve (PPC) indicates A) inefficient production. B) that the trade-off between the 2 goods is not constant. C) changing technology. D) only 1 good is always being produced. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 16) A production point that lies outside the Production Possibilities Curve (PPC) A) denotes inefficiency. B) indicates unemployment. C) is currently not attainable. D) can never be reached, even in future periods. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 17) Which of the following will most likely happen when better technology is used in production? A) an upward movement along the production possibilities curve B) an outward shift of the production possibilities curve C) an inward shift of the production possibilities curve D) a downward movement along the production possibilities curve Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

18) One of the assumptions underlying the production possibilities curve is that A) at least one of the factors of production is a free good. B) the quantity of the resources available for the production of economic goods is fixed over a given time period. C) there is at least one factor of production that is employed inefficiently. D) some of the factors of production are not being used. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 19) Which of the following statements is NOT an assumption underlying the production possibilities curve? A) Resources are fully and efficiently employed. B) Technology is fixed. C) Production occurs over some specified time period. D) The amount of resources available for production can be changed quickly. Answer: D Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 20) A production possibilities curve with quantities of clothing and food on the axes shows which of the following? I. A society cannot have an unlimited amount of each good. II. For an efficient society, an increase in clothing production will necessitate a decrease in food production. III. A society will always produce the maximum amount of both clothing and food. A) I only B) II only C) III only D) Both I and II Answer: D Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

21) It is correct to state that a society which is on its production possibilities curve is A) underutilizing is resources. B) technologically inefficient. C) consuming too much output. D) fully utilizing its productive resources. Answer: D Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 22) Technology is best defined as A) society's stock of applied knowledge concerning the production of goods and services. B) the maximum output that can be obtained from a stock of physical capital. C) output inside the production possibilities curve. D) movement along the production possibilities curve. Answer: A Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 23) A technological improvement can cause the production possibilities curve to shift outward because A) it increases costs and contributes to lower production rates. B) maximum feasible outputs of both goods increase. C) production will fall, but jobs will be saved. D) it causes increases in unemployment. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

24) Suppose the current unemployment rate is 3 percent. If it rises to 4 percent, A) the economy will move up along the production possibilities curve. B) the economy will move closer to the production possibilities curve. C) the production possibilities curve will shift inward. D) the economy will operate farther inside the production possibilities curve. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 25) Which of the following would cause an economy to produce at a point inside its production possibilities curve? A) the efficient allocation of all factors of production B) population growth C) unemployment and an inefficient use of available resources D) capital accumulation Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

26) In the above figure, the combination of computers and televisions shown by point x A) is not attainable at the point in time for which the graph is drawn. B) can be attained only if some of society's resources are unemployed. C) suggests that the law of increasing relative costs does not hold. D) results only because society allocates its resources inefficiently. Answer: A Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 27) In the above figure, the combination of personal computers and televisions shown by point w A) is an efficient use of society's resources because it is below the production possibilities curve. B) is more desirable than point x because producing at point w does not put a strain on society's resources. C) is attainable but involves the inefficient use of some of society's resources. D) is beyond the capacity of society to produce. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

28) In the above figure, points u, v, y, and z show A) an inefficient allocation of society's scarce resources. B) possible combinations of televisions and personal computers. C) a constant trade-off between televisions and personal computers. D) that society prefers more televisions than computers. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 29) The president of the United States promises that the nation's economy will simultaneously produce more defense goods without any decreases in the production of other goods. Under which of the following conditions could such a promise be valid? A) if the United States were producing at a point on its production possibilities curve B) if the United States were producing inside its production possibilities curve C) if the United States were producing to the right of its production possibilities curve D) None of these; the production possibilities curve must shift to the right. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 30) A point outside a society's production possibilities curve is one that is A) unattainable given the resources of the society. B) technologically inefficient. C) undesirable given the implied underemployment of resources. D) desirable since it satisfies the desires of the population. Answer: A Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

31) A point inside a society's production possibilities curve represents A) an unattainable combination of outputs. B) an output combination that satisfies the needs of the population. C) an underutilization of productive resources. D) a technically superior output combination. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 32) A point outside a production possibilities curve indicates A) that resources are not being used efficiently. B) an output combination that society cannot attain given its current level of resources and technology. C) that resources are being used very efficiently. D) that both goods are characterized by increasing costs. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 33) Efficiency can correctly be defined as A) producing outside the production possibilities boundary. B) maximizing opportunity cost. C) producing the most output with given technology and resources. D) providing for the immediate needs of the greatest proportion of the population. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

34) When an economy is operating efficiently, which is TRUE? A) All resources are fully employed. B) It would be possible to increase the output of 1 good without decreasing the output of the other. C) Resources are not fully employed or current technology is not being fully utilized. D) This economy is operating to the right of its production possibilities curve (PPC). Answer: A Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 35) Typically, the greater the specialization of resources, A) the less production that takes place. B) the greater the bow of the production possibilities curve. C) the poorer the country becomes. D) the greater the unemployment in the country. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 36) The production possibilities curve bows outward because A) opportunity costs are decreasing as the production of a good increases. B) opportunity costs are increasing as the production of a good increases. C) opportunity costs are fixed as the production of a good increases. D) resources are of uniform quality. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

The above table shows the daily production possibilities for a nation. 37) When the economy moves from point A to B in the above table, the opportunity cost of a television in terms of cars is A) 10. B) 2.5. C) 2. D) 0.5. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 38) According to the above table, the opportunity cost of each additional car in terms of televisions A) remains constant. B) falls as more cars are produced. C) increases as more cars are produced. D) is meaningless because the cost of cars cannot be expressed in terms of televisions. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 39) Given the production possibilities schedule in the above table, a combination of 60 televisions and 40 cars A) is attainable but involves an inefficient use of society's resources. B) would be attainable only if a new technology of producing televisions or cars were introduced. C) is not attainable because it is not listed in the schedule. D) is not attainable because society does not have enough resources to produce this combination. Answer: A Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

40) Given the production possibilities schedule in the above table, a combination of 75 televisions and 75 cars A) is attainable but involves the unemployment of some of society's resources. B) clearly illustrates the trade-off between televisions and cars. C) cannot be produced by society, given its current level of resources and production technology. D) can be produced only if society is willing to have some of its resources used inefficiently. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 41) A bowed production possibilities curve is consistent with A) a decreasing opportunity cost. B) a technologically inefficient society. C) the overutilization of productive resources. D) highly specialized resources. Answer: D Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 42) A bowed outward production possibilities curve occurs when A) opportunity costs are constant. B) resources are not scarce. C) additional units of output of one good necessitate greater reductions in the other good. D) there are surpluses in the goods being produced. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

43) The law of increasing additional costs is due to A) government regulations. B) technological improvements. C) the fact that it is more difficult to use resources efficiently the more society produces. D) the fact that resources are not perfectly adaptable for alternative uses. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 44) The law of increasing opportunity cost implies that A) producing additional units of one good results in proportionately smaller reductions in output of the other good. B) producing additional units of one good results in increasing amounts of lost output of the other good. C) the production possibilities curve will be a straight line. D) the society will be producing on its production possibilities curve. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 45) Which of the following is NOT an assumption used in deriving a production possibilities curve? A) The labor force is growing at a constant rate. B) Resources are fully employed. C) Technology is constant. D) The quantity of resources is constant. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

46) When determining the production possibilities curve, A) the trade-off between the goods in the economy remains constant. B) the amount of productive resources remains constant. C) the prices of the goods are used. D) the prices of resources are used. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 47) Which of the following is an assumption used in deriving a production possibilities curve? A) Poverty always exists in society. B) The wages in an industry increase constantly. C) Prices will continue to increase. D) The amount of resources is fixed. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 48) All of society's applied knowledge on how to produce goods and services is A) held by university professors. B) called technology. C) opportunity cost. D) efficiency. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 49) Economists define technology as A) machines such as computers. B) entrepreneurship. C) absolute advantage. D) society's knowledge concerning the production of goods. Answer: D Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 78 Copyright © 2021 Pearson Education, Inc.

50) A point outside a production possibilities curve indicates A) that resources are not being used efficiently. B) that resources are being used very efficiently. C) opportunity costs are constant. D) an output combination that is unobtainable with the current resource and technology levels. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 51) A point inside a production possibilities curve indicates A) resources are not being used efficiently. B) resources are being used very efficiently. C) opportunity costs are constant. D) an output combination that is unobtainable with the current resource and technology levels. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 52) A point on a production possibilities curve indicates A) resources are not being used efficiently. B) resources are being used efficiently. C) opportunity costs are constant. D) an output combination that can be attained only if society gets more resources or there is technological change. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

53) An efficient point of production is A) a point on the production possibilities curve. B) a point inside the production possibilities curve. C) the point where scarcity no longer exists. D) the point where we are currently producing. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

54) Refer to the above figure. Which of the following statements is TRUE? A) Point a is efficient, Point b is efficient, point c is inefficient. B) Point a is unobtainable, point b is efficient and point c is inefficient. C) Point a is inefficient, point b is efficient and point c is unobtainable. D) All of the points are efficient. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 55) Refer to the above figure. Point c is A) efficient. B) where economists always want a nation or company to achieve. C) unobtainable. D) inefficient but obtainable. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 80 Copyright © 2021 Pearson Education, Inc.

56) Refer to the above figure. Which of the following points indicates an efficient use of resources? A) a B) d C) e D) More information is needed to answer the question. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 57) Refer to the above figure. Which of the following points indicates an inefficient use of resources? A) a B) d C) e D) More information is needed to answer the question. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

58) Refer to the above figure. Which of the following points indicates an unobtainable point of production? A) a B) d C) e D) More information is needed to answer the question. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 59) Refer to the above figure. The shape of the production possibility curve indicates that production of A) wheat is characterized by increasing costs while the production of beans is characterized by decreasing costs. B) wheat is characterized by decreasing costs while the production of beans is characterized by increasing costs. C) both goods is characterized by increasing costs. D) both goods is characterized by decreasing costs. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 60) Refer to the above figure. Between points f and g, the opportunity cost of producing 75 more bushels of wheat is A) 1 bushel of beans. B) 4 bushels of beans. C) 25 bushels of beans. D) 100 bushels of beans. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

61) Production is efficient when A) it generates a point beyond the production possibility curve. B) the economy cannot produce more of one good without giving up the production of another good. C) technological change occurs. D) the maximum amounts of the most important good are produced. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 62) Whenever the economy is producing the maximum amount of goods given the level of technology and the amount of resources, A) the number of resources used should be decreased since society must protect its scarce resources. B) the concept of opportunity costs does not exist. C) more goods will be available than customers want to buy. D) the economy is producing efficiently. Answer: D Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

63) Refer to the above figure. Assume that only two goods can be produced in the economy. Which of the following statements is TRUE? A) Points a, b, and c are all obtainable points of production. B) Points a and b are obtainable points of production. C) Points b and c are obtainable and efficient points of production. D) Only point b is an obtainable and efficient point of production. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 64) Refer to the above figure. Given our current level of technology and resources, the unobtainable point(s) of production would be A) point a. B) point b. C) point c. D) points a and c. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

65) Refer to the above figure. We are currently producing at point c. Which of the following statements is TRUE? A) Resources are not being efficiently utilized. B) Resources are being efficiently utilized. C) The only way to produce more of Goods X or Y is to have an increase in the amount of resources. D) The Law of Increasing Additional Cost does not hold. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 66) All mutually beneficial trades have taken place. This implies that A) the production possibilities curve is bowed out. B) society is inside the production possibilities curve. C) economic efficiency prevails in the society. D) society is on the constant cost portion of its production possibilities curve. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 67) Technology is A) society's pool of knowledge of how to produce goods and services. B) a resource like land or physical capital. C) computers and lasers. D) not obtainable by engaging in activities that increase human capital. Answer: A Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

68) The law of increasing additional cost occurs when A) there are always shortages in some goods. B) technology is not used. C) resources are not perfectly adaptable for alternative uses. D) there are always alternatives and it is costly to figure out which alternative is best. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 69) The reason the production possibilities curve is bowed outward (concave) is A) the law of increasing additional cost. B) that technology is constantly changing. C) that the number of resources is increasing. D) that the economy has more capital goods than entrepreneurial effort. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 70) Some resources are better suited to produce certain goods than other resources. This fact leads to A) a linear production possibilities curve. B) inefficiency in the economy. C) the law of increasing additional cost. D) increases in technology. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

71) Refer to the above figure. The Law of Increasing Additional Costs applies in A) Panel A only. B) Panel B only. C) Panels A and B. D) neither Panel A nor B. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 72) Refer to the above figure. Which of the following statements is TRUE? A) Panel A does not represent an economy that is producing efficiently while Panel B does. B) Panel A represents an economy that has a lower level of technology than Panel B. C) Opportunity costs do not apply to Panel A but apply to Panel B. D) In Panel A, equal amounts of Y must be given up to obtain equal increments of X while in Panel B increasingly greater amounts of Y must be given up to obtain equal increments of X. Answer: D Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 73) The bowed shape of the traditional production possibilities curve reflects the A) negative side effects of economic growth. B) fact that not all resources are equally well-suited to producing all goods. C) costs of unemployment. D) problems of inequality. Answer: B Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 87 Copyright © 2021 Pearson Education, Inc.

74) Refer to the above figure. Which one of the following statements is TRUE with regard to the economy depicted in the graph? A) Point C cannot be produced. B) The best production point is 500 loaves of bread and 50 bales of wool. C) The total amount of resources it takes to produce 20 bales of wool and 500 loaves of bread is more than the amount of resources needed to produce 50 bales of wool and 250 loaves of bread. D) The total amount of resources it takes to produce 20 bales of wool and 500 loaves of bread is the same as the amount of resources needed to produce 50 bales of wool and 250 loaves of bread. Answer: D Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 75) Refer to the above figure. Which one of the following statements is TRUE with regard to the economy depicted in the graph? A) Starting from point A, this economy does not incur any opportunity cost in producing more bread. B) Starting from point A, this economy does not incur any opportunity cost in producing more wool. C) In moving from point A to point B, the economy produces 30 additional bales of wool at an opportunity cost of 250 loaves of bread. D) In moving from point A to point B, the economy is experiencing economic growth. Answer: C Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 88 Copyright © 2021 Pearson Education, Inc.

76) Refer to the above figure. How do you describe what is happening as the economy moves from point C to point B? A) Previously unemployed resources are now being devoted to the production of wool. B) Previously unemployed resources are now being devoted to the production of bread. C) The economy has increased its wool production by 30 bales at an opportunity cost of 250 loaves of bread. D) The economy has acquired new resources for making bread. Answer: A Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 77) Refer to the above figure. How do you describe what is happening as the economy moves from point A to point B? A) The economy has acquired new resources that are well suited for producing wool. B) Land that was once used to grow wheat is now being used to graze sheep. C) The economy is producing more bread by choosing to produce less wool. D) The technology for growing wheat has improved. Answer: B Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 78) Refer to the above figure. How do you describe what is happening as the economy moves from point A to point C? A) The economy has acquired new resources that are well suited for producing bread. B) Land that was once used to graze sheep is now being used to grow wheat. C) Resources are becoming unemployed. D) The technology for growing wheat has improved. Answer: C Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

79) During periods of unemployment A) the economy operates at a point inside the production possibilities curve. B) the economy operates at a point outside the production possibilities curve. C) the production possibilities curve shifts inward. D) the production possibilities curve shifts outward. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 80) As an economy moves from point to point along its production possibilities curve, which one of the following variables changes? A) the total amount of resources employed B) the level of technology C) the level of efficiency of some factors of production D) the amount of each good or service produced Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 81) Technology A) is constantly changing at every point along a production possibilities curve. B) is the recipe for combining land, labor, physical capital, and entrepreneurship to produce a good. C) does not have an effect on the amount of a good a society can produce with its given resources. D) only changes if resources change. Answer: B Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

82) Which of the following is assumed when constructing a production possibilities curve? A) a fixed amount of resources B) the efficient use of resources C) resources of a given quality D) All of these are correct. Answer: D Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 83) Which of the following is held constant when constructing a production possibilities curve? A) the price level B) the amount of total resources used C) combination of goods produced D) all of these Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 84) In constructing a production possibilities curve, all of the following are assumed EXCEPT A) resources are fully employed. B) the quantity and quality of resources being used is fixed. C) the state of technology is improving. D) the time period involved is fixed. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 85) Inefficient use of resources is shown on the production possibilities curve A) by an inward shifting of the curve. B) by a point inside the curve. C) by a point near the top of the curve. D) by a point outside the curve. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 91 Copyright © 2021 Pearson Education, Inc.

86) A bowed-outward production possibilities curve demonstrates the concept of A) constant opportunity costs as production shifts from the production of one good to the production of the other good. B) decreasing opportunity costs as production shifts from the production of one good to the production of the other good. C) increasing opportunity costs as production shifts from the production of one good to the production of the other good. D) increasing opportunity costs at first but the opportunity costs steadily decrease as you move down along the curve. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 87) The production possibilities curve for two products is bowed out because A) as the production of a good increases, opportunity cost increases. B) as the production of a good increases, opportunity cost is unchanged. C) the qualities of the resources are not identical. D) there are unemployed resources. Answer: A Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

88) Refer to the above figure. Production at Point F A) is not attainable given the underlying assumptions of the production possibilities curve (PPC). B) would not be desirable. C) can only be attained by giving up Point E. D) can be attained only if a society desired more goods and services. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 89) Refer to the above figure. Production at Point E A) would indicate that this economy is producing beyond its capabilities. B) would indicate production at a level below that which is attainable. C) is not attainable with given resources and technology. D) would demonstrate a total lack of technical expertise. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

90) When a society takes increasing amounts of resources and applies them to the production of a specific good, resulting in increasing opportunity costs for each additional unit produced, which of the following applies? A) the law of demand B) the law of supply C) the law of scarcity D) the law of increasing additional costs Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 91) Efficiency is achieved A) when output is being produced at a point inside a production possibilities curve. B) when producers are getting the maximum possible output from the available resources. C) when consumers are able to buy everything that they want. D) when prices of all goods and services go to zero. Answer: B Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

92) In the above figure, the opportunity cost of moving from point D to point C is A) 20 guitars. B) 50 ukuleles. C) 55 guitars. D) 25 ukuleles. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 93) In the above figure, the opportunity cost of moving from point D to point E is A) 75 guitars. B) 55 guitars. C) 100 ukuleles. D) 100 guitars. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

94) In the above figure, the opportunity cost of moving from point A to point C is A) 50 guitars. B) 0 guitars. C) 25 guitars. D) 50 ukuleles. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 95) In the above figure, the production of 75 ukuleles and 75 guitars is A) efficient production. B) inefficient production. C) impossible production. D) full employment production. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 96) In the above figure, the production of 25 guitars and 25 ukuleles is A) efficient production. B) inefficient production. C) impossible production. D) not possible since production always occurs along the PPC. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 97) In the above figure, as more ukuleles are produced, the opportunity cost in terms of guitars is A) decreasing. B) increasing. C) constant. D) zero. Answer: B Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 96 Copyright © 2021 Pearson Education, Inc.

98) An outward bowed production possibilities curve illustrates A) inefficient production. B) the law of increasing additional cost. C) a lack of scarcity. D) zero opportunity cost of moving from inefficient production to currently unobtainable production. Answer: B Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 99) All of the following are assumptions of the production possibilities curve EXCEPT A) resources are fully employed. B) there is a fixed time period. C) there is a fixed level of technology. D) there is a fixed demand for the products. Answer: D Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 100) Why is efficiency desirable? A) It results in an equal distribution of income. B) It results in the highest prices for the goods and services produced. C) It makes best use of the available resources. D) It is the most politically popular solution. Answer: C Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Reflective thinking

101) The law of increasing additional cost exists because A) resources are not perfectly adaptable to both production processes. B) the demand for the product increases. C) the cost of resources of the products increase. D) the cost of resources of the products decrease. Answer: A Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 102) Efficiency is defined as A) the maximum consumption of goods. B) the production of goods and services. C) the production of output at minimum cost. D) the most profits for companies. Answer: C Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

103) For a country that produces two goods: Environmental clean-up goods and space program goods. What economic information is contained in its production possibility curve? Answer:

The above figure illustrates the production possibility curve, which divides the area into two parts. The area beyond the PPC is unattainable, illustrating the concept of scarcity. The curve slopes down, indicating the fact that the only way to apply more resources to producing space program goods is to devote fewer resources to producing environmental clean-up goods. It is bowed out, illustrating increasing opportunity cost. Efficiency is illustrated when society is on the PPC rather than inside it. Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 104) What causes the production possibility curve to be bowed out? Answer: A bowed production possibility curve indicates increasing opportunity costs. To produce more of one good, resources must be taken away from producing another good. These resources often are specialized. This implies that the resources cannot move easily from producing one good to another. The more of a good that is produced, the more it must use resources that are better suited for the other good, and the extra costs of producing another unit of the good increase. Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

105) Explain: "The law of increasing additional cost is an inevitable phenomenon in economics." Answer: Economic resources are seldom suitable for all types of production. Hence, when society demands more of a particular good or service, an increase in the demand for the resources most adaptable to its production will rise; as more of the good is produced, eventually less efficient inputs will be pressed into production. It is the utilization of these less efficient inputs that gives rise to higher societal cost of production. Diff: 2 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 106) Explain the concept of the law of increasing additional cost. Answer: The law of increasing additional cost is the fact that the opportunity cost of additional units of a good increases as society tries to produce more of that good. This accounts for the bowed-out shape of the production possibilities curve. Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 107) Explain what is meant by economic efficiency. Does efficiency imply that the fastest production processes or the most powerful equipment must always be used? Explain. Answer: Efficiency involves a situation in which a given output is produced at lowest cost. Consequently, the fastest-operating or most powerful equipment may not always be efficient. Diff: 3 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 108) Why is a point below the production possibilities curve less efficient than a point on that curve? Answer: A point on the production possibilities curve is efficient because it means the economy is producing the maximum outputs of goods and services with given resources and technology. By contrast, a point below the production possibility curve means that the use of the given resources is not generating the maximum possible outputs of goods and services. Thus, this point represents an inefficient combination of outputs produced with available resources and technology. Diff: 1 Topic: 2.3 The Economic Choices a Nation's People Face Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future 1) In order for an economy to increase its production possibilities, the economy must A) be very efficient. B) increase inputs. C) increase its wants. D) reduce output. Answer: B Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 2) The discovery of new natural resources will cause A) the economy to move closer to the production possibilities curve. B) the production possibilities curve to shift up and to the right. C) an upward movement along the curve. D) the curve to shift back and to the left. Answer: B Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 3) The production possibilities curve can shift inward when A) production increases. B) employment increases. C) the stock of productive capital rises. D) a country experiences a natural disaster. Answer: D Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

4) Refer to the above figure. Which of the following would allow society to move to point d? A) producing efficiently B) concentrating production in wheat C) increasing the quantity of labor D) using the best land to produce wheat and the lower quality land to produce beans Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 5) Economic growth can be drawn in a diagram by A) making the production possibilities curve more bowed out. B) making the production possibilities curve less bowed out. C) shifting the production possibilities curve out. D) shifting the production possibilities curve in. Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

6) All of the following would cause the production possibilities curve to shift outward EXCEPT A) an improvement in technology. B) an increase in the amount of labor available. C) a decline in the unemployment rate. D) an increase in the level of capital stock. Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 7) How is economic growth shown by the production possibilities curve? A) by shifting the curve to the right B) by moving the curve to the left C) by moving up the existing curve D) by changing the shape of the curve from a straight line to one that is bowed Answer: A Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 8) The production possibilities curve shifts outward when A) the law of increasing additional cost takes hold. B) the economy is producing efficiently. C) we produce more consumption goods over productive investment in equipment. D) there is an increase in resources or technology. Answer: D Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

9) Economic growth can be pictured in a production possibilities curve diagram by A) shifting the production possibilities curve in. B) shifting the production possibilities curve out. C) making the production possibilities curve straighter. D) moving from a point inside the production possibilities curve to a point on the curve. Answer: B Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 10) The only way that a society can produce outside the production possibilities curve is A) through economic growth. B) by producing efficiently. C) by obeying the Law of Increasing Additional Cost. D) to use the concept of opportunity cost. Answer: A Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 11) If a country is currently producing inside its production possibilities curve, A) it can increase the production of both goods by putting unemployed resources to work. B) it can increase the production of one of the goods only if it reduces the production of the other good. C) it is experiencing efficient production of one good but not the other. D) None of these are correct. Answer: A Diff: 3 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

12) If an economy produces only steel and wheat, a new fertilizer will A) cause the production of wheat to increase at every point on a production possibilities curve but not affect the production of steel, that is the curve moves outward on the wheat axis only. B) cause the production of both wheat and steel to increase at every point along the production possibilities curve, that is the curve moves outward on both the wheat axis and the steel axis. C) not affect the production of either wheat or steel. D) cause the production of steel to increase at every point along the production possibilities curve but not affect the production of wheat, that is the curve moves outward on the steel axis only. Answer: A Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 13) In order for a production possibilities curve to shift to the right, which of the following must occur? A) government involvement B) increasing consumer wants C) economic growth D) reductions in the supply of resources Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 14) Regarding the production possibilities curve, an improvement in technology will A) shift the curve to the left. B) cause a movement downward along the curve. C) cause a movement upward along the curve. D) shift the curve to the right. Answer: D Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

15) The production possibilities curve (PPC) illustrates economic growth by a(n) A) bowed-out shape of the PPC. B) outward shift of the PPC. C) inward shift of the PPC. D) movement along the PPC. Answer: B Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 16) Economic growth appears on a production possibilities curve as A) the curve shifting out away from the origin. B) the curve shifting in toward the origin. C) a change in the slope of the curve. D) the points outside the production possibilities curve. Answer: A Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 17) A production possibilities curve will shift inward A) when the unemployment rate increases. B) when production is inefficient. C) when resources are expanding. D) when a war destroys the capital goods of a country. Answer: D Diff: 3 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

18) Generally, if a nation produces more consumer goods than capital goods, A) more of all goods may be produced in the future. B) less of all goods may be produced in the future. C) about the same amount of capital goods may be produced in the future as are being produced today. D) society will have to forego future consumption of capital goods. Answer: B Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 19) The use of goods and services for personal satisfaction is known as A) the formation of capital goods. B) production. C) personal investment. D) consumption. Answer: D Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 20) A country that must reduce current consumption to increase future consumption possibilities A) must be allocating resources inefficiently. B) must be producing along the production possibilities curve. C) must be producing outside the production possibilities curve. D) must not have private ownership of property. Answer: B Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

21) Whenever a society forgoes current consumption to invest in capital goods, A) it will have less to consume next year. B) it will be easier for that society to consume less in the future because people will become accustomed to less. C) that society can consume more in the future. D) it will be forced to produce fewer capital goods in the future. Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 22) At a point on a production possibilities curve, opportunity cost of more capital goods today is A) fewer capital goods in the future. B) fewer consumer goods in the future. C) fewer consumer goods today. D) more unemployed resources in the future. Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 23) When an economy sacrifices production of consumption goods to produce more capital goods, we would expect that the production possibilities curve will A) shift outward. B) shift inward. C) become a straight line. D) shift about in random fashion. Answer: A Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

24) Capital goods A) are a special type of consumption goods. B) are consumed because they enhance the enjoyment consumers obtain from other goods and services. C) are goods used to make consumer goods and services. D) refer to the expenses that a company incur for producing other types of goods. Answer: C Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 25) If a country increased the production of its capital goods, then A) the more consumption of goods we can have today. B) the less consumption we can have today, but we will have more in the future. C) the more unemployed resources there will be in the future. D) the more unemployed resources there are today. Answer: B Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 26) The opportunity cost of more consumption of goods today is A) lower consumption of goods in the future. B) fewer capital goods in the future. C) more capital goods today. D) more unemployment both today and in the future. Answer: A Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

27) Whenever productive resources are used to make capital goods, A) society is not producing efficiently. B) society is giving up current consumption. C) the production possibilities curve becomes flatter. D) absolute advantage occurs. Answer: B Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 28) The more society consumes today, A) the more it consumes next year. B) the less it can produce today. C) the less society can consume in the future. D) the more capital goods society can produce in the future. Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 29) The trade-off between current consumption and the production of capital goods is also a trade-off between A) the future cost for capital goods and future cost of consumption goods. B) having fewer needs and more wants in the future. C) satisfying the needs of the poor and the wants of the wealthy. D) current consumption and future consumption. Answer: D Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

30) To have more consumer goods in the future, we must A) produce more capital goods today. B) lower current income. C) get government involved in the production process. D) stop producing all goods today. Answer: A Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 31) The trade-off between the present and future consumption is measured by A) the money cost of both the present and future consumption. B) the foregone present consumption. C) the difference between the money price of future goods and the money cost of producing them. D) the difference between the money price of present goods and the money cost of producing them. Answer: B Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 32) Using productive resources to make capital goods requires that we A) get everyone to agree on the best use of those resources. B) get government approval of our plan to make capital goods. C) forgo some level of current consumption. D) prove that the existence of the capital goods will not cause any environmental damage. Answer: C Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

33) Trading off capital goods for increasing amounts of consumer goods today will most likely result in A) increased long-term growth. B) decreased long-term growth. C) decreased prices in consumer goods. D) increases in the quantity of consumer goods. Answer: B Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 34) A production possibilities curve will shift outward or to the right for all of the following reasons EXCEPT A) an increase in the unemployment rate. B) an increase in the quality of the labor force. C) an improvement in production technology. D) a discovery of a new source of renewable energy. Answer: A Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 35) Economic growth is shown by A) a point near the top of the production possibilities curve. B) a point outside the production possibilities curve. C) an inward shift of the production possibilities curve. D) an outward shift of the production possibilities curve. Answer: D Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

36) If the production of capital goods is shown along the horizontal axis of a production possibilities curve, and the production of consumer goods is shown along the vertical axis of a production possibilities curve, and the economy desires to have a rapid rate of economic growth, then the economy should produce at a point A) near the middle of the curve dividing resources equally between the production of consumer and capital goods. B) near the vertical axis concentrating on the production of consumer goods. C) near the horizontal axis concentrating on the production of capital goods. D) inside the curve allowing the economy to adjust rapidly to changes in economic activity. Answer: C Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 37) If a country wants to promote future growth, it should A) produce more capital goods today. B) produce more consumer goods today. C) produce only economic goods. D) produce only needed goods. Answer: A Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 38) "Because resources are scarce, the production of more capital goods means that fewer resources are available to produce consumption goods, so there is less current consumption." Do you agree or disagree? Explain. Answer: Agree. Capital goods are goods that are used to produce other goods rather than for the sake of current consumption. The resources used to make capital goods are not available to produce current consumption goods, so there is less current consumption. Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

39) Explain briefly what will likely happen to society if it chooses to produce more capital goods and fewer consumption goods. Answer: Because capital goods enable society to produce larger quantities of consumption goods, giving up some consumption goods in exchange for more capital goods today will result in larger production of consumption goods in the future. Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 40) Explain what will happen to the production possibilities curve over time if society gives up some consumption goods in favor of more capital goods. Answer: If society chooses to give up some consumption goods in favor of more capital goods, then the production possibilities curve will shift outward over time. This happens because the capital goods can be used to produce more goods in the future. Diff: 2 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 41) Why does the trade-off between consumption goods and capital goods represent a trade-off between the present and the future? Answer: This is because consumption goods are for current satisfaction but capital goods are goods that can be used for producing consumption goods in the future. Society that reduces the production of consumption goods in favor of capital goods will produce more consumption goods in the future. Diff: 1 Topic: 2.4 Economic Growth, Production Possibilities, and the Trade-Off between Present and Future Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

2.5 Comparative Advantage and Maximizing Your Future Income 1) Comparative advantage is A) when a person can produce a good at a lower opportunity cost compared to another person. B) when a person can produce all goods more quickly than other people. C) when the production possibilities curve shifts outward to the right. D) only for individuals and not countries. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 2) If Josylnn can make $70,000 as an accountant, $50,000 as a school teacher, $20,000 as a cook, and nothing as an opera singer, she has a comparative advantage in A) accounting. B) being a school teacher. C) being a cook. D) opera singing. Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 3) Jake is an executive of a major corporation. Boris is a baker. Jake earns a salary ten times as large as the salary Boris earns, and Jake has a much larger oven for baking bread. Jake can make a loaf of bread that tastes better than Boris's bread, but Boris can bake faster. A) Jake has an absolute and comparative advantage over Boris in making bread. B) Jake has an absolute but not comparative advantage over Boris in making bread. C) Jake had a comparative but not absolute advantage over Boris in making bread. D) Jake does not have an absolute or comparative advantage over Boris in making bread. Answer: B Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

4) Which is the best example of specialization? A) a high school math teacher who teaches only algebra B) a firm that produces both pet food and cooking oil C) a person whose job includes accounting, personnel, and maintenance tasks D) a high school math teacher who teaches algebra and calculus Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 5) Why do people specialize? A) Specialization allows people to do a variety of job tasks. B) Specialization usually increases productivity. C) Specialization decreases people's dependence on each other. D) Specialization occurs when people do not want to learn new tasks. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 6) Specialization can occur because A) governments pass laws that require it. B) varying skills differentiate workers. C) absolute advantage creates specialization among laborers. D) managers and laborers share job tasks. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

7) If a country's production possibilities curve gets more bowed out over time, it is an indication that A) technological change has taken place. B) society is learning to use its resources more efficiently. C) the quantity of labor and capital have increased. D) resources have become more highly specialized. Answer: D Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 8) Generally, specialization leads to A) constant opportunity costs. B) greater productivity. C) reductions in people's skill levels. D) greater self-reliance. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 9) Specialization and the division of labor typically result in A) cost overruns. B) increased output. C) decreased output. D) a greater reliance upon imports. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

10) Absolute advantage is A) producing at a lower opportunity cost. B) producing a good using the fewest inputs. C) producing a good only when demand is high. D) producing a good that requires imported components. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 11) A person has a comparative advantage in an activity whenever she A) has an absolute advantage in the activity. B) can perform the activity at a lower opportunity cost than another person can. C) can do the activity in less time than anyone else. D) can do everything better than anyone else. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 12) Comparative advantage is always a(n) ________ concept. A) absolute B) abstract C) relative D) monetary Answer: C Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

13) If you can earn $30,000 a year teaching, $20,000 a year making phone apps, $35,000 a year driving a cab, and $40,000 a year as an actor or actress. You have a comparative advantage in A) teaching. B) making phone apps C) being an actor or actress. D) one of them but we need more information to know which. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 14) Comparative advantage implies choosing the activity that A) has a high opportunity cost. B) is inside the production possibilities frontier. C) has the lowest opportunity cost. D) does not demand any specialization. Answer: C Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 15) If individual A has comparative advantage in painting and individual B has comparative advantage in carpentry, then A) individual A must use fewer hours to paint a fence than individual B. B) individual B will specialize in painting. C) there is a lower opportunity cost (expressed in units of carpentry) for individual A to paint than for individual B to paint. D) specialization will not occur, since each does not have a clear absolute advantage. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

16) The ability to produce a good at a lower opportunity cost than others is known as A) comparative advantage. B) absolute advantage. C) specialization. D) marginal cost production. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 17) The division of labor refers to A) workers being assigned specific tasks. B) workers performing multiple tasks. C) separating men and women in the workforce. D) creating jobs that all people can perform at the same level. Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 18) Tiger Woods, a professional golfer, pays a garage mechanic to change the motor oil of his car even though he can do the work himself. Which of the following best explains why Tiger Woods does NOT change the oil himself? A) Tiger Woods has an absolute advantage in changing oil. B) Tiger Woods has a comparative advantage in changing oil. C) There is no opportunity cost for the garage mechanic to change oil. D) The opportunity cost of changing oil is higher for Tiger Woods than for the garage mechanic. Answer: D Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

19) Division of labor refers to A) dividing tasks up into several subtasks and having one person perform these subtasks in a certain order. B) the separation of hourly workers from salaried workers. C) assigning different workers to different tasks. D) separating union workers from nonunion workers. Answer: C Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 20) Division of labor increases the output of society by A) eliminating scarcity. B) reducing the choices people have to make to a more manageable number. C) ensuring that people are happier in performing their work. D) allowing resources to specialize in the tasks for which they have a comparative advantage. Answer: D Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 21) The division of productive activities among persons and regions so that no one individual or area is totally self-sufficient is known as A) advantage-taking. B) comparative value. C) specialization. D) outsourcing. Answer: C Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

22) Suppose that at a bicycle shop, instead of having each worker assemble an entire bicycle themselves, one person welds the frames, another person works on the braking system, another person works on the tires, and another person works on the gears. This best demonstrates the concept of A) division of labor. B) microeconomics. C) comparative advantage. D) absolute advantage. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 23) With specialization A) opportunity costs tend to be constant. B) there are greater gains in material well-being. C) there is more emphasis on self-reliance. D) society is more productive while individuals are less productive. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 24) Specialization occurs because A) society trades current consumption for future consumption. B) the production possibilities curve tends to be linear. C) people have different skills. D) society produces at the production possibilities curve. Answer: C Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

25) The concept of absolute advantage relies on A) the idea of comparative advantage. B) the ability to produce more units of an item with a given amount of resources. C) the idea of opportunity cost. D) the concept of economic efficiency as measured on the production possibility curve. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 26) The idea of comparative advantage is closely related to A) the concept of opportunity cost. B) the concept absolute advantage. C) using the worker with the most diverse sets of skills. D) production efficiency. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 27) The division of labor refers to A) the separation of blue-collared workers and white-collared workers. B) finding the best order of performing tasks. C) the separation of workers into union workers and non-union workers. D) the assignment of different workers to different tasks. Answer: D Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 28) Division of labor A) increases the amount of capital in the economy. B) leads to an increase in the amount of output in the economy. C) makes economic goods possible. D) is not possible for service goods. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 123 Copyright © 2021 Pearson Education, Inc.

29) Comparative advantage is the ability to A) perform an activity at a lower opportunity cost. B) determine who your best trading partners are. C) determine the best use of capital goods. D) convince others of the best choices to make in their own self-interest. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 30) Why do most people choose to specialize in a narrow set of skills for their work, rather than to learn a little bit about several varied fields of endeavor? A) They feel that doing so will minimize their chances of being unemployed. B) They don't correctly perceive the costs of being so specialized. C) It allows them to earn more income by being more productive. D) They are unaware of how much better off they would be if they diversified their skills. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 31) Justin and Maria work at a restaurant. Justin can make either 10 pancakes or 4 waffles; Maria can make either 8 pancakes or 2 waffles. According to this scenario, the opportunity cost of making one waffle for Maria is A) 4 pancakes. B) 1/4 pancake. C) 2 1/2 pancakes. D) 2/5 pancake. Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

32) Justin and Maria work at a restaurant. Justin can make either 10 pancakes or 4 waffles; Maria can make either 8 pancakes or 2 waffles. According to this scenario, the opportunity cost of making one pancake for Jose is A) 1/4 waffle. B) 2/5 waffle. C) 2.5 waffles. D) 4 waffles. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 33) Justin and Maria work at a restaurant. Jose can make either 10 pancakes or 4 waffles; Maria can make either 8 pancakes or 2 waffles. According to this scenario, A) Maria has the absolute advantage in making waffles. B) Justin has the absolute advantage in making waffles. C) Maria has the comparative advantage in making waffles. D) Justin has the comparative advantage in making pancakes. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 34) Justin and Maria work at a restaurant. Jose can make either 10 pancakes or 4 waffles; Maria can make either 8 pancakes or 2 waffles. According to this scenario, A) Maria has the absolute advantage in making waffles B) Maria has the absolute advantage in making pancakes. C) Maria has the comparative advantage in making pancakes. D) Justin has the comparative advantage in making pancakes. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

35) One of the benefits of specialization is A) greater output. B) people enjoy doing one repetitive task over and over. C) specialists cost less to hire. D) training costs are higher. Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 36) If Destiny can make either four chairs or one table in an hour and Greg can make either three chairs or two tables in an hour, then A) Destiny has the absolute advantage in the production of tables. B) Greg has the absolute advantage in the production of chairs. C) Destiny has the comparative advantage in the production of chairs. D) Greg has the comparative advantage in the production of chairs. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 37) If Destiny can make either four chairs or one table in an hour and Greg can make either three chairs or two tables in an hour then A) Destiny has the absolute advantage in the production of chairs. B) Destiny has the comparative advantage in the production of tables. C) Greg has the absolute advantage in the production of chairs. D) Greg has the comparative advantage in the production of chairs. Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

38) When Adam Smith's ten pin workers specialized, they were able to increase output of pins in a day from 200 to 48,000. One reason for the increase in pin output was due to A) the time saved when workers do not need to shift from one task to another. B) the boredom the workers suffered when they stopped making a whole pin and only concentrated on one task such as painting the heads white. C) new machinery. D) the bonus they received when they produced more pins. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 39) The making and selling of a pencil for ten cents would likely NOT be possible, but for A) relative advantage. B) the production possibilities curve. C) absolute advantage. D) the division of labor. Answer: D Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 40) When productive activities are organized according to the principle of the division of labor, A) scarcity is eliminated. B) we do not devote enough resources for capital investment. C) total output increases due to the advantages of specialization. D) an inefficient outcome results. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

41) Division of labor means that A) the labor market in the United States is geographically segmented. B) some employees join labor unions and others do not. C) management and labor are always in conflict. D) the production process is divided into smaller tasks. Answer: D Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 42) Two factories make wooden chairs. If the workers in factory X make each chair from start to finish and the workers in factory Y divide labor, one would assume A) the chairs in factory X are of higher quality. B) the workers in factory Y have more job satisfaction. C) factory Y can take advantage of division of labor and produce more efficiently. D) factory X can take advantage of division of labor and produce more efficiently. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 43) If a CEO can type faster than her secretary, then A) the CEO has a comparative advantage in typing. B) the CEO has neither a comparative advantage in typing, nor in management. C) the CEO should still continue performing CEO duties since the CEO has a comparative advantage in management, and the secretary should continue typing. D) the CEO should still continue performing CEO duties as well as typing since he has a comparative advantage in both management, and typing. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

44) "My brother is better at cooking, better at cleaning, and better at fixing the car than I am." Relative to me, my brother has A) an absolute advantage in cooking, cleaning, and car repair. B) a comparative advantage in cooking, cleaning, and car repair. C) more intelligence than me. D) more income than me. Answer: A Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 45) If a CEO is a better at typing a document than his assistant, he is said to have a(n) ________ advantage in typing over his assistant. A) absolute B) unusual C) relative D) overwhelming Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 46) Assuming a CEO has to sacrifice more than his assistant in order to engage in full-time typing, we would say that his assistant has a(n) ________ advantage in typing versus the CEO. A) absolute B) comparative C) pecuniary D) overwhelming Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

47) Comparative advantage implies that you A) can produce more units of a good or service than another. B) can produce a good or service at a lower opportunity cost. C) can produce goods with more capital resources. D) can produce goods with more human resources. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 48) Which of the following is TRUE with respect to specialization? A) Adam Smith in The Wealth of Nations referred to specialization and division of labor. B) With a given set of resources, specialization results in higher output. C) Individuals and nations specialize in their areas of comparative advantage in order to reap the gains of specialization. D) All of these are correct. Answer: D Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 49) The principle of comparative advantage implies that A) only wealthy countries ultimately can benefit from international trade. B) every country can benefit from international trade. C) we should limit the extent to which people specialize. D) most people are harmed by trade. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

50) Assume that Country A and Country B have the same resources, but that individuals in Country A have specialized whereas individuals in Country B have not. Given this information, you can determine that A) Country A will have a higher output than Country B. B) Country A will have a lower output than Country B. C) Country A and Country B will have identical outputs. D) individuals in Country A will have lower incomes than individuals in Country B. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 51) When nations specialize in their areas of comparative advantage and then trade with the rest of the world, the result is that A) the average standard of living in the world will go down. B) the average standard of living in the world will go up. C) the world will move from a point on the production possibilities curve to a point inside the curve. D) worldwide economic efficiency will decrease. Answer: B Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 52) When a country specializes and trades with other countries, it is most likely that it specializes in goods A) for which it has a comparative advantage. B) for which it has an absolute advantage. C) for which it has no advantage. D) which are very costly to produce. Answer: A Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

53) When two countries specialize in the production of different goods and trade with each other, it is most likely each country will A) export the goods in which it has a comparative advantage. B) export the goods in which it has an absolute advantage. C) import the goods in which it has a comparative advantage. D) import the goods in which it has an absolute advantage. Answer: A Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 54) Which of the following is TRUE about comparative advantage? A) Comparative advantage explains trade among nations, but not within nations. B) Comparative advantage explains trade within nations, but not among nations. C) Comparative advantage explains trade within nations and among nations. D) Comparative advantage has nothing to do with trade among nations; it only is concerned with specialization within a firm. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 55) When a country or a region of a country specializes in producing the product that has the lower opportunity cost compared to another country or region, it is practicing A) absolute advantage. B) cost disadvantage. C) regional advantage. D) comparative advantage. Answer: D Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

56) The reason that most of the coffee that is consumed in the United States comes from Colombia is that A) Colombia has an absolute advantage in producing coffee relative to the United States. B) Colombia has a comparative advantage in producing coffee relative to the United States. C) coffee cannot be grown in the United States. D) government trade disincentives regarding Colombian coffee make such trade possible. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 57) The text argues that if avocado growers in Mexico can produce avocadoes cheaper than avocado growers in the United States, this will not reduce total jobs available in the United States. The logic underlying this argument is that A) avocado growers in the United States did not earn much anyway. B) avocado growers in the United States are welcome to emigrate to Mexico. C) avocado growers in the United States will switch to specializing in a crop in which they hold the comparative advantage. D) avocado growers in Mexico need the jobs more than Americans do. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 58) You should specialize in the production of a good if you have A) an absolute advantage. B) more capital resources than your trading partner. C) more human resources than your trading partner. D) a comparative advantage. Answer: D Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

59) In economics, international trade is based on the existence of A) absolute advantage between countries. B) relative advantage between countries. C) comparative advantage between countries. D) output advantage between countries. Answer: C Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 60) Suppose that Kansas farmers can grow wheat more cheaply than can Texas farmers. In the interest of efficiency, what is the desirable outcome? A) Allow the Kansas farmers to sell their wheat for a lower price. B) Pass a law in Kansas mandating a minimum price for wheat equal to what is charged by Texas farmers. C) Pass a law in Texas mandating a maximum price for wheat equal to what is charged by Kansas farmers. D) Have Texas residents boycott Kansas wheat. Answer: A Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 61) Economists argue that unhindered international trade leads to an efficient outcome. What is meant by "an efficient outcome" in this context? A) an outcome in which wages are roughly equal around the world B) an outcome in which the standard of living is roughly equal around the world C) an outcome in which an individual can choose to specialize in a certain line of work and be certain that he or she can make a living at that until retirement D) an outcome in which resources are devoted to their most efficient use Answer: D Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

62) Based on the above figure, if countries "A" and "B" faced the production possibilities curves above, both countries would benefit if A) they did not trade. B) "A" produced industrial goods, and "B" produced agricultural goods. C) "B" produced industrial goods, and "A" produced agricultural goods. D) they both produced both industrial and agricultural goods. Answer: B Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 63) According to the concept of comparative advantage, a good should be produced in that nation in which A) domestic opportunity cost is greatest. B) domestic opportunity cost is the smallest. C) money is used. D) terms of trade are maximized. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

64) International trade between two nations increases the standard of living of both nations due to A) specialization and gains from absolute advantage. B) specialization and gains from comparative advantage. C) high tariffs. D) political intervention. Answer: B Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 65) Distinguish the concepts of comparative advantage and absolute advantage. Answer: Comparative advantage is the ability to produce a good or service at a lower opportunity cost compared to other producers, while absolute advantage is the ability to produce more units of a good or service using a given quantity of labor or resource inputs. Comparative advantage is a relative concept and it is the basis for specialization. Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 66) What is the "division of labor"? How is the division of labor related to production? Answer: The division of labor occurs when resources specialize into specific tasks. Total output is greater when resources are specialized. Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 67) Explain how comparative advantage, specialization and division of labor are related. Answer: Comparative advantage is the ability to perform an activity at a lower opportunity cost. Specialization involves the organization of economic activity among different individuals and regions. Most individuals specialize based on their comparative advantage. The division of labor refers to the segregation of a workers into different specific tasks. The division of labor occurs when resources specialize into specific tasks. Total output is greater when resources are specialized. Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

68) What is the difference between comparative advantage and absolute advantage? Answer: Absolute advantage refers to the ability to produce a good with fewer total resources. Comparative advantage is the ability to produce at the lower opportunity cost. A comparative advantage exists when one has to give up fewer units of the other good than another person or country. Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 69) Why do most people specialize in their work? Answer: Most people specialize because specializing in what they have a comparative advantage increases their productivity. Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 70) Briefly explain how specialization and trade can benefit nations. Answer: When nations specialize in producing goods for which they have a comparative advantage and then trade with other nations, their production possibilities curves move outward, which yields greater production and consumption possibilities. Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 71) Would a country with an absolute advantage in the production of all goods and services trade with other countries? Explain. Answer: Yes. Trade is based on comparative advantage, not absolute advantage. While it is possible for a country to have an absolute advantage in all goods, it can only have a comparative advantage in one (based on a two good model). When nations specialize in what they have a comparative advantage and then trade with other nations, their production possibilities curves move outward, which yields greater production and consumption possibilities. Diff: 3 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

72) Politicians often argue that a country's standard of living is reduced when it allows imports into the country. Offer an economically sound counter-argument. Answer: Specialization of labor is productive, so output is greater when people produce goods for which they have a comparative advantage—that is, goods for which the opportunity cost of producing is lower than others. They trade for those in which they do not have a comparative advantage. International trade based on comparative advantage then increases total output of the two countries and can result in higher standards of living for citizens of both countries. Diff: 2 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 73) What happens to overall living standards when countries trade with other countries? Answer: When countries specialize in producing goods for which they have a comparative advantage and then trade with the rest of the world, then their living standards tend to rise as people can have more goods than before. Diff: 1 Topic: 2.5 Comparative Advantage and Maximizing Your Future Income Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 3 Demand and Supply 3.1 Demand 1) In economics, "demand" refers to A) what people need instead of want without paying for it. B) the minimum amount of a good people need to survive. C) the satisfaction a good will provide a person. D) how much of a good people will buy at any price during a given time period. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 2) The concept of "demand" in economics refers to A) the different quantities of a good or service people will buy at different possible prices. B) the different types of goods and services that people of different income levels want to buy. C) how changes in the prices of all goods affect people's buying behavior. D) changes in people's consumption behavior over time. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 3) The law of demand states that A) consumers with more income will spend more on goods and services. B) a higher price will lead to increased sales. C) the price can never be too high for some consumers. D) quantity demanded of a good will vary inversely with the price of that good. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

4) The law of demand states that A) consumers will exhaust their incomes as they purchase goods and services at given absolute prices. B) the quantity demanded of a good is higher at a lower relative price than at a higher relative price. C) there is a direct positive relationship between relative price and quantity demanded. D) if the price of a good increases both relatively and absolutely, there will be no change in quantity demanded. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 5) The law of demand includes the statement "other things being equal." These other things include all of the following EXCEPT A) the price of that good in the law of demand. B) consumers' income. C) consumers' tastes and preferences. D) the number of potential buyers. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 6) According to the law of demand, other things being equal A) when the price a good goes up, then people buy more of that good. B) when the price a good goes down, then people buy more of that good. C) when people's income goes down, then they buy less of a good. D) when people's income goes up, then they buy less of a good. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 7) The law of demand tells us that people will buy less of a good if A) the price of that good increases. B) the prices of other goods increase. C) people's income decreases. D) every factor that can affect people's buying decisions changes. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) The law of demand is based on the observation that A) people buy less of a product when the product becomes less fashionable. B) people buy more of a product when its price falls. C) people are indifferent to price changes. D) people always want more than they need. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

9) Refer to the above figure. Which panel demonstrates the law of demand? A) Panel A B) Panel B C) Panel C D) Panel D Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 10) A fundamental principle in demand analysis is that a change in price leads to A) a movement along the demand curve. B) a rightward shift of the demand curve. C) a leftward shift of the demand curve. D) a complementary movement on the supply curve. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 3 Copyright © 2021 Pearson Education, Inc.

11) The law of demand states that A) people demand less at lower prices. B) the quantity demanded is directly related to price. C) the quantity demanded is inversely related to price. D) changes in price and changes in quantity demanded move in the same direction. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 12) Which of the following is an example of the law of demand? A) An increase in the price of magnetic optical disks is followed by a reduction in the amount of magnetic optical disks purchased. B) An increase in the price of tablets is followed by an increase in the sale of tablets. C) A decrease in the price of milk has no effect on the amount of milk consumed. D) The amount of smartphones sold increases while the price of smartphones is constant. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 13) According to the law of demand, a decrease in the price of a good causes A) a rightward shift of the demand curve for that good. B) a leftward shift of the demand curve for that good. C) an upward movement along the demand curve for that good. D) a downward movement along the demand curve for that good. Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 14) The only variable that can affect a movement along the demand curve is A) income levels. B) the price of the good itself. C) the number of buyers. D) the number of substitutes. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

15) The demand curve is downward sloping because A) the price must rise to induce firms to increase quantity supplied. B) a reduction in the price of a good causes individuals to increase their purchase of that good. C) an increase in the price will cause a leftward shift in the demand curve. D) all of these. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 16) The money price of a good is also known as its A) relative price. B) comparative price. C) absolute price. D) subjective price. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 17) Suppose that the price of cornflakes is $3.0 per box and the price of oatmeal is $1.5 per box. Both boxes contain the same number of ounces of cereal. The relative price of cornflakes in terms of oatmeal is A) 0.67. B) 1.0. C) 1.5. D) 2.0. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 18) The money price of a good is that price A) expressed in constant 2017 dollars. B) expressed in purchasing power against a common item like bread. C) expressed in today's dollars. D) that would clear the market. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

19) The relative price of a good is that price A) expressed in today's dollars. B) expressed in constant 2020 dollars. C) expressed in terms of the price of another good. D) that is equal to the equilibrium price. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 20) The price of a tablet increased from $250 to $400 while the price of a tablet app increased from $1 to $2. The relative price of tablets in terms of tablet apps A) increased from 175 to 350. B) decreased from 250 to 200. C) increased from 0.003 to 0.05. D) decreased from 0.35 to 0.2. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 21) The price of a new textbook is $60 in one year and $75 two years later, while the price of a used copy of the textbook increased from $25 to $37.50. The relative price of a new textbook A) increased by 25 percent. B) increased from 2.4 to 3. C) decreased from 2.4 to 2.0. D) decreased from 1.4 to 1.25. Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 22) The price of a new textbook increased from $100 to $120 in one year, while the price of a used textbook increased by 10 percent. What happened to the relative price of a used textbook? A) It decreased by 20 percent. B) It increased by 10 percent. C) It remained constant. D) It can't be determined without knowing the nominal price of the used textbook in at least one of the years. Answer: D Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 6 Copyright © 2021 Pearson Education, Inc.

23) The price of a new textbook increases from $105 to $130 while the price of used copies of the textbook increases from $45 to $55. Other things equal, we would expect to observe A) the quantity demanded of the used textbook to increase while the quantity demanded of the new textbook to fall. B) the quantity demanded of both to fall. C) the demand for the new textbook to increase while the demand for the used textbook to decrease. D) the quantity demanded of the used textbook to decrease and the quantity demanded of the new textbook to increase. Answer: D Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 24) When the term "price" is used in the law of demand, price refers to A) the dollar price of the good. B) the price of the good relative to the price of another good. C) the absolute price of the good. D) the nominal price of the good relative to its nominal price in the previous year. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 25) According to the law of demand, the quantity demanded of a good is related to A) the average price of all goods. B) income. C) any factor that affects the decision of an individual consumer but not the market. D) the relative price of that good. Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

26) Which one of the following statements is FALSE? A) Generally, what matters most to consumers is what a good costs in dollars. B) The relative price of a good is its price measured relative to the price of other goods. C) The nominal price of a good is its price measured in current dollars. D) When the price of beer goes up by the same proportion as the prices of all other goods, the relative price of beer does not change. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 27) Markets are A) a mechanism through which prices of goods and services are determined by the forces of supply and demand. B) specific geographic locations. C) hypothetical constructs used to analyze how people form their tastes and preferences. D) places where people can inspect goods and services carefully. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 28) The arrangements that individuals have with each other to exchange goods is known as A) demand. B) supply. C) a market. D) complements. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 29) In economics, the meaning of demand refers to A) how badly someone wants a good. B) the quantities of a good that people will buy at various prices. C) the quantities of a good that people will sell at various prices. D) how efficient people produce goods. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

30) Market demand is A) the total quantities demanded of all consumers of a particular item at given prices. B) a movement along the demand curve in response to the market. C) total equilibrium demand for the market. D) the demand for and supply of a good or service. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 31) Demand is a schedule of A) how much of a good a person wants. B) how much of a good people will purchase at each different possible price. C) how much of a good people will purchase at each income level. D) each possible price and the amount people will buy when their incomes change. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 32) A schedule of amounts of a good that people will purchase at various prices during a specific time period holding other factors constant is A) a market. B) supply. C) demand. D) the market clearing price. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 33) Which of the following best represents the law of demand? A) As the price of a good decreases, the quantity demanded of that good decreases. B) As the price of a good decreases, the quantity demanded of that good increases. C) As the demand for a good increases, the price of that good increases. D) As the price of a good decreases, the demand curve for that good shifts to the right. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

34) Other things being equal, an increase in the prices of portable power banks leads to a decrease in the amount portable power banks that people purchase. This is known as A) the law of demand. B) the law of supply. C) ceteris paribus. D) equilibrium. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 35) According to the law of demand, A) price and quantity demanded move in the same direction. B) price and quantity demanded move in opposite directions. C) ceteris paribus does not apply. D) price and quantity demanded are unrelated. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 36) Demand applies to which of the following? A) fast food B) education C) labor market D) all of these Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 37) According to the law of demand, A) people buy more of a good when the price rises. B) people buy more of a good when their income rises. C) people buy more of a good when the relative price rises. D) people buy more of a good when the price falls. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

38) Which of the following is an example of the law of demand? A) A decrease in the price of tea is followed by an increase in tea purchases. B) A decrease in the price of tea is followed by a decrease in tea purchases. C) An increase in the price of tea has no effect on the amount of tea purchased. D) The amount of tea purchased increases when the price is constant. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 39) John argues that when the price of a good decreases, people will purchase less of the good. This statement is A) consistent with the law of demand. B) inconsistent with the law of demand. C) referring to money prices. D) consistent with the law of supply. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 40) Which of the following illustrates the law of demand? A) More people watch college football in March than in December. B) The number of long distance calls in the United States is greater on Christmas than on Valentine's Day. C) College enrollment decreases when tuition increases. D) The prevailing wage rate in an industry determines how many people choose to work in the industry. Answer: C Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 41) The law of demand includes the statement "other things being equal." These other things include all of the following EXCEPT A) the price of the good itself. B) the price of related goods. C) incomes. D) tastes. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 11 Copyright © 2021 Pearson Education, Inc.

42) Pam graduates from law school and gets a position in a law firm. At the same time the price of hamburger falls while other food prices have stayed the same. She notices that she buys less hamburger than she did before. Is she violating the law of demand? A) Yes, since she is buying less hamburger at a lower price. B) Yes, since she is buying less hamburger in a relatively short period of time and we wouldn't expect her tastes to have changed. C) No, since the law of demand refers to relative price changes and the price of hamburger falling is an absolute price change. D) No, since other things are not held constant, such as her income. Answer: D Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 43) Suppose all prices decrease by 10 percent in the year while the total sales of smartphones remain constant. This is A) a violation of the law of demand since fewer smartphones should be purchased at a higher price. B) a violation of the law of demand since more smartphones should have been purchased with higher incomes. C) not a violation of the law of demand since the relative price of smartphones did not change. D) not a violation of the law of demand since the law of demand does not apply to expensive goods like smartphones. Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 44) The price of a commodity in terms of another commodity is A) the law of demand. B) a substitute. C) the money price. D) the relative price. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

45) The price that we observe in the market is A) the law of demand. B) a substitute. C) the money price. D) the relative price. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 46) The absolute price of a good is its A) relative price. B) money price. C) subjective price. D) projected price. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 47) The "real" price of a good is known as A) the absolute price of the good. B) the dollar price of the good since we use dollars in the United States. C) relative price of the good. D) the price actually paid for a good instead of the sticker price. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 48) Jane has noticed that she used to pay $2.75 for a hamburger and now she pays $3.0. Which of the following statements is TRUE? A) The relative price of hamburgers has increased compared to hotdogs. B) The money price of hamburgers has increased. C) The law of supply explains why the price of hamburgers has increased. D) Jane will stop consuming hamburgers. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

49) The price of a first-class stamp in 1957 was 3 cents, and it is 47 cents in 2016. From this we know that A) both the relative and the absolute price of first-class stamps increased from 1957 to 2016. B) the money price of first-class stamps increased from 1957 to 2016 but the absolute price of first-class stamps stayed constant. C) the money price of first-class stamps increased from 1957 to 2016 and the relative price of first-class stamps decreased. D) the money price of first-class stamps increased from 1957 to 2016, but we can't tell if the relative price of first-class stamps increased or decreased without more information. Answer: D Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 50) The price of a phone call at a pay phone was 5 cents in 1950 and the price of a first-class stamp was 3 cents. In 2016, the pay phone costs 50 cents for a call and a first-class stamp costs 47 cents. We know that A) both the nominal and the relative price of phone calls increased from 1950 to 2016. B) both the nominal prices of phone calls and first-class stamps increased from 1950 to 2016, but the relative price of stamps increased and the relative price of phone calls decreased from 1950 to 2016. C) all prices increased from 1950 to 2016: Nominal prices of phone calls, first-class stamps, and the relative prices of phone calls and first-class stamps. D) both the nominal prices of phone calls and first-class stamps increased from 1950 to 2016, but we can't tell if the relative prices increased or decreased without more information. Answer: B Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 51) The price of a gallon of gasoline increased from $2.00 to $2.25 while the price of a ride on the city bus increased from 50 cents to 75 cents. The relative price of riding the city bus A) increased from 0.25 to 0.6. B) decreased from 4.0 to 3.0. C) stayed constant at 0.25. D) stayed constant at 4.0. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

52) If we are comparing the price of regular gasoline with the price of super gasoline, then an increase in the relative price of regular gasoline implies that A) the nominal price of regular gasoline increased. B) the nominal price of super gasoline decreased. C) the relative price of super gasoline decreased. D) the relative price of regular gasoline increased. Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 53) The price of a new textbook is $120 in one year and is $150 two years later, while the price of a used copy of the text increased from $40 to $60. The relative price of a new textbook A) increased from 3 to 4.5. B) decreased from 0.8 to 0.67. C) decreased from 3 to 2.5. D) remained constant. Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 54) The price of a new textbook increased by 35 percent and the price of a used textbook increased by 30 percent. What happened to the relative price of the new textbook? A) It increased by 5 percent. B) It increased, but we can't tell by how much without more information. C) It decreased by 5 percent. D) It decreased, but we can't tell by how much without more information. Answer: B Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

55) The price of a new textbook increases from $200 to $270, while the price of used copies of the textbook increased from $100 to $125. Other things being equal, we would expect A) the quantity demanded of the used textbook to increase and the quantity demanded of the new textbook to decrease. B) the quantity demanded of both to fall. C) the demand for the new textbook to increase and the demand for the used textbook to decrease. D) the quantity demanded of the used textbook to decrease and the quantity demanded of the new textbook to increase. Answer: A Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 56) The price of a new car is $40,000 while the price of a five-year old car of the same brand is $16,000. The next year the price of the new car increases to $44,000 and the price of a five-year old car of the same brand is $17,600. The relative price of the used car A) decreased by $2,400. B) decreased by 10 percent. C) increased by 10 percent. D) remained constant at 0.4. Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 57) The price of a loaf of bread is $1.50, the price of a gallon of milk is $3.00, and the price of a pound of butter is $2.40. The price of a loaf of bread relative to a gallon of milk is ________, while the price of a gallon of milk relative to a pound of butter is ________. A) 0.5; 0.8. B) 0.5; 1.25. C) 2.0; 1.25. D) 2.0; 0.8. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

58) The price of cookies in terms of gallons of milk per cookie is 0.6 and the price a gallon of milk in terms of pounds of butter per gallon is 1.2. What is the relative price of cookies to butter? A) 1.39 B) 0.6 C) 0.72 D) 0.50 Answer: C Diff: 3 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 59) An increase in the relative price of a good cannot be caused by A) an increase in the nominal price of the good that is greater than the increase in the nominal price of the other good. B) a decrease in the nominal price of the good that is less than the decrease in the nominal price of the other good. C) a decrease in the nominal price of the other good while the price of the good itself remains constant. D) an increase in the nominal price of the other good while the price of the good itself remains constant. Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 60) The relative price of a smartphone is A) the money price of the smartphone divided by the money price of some other good. B) the price of the smartphone compared with what students think it should cost. C) the amount it cost to make the smartphone. D) what the company earned for selling the smartphone. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

61) The law of demand A) is only an assumption that cannot be tested. B) only applies to necessities, not luxuries. C) is consistent with human behavior in the world. D) does not apply to scarce goods. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 62) Which one of the following statements is TRUE? A) If the money price of a good increases, its relative price necessarily increases. B) If the money price of a good increases, its relative price necessarily decreases. C) The relative price of a good refers to the opportunity cost of purchasing it. D) Rational consumers always ignore the monetary price of a good when deciding whether to buy it. Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 63) Demand is defined as A) a schedule of how much of an item people will purchase at any particular price of that item during a specified time period, other things being constant. B) a specific quantity of an item that people want at a particular price of that item during a specified time period, other things being constant. C) a schedule of how much of a good or service people will purchase at any particular price of a different item during the specified time period, other things being constant. D) a specific quantity of a good or service that people will purchase at one particular price of another item during a specified time period, other things being constant. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

64) The fact that when the price of a good goes down, people buy more of it is called A) the law of supply. B) the law of demand. C) market equilibrium. D) ceteris paribus. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 65) Ceteris paribus, as the price of a good or service increases A) people will buy more of it. B) people will buy less of it. C) people will want less of it. D) people will want more of it. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 66) The statement "other things being equal" in the law of demand means all of the following remain constant EXCEPT A) consumer income. B) the price of the good concerned in the law of demand. C) the prices of substitutes. D) tastes and preferences. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 67) The price of one product in terms of another commodity is called its A) relative price. B) money price. C) financial price. D) converse price. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

68) What type of relationship does the law of demand demonstrate? A) direct B) equilibrium C) inverse D) dynamic Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 69) Consider the following:

The relative price of movies this year has A) increased. B) decreased. C) stayed the same. D) Not enough information has been given to calculate an answer. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 70) Consider the following:

The relative price of hamburgers this year has A) increased. B) decreased. C) stayed the same. D) Not enough information has been given to calculate an answer. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

71) Total market demand can be calculated by A) horizontally summing individual demand curves at each and every price level. B) vertically summing individual demand curves at each and every income level. C) adding up the largest quantity demanded by each individual. D) looking at the changes in the products' popularity. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 72) The law of demand states that there is A) an inverse relationship between income and quantity demanded, ceteris paribus. B) a direct relationship between income and quantity demanded, ceteris paribus. C) no relationship between taste and quantity demanded, ceteris paribus. D) an inverse relationship between price and quantity demanded, ceteris paribus. Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 73) The law of demand shows that there is A) an inverse relationship between price and profit. B) an inverse relationship between price and resource cost. C) an inverse relationship between price and quantity demanded. D) a direct relationship between price and quantity demanded. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 74) The demand curve shows the relationship between quantity demanded and A) income. B) price. C) supply. D) quantity supplied. Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

75) When the price of TVs goes up and fewer TVs are purchased, this is representative of the A) law of demand. B) law of supply. C) law of market operations. D) law of increasing costs. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 76) Suppose that the demand curve for apples is downward sloping and the price per pound decreases from $1.25 to $1.00. We would then expect A) the demand for apples to decrease. B) the quantity of apples demanded to fall. C) the demand curve to shift toward the origin. D) the quantity of apples demanded to increase. Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 77) The law of demand implies that the demand curve A) has a negative slope. B) has a positive slope. C) shifts to the right when the price of a good increases. D) shifts to the left when the price of a good decreases. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 78) A demand curve A) slopes down because of the inverse relationship between price and quantity demanded. B) slopes up because of the direct relationship between price and quantity demanded. C) can slope up or down depending on the tastes of the consumer. D) is vertical for necessities, upward sloping for luxury goods, and downward sloping for all other goods. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

79) If Apple's iTunes Music Store increases its "fee" for its music downloads, the law of demand predicts that A) the number of iTunes music downloads would increase. B) there would be no change in the demand for iTunes music downloads. C) the number of iTunes music downloads would decrease. D) iTunes music supply would change but demand would not. Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 80) Which of the following will occur as the price of a good decreases? A) The demand curve for that good will shift to the left. B) The demand curve for that good will shift to the right. C) The quantity demanded for that good will increase. D) Demand for that good will increase. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 81) A demand curve is a graphical representation of A) consumer tastes. B) national income. C) the demand schedule. D) relative prices. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

82) When economists talk about a demand schedule for a product, they mean A) the amount of a good that consumers intend to purchase at each price in a set of possible prices in a given time period. B) the amount of a good that consumers are able to purchase (though they might not be willing to) at different prices in a given period of time. C) the amount of a good that consumers intend to purchase at only one particular price in a given period of time. D) the amount of a good that producers are willing to make available for sale at a particular price in a given time period. Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 83) Adding the quantities demanded by all consumers at every price will yield A) the market-clearing price. B) the number of consumers. C) the total substitution effect from a price change. D) the market demand curve. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 84) When the price of a good falls, there will be A) an outward shift in the good's demand curve. B) both an outward shift in the good's demand curve and a movement along the good's demand curve. C) a movement along the good's demand curve. D) no change in quantity demanded. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

85) In deriving the demand schedule for a good, economists assume that A) consumers have equal incomes to allocate among goods. B) a consumer will allocate all of her income to one good. C) all other influences on demand except the product price are held constant. D) reported income changes at each point on the demand schedule. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 86) A demand schedule provides A) the quantities of a good people are willing to sell every year. B) the amount of a good a person wants to sell during a given time period. C) the alternative quantities demanded for a given time period at different possible prices. D) the amount of a good a person wants at different times of the day. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 87) An increase in quantity demanded is caused by A) an increase in income. B) a decrease in the price of the good. C) a decrease in the price of a complement. D) a change in expectations about price in the future. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 88) Gasoline prices in the United States decreased significantly between 2014 and 2016. A decrease in the price of gasoline, holding other things constant, will cause which of the following to occur? A) increase in the demand for gasoline B) decrease in the demand for gasoline C) increase in the quantity of gasoline demanded D) decrease in the quantity of gasoline demanded Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

89) A schedule of how much of a good people will purchase for a range of possible prices during a specified time period, other things constant, is the definition of A) supply. B) demand. C) a purchasing contract. D) an economic market. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 90) The market demand curve for a particular good A) is the horizontal sum of all individual demand curves for the good. B) may be less than an individual demand curve for the good. C) may or may not show a direct relationship between price and quantity demanded. D) will not be affected by any of the determinants of individual demand. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 91) A market demand schedule for a product indicates that A) as the product's price falls, consumers buy less of the good. B) there is a positive relationship between price and quantity demanded. C) as a product's price rises, consumers buy more of the good. D) there is a negative relationship between price and quantity demanded. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 92) Graphically, a market demand curve is found by A) taking the average of all prices that people are willing to pay. B) summing the quantities demanded by all individuals at each price. C) summing the prices each consumer would pay for each quantity. D) taking the average of the individual demand curves. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

93) The alternative quantities demanded for a given time period at different possible prices is known as A) absolute demand. B) a demand schedule. C) real demand. D) constant demand. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 94) For a demand schedule, which of the following is held constant? A) relative prices B) quantity demanded C) quality of the good D) nominal prices Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 95) Four points on a demand schedule are given: $12, 2 units; $10, 3 units; $15, 5 units; and $2, 4 units. Which combination is inconsistent with the law of demand? A) $12 and 2 units B) $10 and 3 unit C) $15 and 5 units D) $2 and 4 units Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 96) A demand schedule A) holds all prices constant. B) is only for a given time period. C) holds quantity constant. D) is for a given variety of goods. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

97) A demand curve is derived from A) the production possibilities curve. B) consumer's income. C) a demand schedule. D) an equilibrium. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 98) A demand curve represents a(n) A) direct relationship between price and quantity demanded. B) direct relationship between price and demand. C) indirect or inverse relationship between price and quantity demanded. D) indirect or inverse relationship between price and supply. Answer: C Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 99) A demand curve is a A) graphical representation of the demand schedule. B) graphical representation of alternative demands. C) horizontal line connecting amounts demanded at various income levels. D) graphical relationship, that includes several things such as tastes, time, and supply. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

100) Refer to the above figure. Which panel best demonstrates the demand curve? A) Panel A B) Panel B C) Panel C D) Panel D Answer: A Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 101) An indirect or inverse relationship between price and quantity demanded is A) the market clearing price. B) a change in demand. C) a supply curve. D) a demand curve. Answer: D Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 102) By summing the quantities demanded by individuals at each price we obtain the A) equilibrium price. B) market demand curve. C) market supply curve. D) individual demand curve. Answer: B Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

103) We are given the individual demand curves for all of the people that consume ice cream. Which statement is TRUE about the market demand curve for ice cream? A) The market demand curve is obtained by horizontally summing the individual demand curves. B) The market demand curve is obtained by vertically summing the individual demand curves. C) The market demand curve cannot be obtained because information on prices is missing. D) The market demand curve cannot be obtained from individual demand curves. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 104) A market demand curve is found by A) adding the prices each consumer would pay for each quantity. B) adding the prices and the quantities demanded by a consumer. C) adding the quantities demanded for each individual consumer at each price. D) taking the demand curve of the "representative" consumer. Answer: C Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

105) Refer to the above table. What is the market quantity demanded of DVDs at a price of $12? A) 6 B) 9 C) 12 D) 24 Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

106) Refer to the above table. What is the market quantity demanded at a price of $8? A) 5 B) 15 C) 35 D) 44 Answer: D Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 107) Refer to the above table. Suppose Buyer 2 leaves the market. What is the new market quantity of DVDs demanded at a price of $10? A) 33 B) 25 C) 22 D) 8 Answer: B Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 108) Demand is a schedule that shows A) a set of possible prices for a good and the quantities of the good that will be purchased at each of those prices. B) how much income it takes to afford various quantities of a good. C) the relationship between the cost of producing a good and the price that sellers will charge. D) how population changes will affect the amount of a good that is needed. Answer: A Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 109) State the law of demand and illustrate it. Explain what is meant by the term "price" in the law of demand. Answer: The law of demand states that when the price of a good increases, people buy less of the good, other things equal, and when price of a good decreases, people buy more of it. An increase in the price of gasoline would lead people to buy less gasoline. Price means "relative price," or the price of the good in terms of other goods. People make their decisions on the basis of relative prices and not on the basis of the money price. Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 31 Copyright © 2021 Pearson Education, Inc.

110) In 1950, a phone call at a pay phone cost 5 cents and a first-class stamp cost 3 cents. Today, those prices are 50 cents and 49 cents respectively. What has happened to the price of each good relative to the other? What has happened to the price of each good relative to all other goods? Answer: The price of a phone call has decreased relative to a stamp. In 1950, the price of a phone call was 1.67 stamps, and today the price is 1.14 stamps. The opposite is true for stamps. In 1950 the price of a stamp was 0.60 phone call and today the price is 0.88 phone call. We cannot tell what has happened to the prices of phone calls or stamps relative to all other goods without knowing what the money prices of all other goods were in 1950 and today. All we can say is that phone calls have either increased less than stamps or decreased more than stamps. Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 111) What information is provided by a demand curve? What variables are measured along the axes of the graph? Answer: The demand curve is a graphical representation of a demand schedule. The price per unit is measured along the vertical axis and the number of units per period of time is measured along the horizontal axis. The units of the good are identical so that quality is held constant. The price is the relative price, so all other prices are held constant. The demand curve pictures the relationship between relative price and the quantity purchased. Diff: 2 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 112) Explain how a market demand curve is constructed. Answer: The market demand curve is the horizontal summation of the individual demand curves. A price is selected, and the quantities demanded of each person at that price are summed. Then another price is selected and the quantities demanded of each person at that price are summed. Continue doing this for other prices until the market demand curve is traced out. Diff: 1 Topic: 3.1 Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

3.2 Shifts in Demand 1) Which of the following statements is FALSE about the demand curve? A) An increase in demand shifts the demand curve to the left, closer to the price axis. B) When only the price of a good changes, there is movement along the demand curve but no change in demand. C) A change in demand is graphically shown by shifting the entire demand curve. D) When demand decreases, there is a drop in the quantity demanded at each price. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 2) Which of the following will cause a movement along the demand curve instead of a shift of the demand curve? A) income B) tastes and preferences C) expectations on the future price of a good D) none of these Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 3) Which of the following is a determinant of market demand? A) consumers' expectation of the future relative price of a product B) taxes imposed on firms that sell the product C) cost of inputs used to produce the product D) number of firms that produce the product Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

4) If more buyers came into the market for a good, we would expect to see the market demand curve A) shift inward and to the left. B) remain unchanged since none of the determinants of individual demand changed. C) shift outward and to the right. D) reflect a positive relationship between price and quantity demanded. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 5) Suppose that jeans that were fashionable in the 1990s become unfashionable today. If other factors were held constant, then there would be in the market of jeans A) a rightward movement along the supply curve. B) a rightward shift of the demand curve. C) a leftward shift in the demand curve. D) a leftward movement along the supply curve. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 6) Suppose a college increases the wages paid to student employees. Assuming that the supply curve for school sweatshirts does not shift, which of the following options is the best description of the most likely effect of the increase in wage earnings on the demand curve for school sweatshirts in the bookstore? A) The demand curve shifts to the right. B) The demand curve shifts to the left. C) a leftward movement along the demand curve D) a rightward movement along the demand curve Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

7) An increase in demand is shown graphically by A) a shift of the demand curve to the left. B) a movement up along the existing curve. C) a shift of the demand curve to the right. D) a movement down the existing curve. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 8) If a demand curve shifts, we know that A) the price of the good itself is not a factor. B) the price of the good itself is a factor. C) the price of the good and supply are the major factors. D) the price of the good and demand are major factors. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 9) Which of the following statements is FALSE? A) If there is an increase in the demand for a product, consumers want to buy more of the product at each and every possible price. B) A decrease in demand shifts the demand curve leftward toward the origin, while a decrease in quantity demanded involves a movement upward along a particular demand curve. C) If the price of a good rises, quantity demanded of the good decreases and the demand curve shifts toward the origin as long as supply is static. D) A change in the demand for a product is caused by factors other than changes in the product's price. Answer: C Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

10) A demand curve for a normal good A) slopes upward and to the right. B) is constructed based on the assumption that income is rising. C) is constructed based on the assumption that an inverse relationship exists between price and income. D) shows the inverse relationship between price and quantity demanded. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 11) Which of the following statements is FALSE? A) An increase in income causes an increase in the demand for a normal good. B) An increase in income causes a decrease in the demand for an inferior good. C) A decrease in income causes the demand curve for a normal good to shift to the left. D) An increase in income causes the demand curve for an inferior good to shift to the right. Answer: D Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 12) Suppose an individual experiences a permanent increase in income. As a result of this increased income, further assume that the individual eats dinner at restaurants more frequently each month. This information suggests that dinners at restaurants for this individual are A) an inferior good. B) a substitute good. C) a normal good. D) both complimentary and inferior. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 13) In economic terminology, a normal good is a good A) on which a monetary value cannot be placed. B) that is liked only by normal people. C) for which demand increases when price increases. D) for which demand increases when income increases. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

14) In economic terminology, an inferior good is a good A) that no one will purchase. B) that doesn't work properly. C) that has no monetary value. D) for which demand increases as income decreases. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 15) If the demand of a good is inversely related to income, it must be A) a bad good. B) an inferior good. C) a normal good. D) an everyday product. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 16) If an increase in the incomes of people who live in the Los Angeles area leads to an increase in the demand for season tickets for games played by the Los Angeles Lakers professional basketball team, then these season tickets are A) a normal good. B) an inferior good. C) an income complement. D) an income substitute. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 17) An inferior good is one for which A) demand increases as income increases. B) demand decreases as income increases. C) the demand curve is vertical. D) the demand curve slopes up. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

18) For a normal good, an increase in consumer income will lead to I. a movement down the demand curve. II. a rightward shift in the demand curve. III. a reduction in supply. A) I only B) II only C) III only D) both II and III Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 19) Sarah gets a salary increase. Before her raise, she purchased 5 pounds of fish and 1 pound of beef stew a month. After her raise, she consumes 2 pounds of fish and 3 pounds of beef stew a month. If everything else is held constant, we know that A) fish is an inferior good and beef stew is a normal good for Sarah. B) fish is a normal good and beef stew is an inferior good for Sarah. C) both fish and beef stew are normal goods for Sarah. D) both fish and beef stew are inferior goods for Sarah. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 20) Fashion trends are a nonprice determinant for demand because A) they cause a movement along the demand curve. B) they influence people's tastes and preferences in clothing. C) they change the supply of accessories. D) they do not affect demand. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

21) Which of the following will cause a rightward shift of the demand curve? A) a decrease in the cost of production B) a decrease in the price of the good C) an increase in the expected future price of the good D) all of these Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 22) Which one of the following is NOT a determinant of demand? A) prices of related goods B) cost of inputs in production C) income D) future price expectations Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 23) All of the following will affect the position of the demand curve EXCEPT A) income. B) taste and preference. C) changes in expectations of future relative prices. D) prices of resources used to produce the product. Answer: D Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 24) Assume that soda and bottled water are substitutes. Given a downward-sloping demand curve for bottled water, an increase in the price of bottled water will cause A) an increase in the demand for soda. B) a decrease in the demand for soda. C) a leftward shift of the demand curve for bottled water. D) a leftward shift in the demand for soda. Answer: A Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

25) If goods A and B are substitute goods, then an increase in the price of B, other things being equal, A) results in a decrease in the amounts of both A and B consumed. B) decreases the quantity demanded of B, but has no effect on the amount of A consumed. C) results in a decrease in the quantity of B consumed, but increases the demand for A. D) has no real effect on the quantity demanded of good B, but increases the demand for A. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 26) If bagels and donuts are substitute goods, which of the following is likely to occur if the price of bagels has decreased? A) The demand curve for bagels shifts to the right. B) A leftward movement along the bagel demand curve. C) The demand curve for donuts shifts to the right. D) The demand curve for donuts shifts to the left. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 27) If two goods are substitutes, then A) an increase in the price of one causes the demand for the other to fall. B) there is an inverse relationship between changes in the price of one good and changes in the demand for the other. C) if the price of one good falls, the demand for the other good falls also. D) changes in the quantity demanded of one good will not affect the demand for the other. Answer: C Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 28) Suppose that goods X and Y are substitutes and the price of good Y falls. We would then expect A) the quantity of good Y demanded to increase and the demand for good X to increase also. B) an increase in the demand for good X and a decrease in the quantity of good Y demanded. C) an increase in the quantity demanded of good Y and a decrease in the demand for good X. D) an increase in the demand for both good X and good Y. Answer: C Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

29) After the price of smartphone apps falls, Alex buys fewer flash drives but he buys a new smartphone. For Alex A) smartphone apps and flash drives are complements, and smartphone apps and smartphones are substitutes. B) smartphone apps, flash drives, and smartphones are all complements. C) smartphone apps and flash drives are substitutes, and smartphone apps and smartphones are complements. D) smartphone apps, flash drives, and smartphones are not all complements. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 30) An increase in demand for a good can be caused by A) a decrease in the price of a substitute good. B) a reduction in income if the good is a normal good. C) a decrease in the price of a complementary good. D) an increase in price of a complementary good. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 31) We observe that people buy less beef and more fish when the price of beef relative to fish increases. This indicates that beef and fish are A) substitutes. B) complements. C) inferior goods. D) unrelated goods. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

32) Suppose a concert by Rihanna and a basketball game played by the Houston Rockets are substitutes, then which of the following is TRUE? A) If the price of a ticket to a Rockets game increases, then the demand for Rihanna tickets will fall. B) If the price of a ticket to a Rockets game decreases, then the demand for Rihanna tickets will fall. C) If the price of a ticket to a Rockets game increases, then the demand for Rihanna tickets will remain unchanged. D) The price of a ticket to a Rockets game will always equal the price of a ticket to a Rihanna concert. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 33) If two goods, X and Y, are complements, then which of the following statements is FALSE? A) They are consumed together. B) An increase in the price of X causes the demand for Y to rise. C) When the quantity demanded of X increases, the demand for Y increases. D) A decrease in the price of Y causes an increase in the demand for X. Answer: B Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 34) Of the following, which is the least likely to be an example of substitute goods? A) beer and pretzels B) margarine and butter C) beef and chicken D) soda and bottled water Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

35) Which of the following pairs of goods is LEAST likely to be a pair of complements? A) gasoline and vehicles B) coffee and sugar C) soda and bottled water D) razors and razor blades Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 36) Suppose we observe that the demand for eggs increases when people buy more cheese. We can conclude that eggs and cheese are A) inferior goods. B) normal goods. C) complements. D) substitutes. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 37) When the price of laptops decreased in the 2010s, there was an increase in the demand for computing apps because laptops computing apps are A) substitute goods. B) capital goods. C) inferior goods. D) complementary goods. Answer: D Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 38) If the price of laptops were to rise, then the demand for printers would decrease because laptops and printers are A) complementary goods. B) consumer goods. C) inferior goods. D) substitute goods. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 43 Copyright © 2021 Pearson Education, Inc.

39) In the above figure, when the price of Good B increases, the result can be shown by A) the movement from D1 to D2 in Graph A. B) the movement from D2 to D1 in Graph A. C) the movement along D0 from P1 to P2. D) the movement along D0 from P2 to P1. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 40) In the above figure, an increase in income is best demonstrated by a A) shift of D1 to D2 in Graph A, if good A is a normal good. B) shift of D2 to D1 in Graph A, if good A is a normal good. C) movement along D0 from P1 to P2 in Graph B. D) movement along D0 from P2 to P1 in Graph B. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

41) In the above figure, the demand curve for Good A shifts from D1 to D2 in Graph A when the price of Good B changes from P1 to P2 in Graph B. We can conclude that A) Good A and Good B are substitutes. B) Good A and Good B are complements. C) Good A is a normal good but Good B is an inferior good. D) Good A and Good B are unrelated. Answer: A Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 42) Suppose Good Z is a normal good. Which of the following will increase the demand for Good Z? A) an increase in the price of its substitutes B) a lower expected future relative price of Good Z C) an increase in the price of its complements D) a decrease in income Answer: A Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 43) If the price of cheese increases, the demand for hamburger buns will A) increase. B) decrease. C) remain constant. D) shift to the right. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 44) If the price of bananas goes down, then the demand for pears will A) increase, assuming bananas and pears are substitutes. B) decrease, assuming bananas and pears are substitutes. C) decrease, assuming bananas and pears are complements. D) remain constant, assuming bananas and pears are related goods. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

45) There is an increase in the demand for cookies when the price of milk falls. Other things constant, we can conclude that cookies and milk are A) substitute goods. B) inferior goods. C) independent goods. D) complementary goods. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 46) A decrease in demand is represented by a A) shift of the demand curve to the left. B) shift of the demand curve to the right. C) movement down the demand curve. D) movement up the demand curve. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 47) Two goods are substitutes when A) an increase in the price of one reduces the demand for the other. B) an increase in the price of one raises the demand for the other. C) the two goods are used together. D) the two goods have the same price. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 48) An increase in the price of wheat will lead to A) an upward movement along the demand curve for wheat. B) a leftward shift in the demand curve for wheat. C) a rightward shift in the supply curve for wheat. D) an increase in the quantity of wheat consumed. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

49) A significant increase in the price of basketballs will most likely lead to A) an increase in the demand for basketball shoes. B) an inward shift in the demand for basketballs. C) a movement along the demand curve for basketball shoes. D) an inward shift in the demand for basketball shoes. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 50) If the price of butter increases, the demand for margarine A) will be unchanged. B) will shift outward. C) will shift inward. D) will kink into an S-curve. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 51) Sugar and coffee are complements. When the price of coffee decreases, the demand for sugar A) will fall. B) remains constant. C) will shift outward. D) will shift inward. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 52) An expected future increase in the price of bananas may A) increase the demand for bananas now. B) decrease the demand for bananas now. C) increase the supply of bananas now. D) make bananas an inferior good. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

53) An expected increase in the future price of automobiles will lead to A) an outward shift in demand for automobiles today. B) a reduction in the demand for gasoline today. C) a movement down the demand schedule for automobiles. D) no predictable impact on today's demand for automobiles. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 54) If consumers expect that the price of pretzels will decrease next week, what would happen today? A) Demand today for pretzels would decrease. B) Demand today for pretzels would increase. C) Demand today for pretzels would be unaffected. D) Supply today of pretzels would decrease. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 55) Which of the following will cause a movement along the demand curve for shoes? A) an increase in the price of socks B) an increase in income C) an increase in the price of shoes D) all of these Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 56) Which of the following will NOT cause a shift in the demand for portable power banks? A) a change in taste B) a change in income C) a change in the price of portable power banks D) a change in the price of smartphones Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

57) With reference to the difference between a change in demand and a change in quantity demanded, which of the following is TRUE? A) If a good's price goes down, then demand for the good will decrease. B) If a good's price goes down, then quantity demanded will increase. C) If demand increases, then the demand curve will shift to the left. D) If price rises and quantity demanded decreases, then the demand curve will shift to the left. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 58) Which of the following does NOT cause a shift in demand? A) change in income B) change in tastes C) change in the price of the good D) change in the price of a related good Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 59) More cattle are found to have mad cow disease. As a result, consumer confidence in the safety of beef is shaken. What would an economist predict will happen in the beef market? A) As consumer preferences move away from beef, there is an upward movement along the beef demand curve. B) The demand curve will shift to the left. C) The demand curve does not shift but consumers move to a point lower down the curve. D) absolutely no change in either the quantity demand or the demand for beef Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 60) Suppose that a new study finds that eating more fish will improve a person's health. As a result A) the demand for fish will fall. B) the demand for fish will rise. C) the price of fish will fall. D) a smaller amount of fish will be purchased. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 49 Copyright © 2021 Pearson Education, Inc.

61) An increase in the number of consumers in a market would cause A) an increase in quantity demanded. B) an increase in quantity supplied. C) an increase in demand. D) an increase in supply. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 62) A shift in demand occurs when A) the price of that good changes. B) the amount demanded of a good changes at each existing price. C) there is a change in quantity demanded. D) the price changes and the good is a normal good. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 63) If a bottle of soda and bottled juice are substitutes, when the price of soda rises, A) demand for bottled juice rises. B) demand for bottled juice falls. C) quantity of bottled juice demanded falls. D) quantity of bottled juice demanded rises. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 64) When income falls, A) the demand for a normal goods rises. B) the demand for an inferior goods rises. C) there is a movement downward along the demand curve for a normal good. D) there is a movement downward along the demand curve for an inferior good. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

65) When income rises, A) demand for a normal good rises. B) demand for a luxury good falls. C) demand for an inferior good rises. D) quantity of a normal good demanded rises. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 66) Which of the following factors will lead to a shift in the demand curve? A) changes in the costs of inputs B) changes in technology C) changes in the price of the good D) changes in consumers' tastes and preferences Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 67) The relationship between a change in the price of a complementary good and demand for another complementary good is A) positive. B) negative. C) inconclusive. D) zero. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 68) Assuming bottled water and cola are substitutes, if the price of bottled water rises, A) there is a movement along the demand curve for cola. B) the demand curve for bottled water will shift to the right. C) the demand curve for cola will shift to the right. D) the demand curve for bottled water will shift to the left. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

69) Suppose that today, consumers expect the price of bottled water to double in the future. Then today the bottled water's A) demand curve will shift to the right. B) demand curve will shift to the left. C) supply curve will shift to the right. D) supply curve will shift to the left. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 70) A shift in the demand curve will occur when A) supply shifts. B) the price of an input used to produce the good changes. C) consumers' income changes. D) the price of the product changes. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 71) Suppose it is discovered that consumption of chocolate leads to a longer life. This information would lead to A) an increase in quantity demanded of chocolate. B) an increase in demand for chocolate. C) a decrease in quantity demanded of chocolate. D) a decrease in demand for chocolate. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 72) Which of the following causes a decrease in demand for a normal good? A) increase in price of a substitute B) increase in price of a complement C) increase in price D) increase in income Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

73) Which of the following causes an increase in demand for a normal good? A) increase in the price of a substitute B) increase in the price of a complement C) decrease in price D) decrease in income Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

74) Refer to the above figure. The rightward shift of the curve indicates A) an increase in demand. B) a decrease in demand. C) an increase in quantity demanded. D) a decrease in quantity demanded. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 75) Refer to the above figure. For a normal good, the rightward shift of the curve could have been caused by A) a technological improvement. B) an increase in the cost of inputs. C) an increase in income. D) a decrease in income. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

76) Refer to the above figure. The arrows show the direction of a shift in the demand curve of Good A. Which of the following would be the most likely reason for the shift in the demand curve if Good A is an inferior good? A) an increase in the price of Good A B) a decrease in the price of Good A C) a decrease in consumers' income D) an increase in consumers' income Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 77) Refer to the above figure for a particular good. The rightward shift of the curve could have been caused by A) a decrease in the price of an input. B) a decrease in the price of that good. C) an increase in the price of a complementary good. D) an increase in the price of a substitute good. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 78) A shift of the demand curve to the left represents A) an increase in demand. B) a decrease in demand. C) an increase in quantity demanded. D) a decrease in quantity demanded. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 79) Which of the following will NOT lead to an increase in demand for a normal good? A) an increase in income B) an increase in the price of an input C) a decrease in the price of a complement good D) an increase in the number of consumers Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

80) A shift in the demand curve to the right represents A) an increase in demand. B) a decrease in demand. C) an increase in quantity demanded. D) a decrease in quantity demanded. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 81) An increase in demand occurs when A) we measure price in money price rather than real price. B) we move up the demand curve. C) the demand curve shifts to the right. D) the demand curve shifts to the left. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 82) A decrease in demand would be represented by A) the price of a good going up. B) a downward movement along the demand curve. C) an upward movement along the demand curve. D) a shift of the demand curve to the left. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 83) A normal good is one for which A) demand increases as income increases. B) demand increases as income decreases. C) the demand curve is horizontal. D) demand decreases as the price of a substitute increases. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

84) As John's income has increased, he has purchased less instant noodles. Instant noodles are A) a normal good for John. B) an inferior good for John. C) not following the law of demand. D) not scarce for John. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

85) Refer to the above figure. A movement from point A to point B indicates A) an increase in demand. B) a decrease in demand. C) an increase in quantity demanded. D) a decrease in quantity demanded. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 86) Refer to the above figure. A movement from Point A to Point B is caused by A) an increase in income. B) an expectation of a decrease in the price of the good in that figure. C) a decrease in the price of the good in that figure. D) all of these. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

87) Refer to the above figure. Which of the following statements is TRUE? A) Panel A shows a decrease in demand and Panel B shows an increase in demand. B) Both Panels A and B show an increase in demand. C) Panel A shows a change in demand and Panel B shows a change in quantity demanded. D) Panel A shows a change in quantity demanded and Panel B shows a change in demand. Answer: D Diff: 3 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 88) Refer to the above figure. Which panel shows the effect of an increase in the price of a good on the demand curve of that good? A) Panel A B) Panel B C) both panels D) neither panel Answer: D Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 89) A change in quantity demanded A) is a shift of the demand curve. B) is a movement along the demand curve. C) can be either a shift or a movement along the demand curve. D) is caused when there is a change in a ceteris paribus factor. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

90) A change in any of the ceteris paribus conditions for demand leads to a A) good going from an inferior good to a normal good. B) movement along the demand curve. C) shift of the demand curve. D) change in supply. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 91) Bryce graduates from college and gets a job paying $80,000 a year. While in school, he consumed 5 pounds of chicken and 10 pounds of shrimp a month. After he starts working, he consumes 4 pounds of chicken and 12 pounds of shrimp a month. If everything else is held constant, we know that A) chicken and shrimp are normal goods for Matt. B) chicken is an inferior good and shrimp is a normal good for Matt. C) chicken is a normal good for Matt. D) shrimp is an inferior good for Matt. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 92) After the price of milk increases, Liza buys more eggs and less hotdogs. For Liza A) milk, eggs, and hotdogs are all complements. B) milk and eggs are complements, and milk and hotdogs are substitutes. C) milk and eggs are substitutes, and milk and hotdogs are complements. D) milk, eggs, and hotdogs are all substitutes. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 93) When a rise in the price of one item results in a decrease in the demand for another good, then the two goods are A) substitute goods. B) complementary goods. C) inferior goods. D) satisfying the law of supply. Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 58 Copyright © 2021 Pearson Education, Inc.

94) An increase in quantity demanded of a good is caused by A) a decrease in income. B) a decrease in the price of a substitute. C) a decrease in the price of the good. D) a change of tastes. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 95) Blake decreases his consumption of grapes after his income goes up. For Blake A) grapes and income are substitute goods. B) grapes and income are complementary goods. C) grapes are an inferior good. D) grapes are a superior good. Answer: C Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 96) Hailey increases her consumption of Good X after the price of Good Y decreased. For Hailey A) Good X and Good Y are substitutes. B) Good X and Good Y are complements. C) Good X is an inferior good. D) Good Y is an inferior good. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 97) Joslynn decreases her consumption of Good A after the price of Good B decreased. For Joslynn A) Good A and Good B are substitutes. B) Good A and Good B are complements. C) Good A is an inferior good. D) Good B is an inferior good. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

98) Landon increases his consumption of Good X and Good Y when his income increases. For Landon A) Good X and Good Y are substitute goods. B) Good X and Good Y are complement goods. C) Good X is an inferior good. D) Good X and Y are normal goods Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 99) All of the following are non-price determinants of demand EXCEPT A) price of related goods. B) price of raw materials used in production of the good. C) income. D) number of consumers. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 100) Assuming that fish, chicken, pork, and beef are substitutes, suppose that the price of fish has fallen. This will, other things being equal A) reduce demand for chicken, pork, and beef. B) leave demand for chicken, pork, and beef unchanged. C) increase demand for chicken, pork, and beef. D) increase quantity demanded of beef. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 101) Which factor would cause a movement along the demand curve for pizza? A) an increase in the number of students in town B) a renewed preference for Italian food C) a drop in the price of pizza D) an increase in average income Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

102) Which of the following will cause the demand curve for iTunes music services to shift to the left? A) a rise in the price of iTunes music services B) a decrease in average incomes of iTunes music subscribers if iTunes music services are a normal good C) an increase in population D) the creation of several popular iTunes songs Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 103) Which of the following will cause the demand curve for bottled water to shift right, if bottled water is a normal good? A) a fall in the price of bottled water B) a fall in average incomes of bottled water consumers C) a decline in population D) a successful advertising campaign linking bottled water to lower cholesterol Answer: D Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 104) Which of the following products are likely to be complementary goods? A) Coke and Pepsi B) mobile devices and lithium batteries C) HD-DVDs and Blu-Ray DVDs D) Domino's pizza and Papa John's pizza Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 105) If a decrease in the price of good X causes a decrease in demand for good Y, the two goods are A) substitutes. B) complements. C) normal. D) inferior. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

106) Which one of the following would cause a rightward shift in the demand curve of smartphones? A) Smartphones become easier to use. B) The price of smartphones decreases. C) Production methods are modified to make production of smartphones more efficient. D) Government regulations are imposed to limit the number of smartphones imported. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 107) The Chunnel auto tunnel allows motorists to travel between England and France. As an alternative, there is ferry service across the English Channel. What would happen in the market for ferry service if fees for using the Chunnel were increased? A) The demand for ferry service would increase. B) The demand for ferry service would decrease. C) There would be an upward movement along the demand curve for transits through the Chunnel. D) There would be a downward movement along the demand curve for transits through the Chunnel. Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 108) Which one of the following would cause an increase in the demand for hotel rooms in Cacun? A) an increase in airfares to Cancun B) a decrease in airfares to Cancun C) an upward movement along the demand curve for stays in Cancun hotel rooms D) a downward movement along the demand curve for stays in Cancun hotel rooms Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

109) What would happen in the market for prescription drugs if people begin to view over-thecounter remedies as a good substitute for prescription medications? A) Prescription medications will become an inferior good. B) There is an upward movement along the demand curve for prescription medications. C) There is a downward movement along the demand curve for prescription medications. D) The demand for prescription medications will decrease. Answer: D Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 110) Which of the following is a non-price determinant of demand? A) income B) tastes and preferences C) prices of related goods and services D) All of these are correct. Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 111) Which of the following is NOT a non-price determinant of demand? A) the price of the good or service B) tastes and preferences C) expectations of future prices D) prices of related goods and services Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 112) Which of the following would cause a change in the quantity demanded of a product? A) a higher price B) a higher income C) expectations of future price increases D) All of these are correct. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

113) Which of the following would most likely be considered complements? A) butter and margarine B) rental cars and taxis C) plastic wrap and aluminum foil D) tennis rackets and tennis balls Answer: D Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 114) If a good is a normal good, an increase in income will A) decrease the quantity demanded of the good. B) increase the demand for the good. C) cause the demand curve for the good to shift to the left. D) cause a movement down along the demand curve. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 115) All of the following cause a shift in the demand curve EXCEPT a change in the A) price of related goods. B) price of the good or service. C) consumer income. D) number of consumers. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 116) If the price of one good goes up and the demand of a related good goes down, the two goods are A) complements. B) substitutes. C) inferior goods. D) normal goods. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

117) When income increases, the demand curve for an inferior good A) shifts to the right. B) shifts to the left. C) moves up along the demand curve for the product. D) remains constant. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 118) We know that goods A and B are related goods, because when the price of A increases A) the demand curve for B will shift to the right, because A and B are complementary goods. B) the quantity of B demanded will shift along its demand curve, because A and B are complementary goods. C) the demand curve for B will shift to the left, because A and B are complementary goods. D) the demand curve for B will remain unchanged because A and B are substitute goods. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 119) An increase in the quantity demanded is shown by A) a leftward shift of the demand curve. B) a rightward shift of the demand curve. C) a movement down along a demand curve. D) a movement up along a demand curve. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 120) A movement along a demand curve is A) a change in demand and can be caused by a change in consumers' income. B) a change in the quantity demanded and is caused by a change in the price of the good. C) a change in the quantity demanded and can be caused by a change in consumers' income. D) a change in demand and is caused by a change in the price of the good. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

121) Which of the following are complementary goods? A) sport utility vehicles and gasoline B) butter and margarine C) white wine and red wine D) trucks and sedans Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 122) Which of the following are most likely substitute goods? A) cooking oil and butter B) peanut butter and jelly C) pizza and beer D) trucks and gasoline Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

123) Refer to the above figure. Suppose that Cheerios and Apple Jacks are substitutes. Which diagram shows the effect on the demand for Cheerios when the price of Apple Jacks cereal has increased? A) A B) B C) neither graph D) both graphs Answer: A Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

124) Refer to the above figure. Suppose that Cheerios and Apple Jacks are substitutes. Which diagram shows the effect on the demand for Cheerios when the price of Apple Jacks cereal has decreased? A) A B) B C) neither graph D) both graphs Answer: B Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 125) Refer to the above figure for the market of Cheerios. Which diagram depicts the effect of an increase in the price of Cheerios? A) A B) B C) neither graph D) both graphs Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 126) If the price of margarine falls, the demand for butter will A) remain unchanged. B) increase. C) decrease. D) rise at first and then fall. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 127) If the price of gasoline rises sharply and the demand for trucks falls, then the two goods are A) complements. B) normal goods. C) substitutes. D) inferior goods. Answer: A Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 67 Copyright © 2021 Pearson Education, Inc.

128) If the price of airline travel in Mexico falls, and the demand for train travel in Mexico also falls, then the two goods are A) complements. B) normal goods. C) substitutes. D) inferior goods. Answer: C Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 129) Here's what we know about last year's weekly demand for 2-night DVD rentals in the Village of Harmony: When P = $3, Qd = 100; at P = $5, Qd = 75; and when P = $7, Qd = 50. This year the village population has increased by 25%. What impact is this most likely to have? A) Each individual's demand for DVD rentals will increase. B) Each individual's demand curve for DVD rentals will shift to the left. C) The market demand curve for DVD rentals shifts left. D) The market demand for DVD rentals increases. Answer: D Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 130) Which of the following is NOT a determinant of demand? A) consumers' incomes B) prices of other goods C) consumers' tastes D) production technology Answer: D Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

131) All other factors held constant, when McDonald's raises the price of its Big Mac by 20 cents, A) there is likely to be a decrease in the quantity of Taco Bell's Chalupas demanded, assuming the Big Mac and Chalupas are substitutes. B) there is likely to be an increase in demand for Taco Bell's Chalupas, assuming the Big Mac and Chalupas are substitutes. C) there is likely to be a decrease in demand for Taco Bell's Chalupas, assuming the Big Mac and Chalupas are substitutes. D) there is likely to be an increase in demand for McDonald's Big Mac, assuming the Big Mac and Chalupas are substitutes. Answer: B Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 132) Distinguish between a change in demand and a change in quantity demanded. Answer: A change in quantity demanded is caused by a change in the price of the good. It is a movement along the demand curve, so that an increase in price leads to a decrease in quantity demanded. A change in demand refers to a shift of the demand curve. The amount demanded changes at every price. Changes in income, population, prices of related goods, tastes and preferences, and expectations about the future cause the demand curve to shift either to the right or to the left. Diff: 2 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 133) Briefly discuss the determinants of demand other than price. Answer: An increase in income causes demand of a normal good to increase and demand of an inferior good to decrease. An increase in the price of a related good causes demand to increase if the two goods are substitutes and causes demand to decrease if the two goods are complements. An increase in population causes demand to increase. Demand increases if consumers develop more of a preference for the good. Expectations about the future also matter. If consumers think the price will increase in the future, current demand increases. Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

134) What is the difference between a normal good and an inferior good? How does this relate to the demand curve? Answer: A normal good is one for which demand increases as income increases, and an inferior good is one for which demand decreases as income decreases. Hence, an increase in income causes the demand curve for a normal good to shift to the right, showing an increase in demand; and an increase in income causes the demand curve for an inferior good to shift to the left, showing a decrease in demand. Diff: 1 Topic: 3.2 Shifts in Demand Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 3.3 Supply 1) The law of supply implies that the supply curve is A) flat. B) upward sloping. C) downward sloping. D) vertical. Answer: B Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 2) If the price of wireless earbuds increases, then there will be ________ of wireless earbuds. A) a decrease in the supply B) an increase in the supply C) an increase in the quantity supplied D) a decrease in the quantity supplied Answer: C Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 3) The law of supply states that other things being equal, A) supply creates its own demand. B) supply will increase if productivity increases. C) as price increases, quantity supplied increases. D) supply will increase to meet demand if demand increases. Answer: C Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 70 Copyright © 2021 Pearson Education, Inc.

4) Other things being equal, the relationship between price and quantity supplied is A) negative. B) constant. C) positive. D) non-existent. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 5) A movement along a supply curve is induced by a change in A) input prices. B) taxes and subsidies. C) price expectations. D) the product's own price. Answer: D Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 6) The quantity supplied of a particular good is the amount of the good that A) households are willing to consume at each particular price. B) firms will actually end up buying at a particular price during a given time period. C) firms are willing to sell at each price during a particular time period. D) households want firms to sell at each price during a particular time period. Answer: C Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 7) Which of the following represents the law of supply? A) An increase in the price of a good causes an increase in the supply of that good. B) An increase in the price of a good causes a rightward shift of the supply curve for that good. C) An increase in the price of a good causes an increase in the quantity supplied of that good. D) All of these Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

8) An increase in price will lead to an increase in quantity supplied. This statement is A) the law of supply. B) the law of demand. C) untrue always. D) a normative statement. Answer: A Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 9) Which of the following is an example of the law of supply? A) The price of gum has increased so producers are making more gum. B) The price of labor has increased and producers decrease supply. C) The amount of a good purchased increases when the price decreases. D) Producers provide less of a good when the price increases. Answer: A Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 10) According to the law of supply, A) people buy more of a good when the price increases. B) people buy less of a good when the price decreases. C) producers provide more of a good when the price decreases. D) producers provide less of a good when the price decreases. Answer: D Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 11) Suppliers will provide more of a good when A) the market price increases. B) the good is a normal good. C) resource prices increase. D) there is a decrease in demand. Answer: A Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

12) A given supply curve illustrates A) the relationship between price and quantity supplied. B) the effect of a change in resource costs on quantity supplied. C) the effect of a change in technology on quantity supplied. D) the relationship between expected future prices and quantity supplied. Answer: A Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 13) The data points on a supply curve come from A) survey analysis. B) the same place from which we get the data points on a demand curve. C) the supply schedule. D) companies' annual reports. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 14) Other things being equal, an increase in the price of a good leads to an increase in the amount produced. This is known as A) the law of demand. B) the law of supply. C) ceteris paribus. D) equilibrium. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 15) The direct relationship between changes in price and changes in quantity supplied is A) a change in supply. B) shown by a shift in the supply curve. C) the law of supply. D) the law of relative production. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

16) If the price of oil rises, producers of oil will A) increase the quantity of oil supplied. B) supply less oil. C) leave the amount of oil supplied unchanged. D) cut the price. Answer: A Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 17) The law of supply states that there is A) an inverse relationship between price and technology, ceteris paribus. B) a direct relationship between profit and quantity supplied, ceteris paribus. C) no relationship between price of resources and number of suppliers, ceteris paribus. D) a direct relationship between price and quantity supplied, ceteris paribus. Answer: D Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 18) Regarding the law of supply, which of the following statements is correct? A) As the price of a good or service rises, the quantity supplied will increase. B) As the price of a good or service rises, the quantity supplied will decrease. C) The ceteris paribus assumption does not apply. D) As demand falls, supply rises. Answer: A Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

19) Refer to the above figure. Which panel demonstrates the law of supply? A) Panel A B) Panel B C) Panel C D) Panel D Answer: B Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 20) The relationship between quantity supplied and the price of output is such that A) an increase in quantity will automatically lead to a reduction in price. B) an increase in price will lead to an increase in quantity supplied. C) an increase in price will produce an inward shift in the supply curve. D) quantity will decrease as the number of firms increases. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 21) For typical goods, supply curves are A) downward sloping. B) upward sloping. C) horizontal. D) vertical. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

22) Which one of the following statements is FALSE? A) There is an inverse (negative) relationship between product price and quantity supplied. B) There is some price at which quantity supplied of a product is zero. C) As product price increases, producers are willing to put more of the good on the market for sale. D) In order to entice producers to offer more of a product on the market for sale, product price must rise. Answer: A Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 23) If the price of a product increases, we would expect A) the level of demand to decrease. B) quantity supplied to increase. C) the level of supply to increase. D) an increase in quantity demanded. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 24) The relationship between quantity supplied and price is usually A) an inverse relationship. B) a direct relationship. C) a negative relationship. D) impossible to determine. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 25) Which of the following statements about a supply curve is FALSE? A) It shows a direct (positive) relationship between price and quantity supplied. B) It shows the quantity supplied at each specific price. C) It typically slopes downward to the right. D) It has a positive slope. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 76 Copyright © 2021 Pearson Education, Inc.

26) A supply schedule A) can be used to generate a supply curve. B) is a table reflecting the inverse relationship between price and quantity supplied. C) shows what happens to quantity supplied when price is held constant. D) all of these Answer: A Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 27) A direct or positive relationship between price and quantity supplied is A) the market clearing price. B) a change in demand. C) a supply curve. D) a demand curve. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 28) A supply curve A) has an indirect or negative relationship between price and quantity supplied. B) has a direct or positive relationship between price and quantity supplied. C) shows the relationship between quantity supplied and income. D) shows the relationship between complements. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 29) Which of the following causes a movement along a supply curve? A) a change in resource costs B) a change in technology C) a change in the price D) all of these Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

30) Market supply is obtained by A) summing the amount demanded by individual consumers at various prices. B) summing the amount supplied by individual producers at various prices. C) the law of supply. D) observing how the supply curve shifts. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 31) Graphically, the market supply curve is obtained by A) changing the ceteris paribus conditions. B) a change in quantity supplied. C) horizontally summing quantity supplied at various prices for individual producers. D) vertically summing quantity supplied at various prices for individual producers. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

32) Refer to the above table. The market quantity supplied when the price is $5 is A) 0. B) 5. C) 11. D) 20. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

33) Refer to the above table. The market quantity supplied when the price is $8 is A) 0. B) 20. C) 38. D) 29. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 34) The market supply curve is found by A) plotting the supply curves of individual firms. B) plotting and summing up the supply curves of individual firms. C) plotting the supply curves of individual consumers. D) taking the supply curve of the representative firm. Answer: B Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 35) Total market supply can be derived by A) horizontally summing individual supply curves at each and every price level. B) vertically summing individual supply curves at the current technology level. C) adding up the largest quantity demanded at various prices. D) looking at the changes in the price of raw materials needed to produce the product. Answer: A Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 36) The market supply curve can be derived by A) vertically adding the individual supplies at each quantity level. B) multiplying the price and quantity supplied at each price level. C) horizontally adding the individual supplies at each price level. D) looking at the capacity utilization in the largest firms in the industry. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

37) The supply curve has a A) negative slope. B) positive slope. C) slope equal to -1. D) undefined slope. Answer: B Diff: 2 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 38) The supply curve shows the relationship between the A) cost of production and the price of the product. B) cost of resources and cost of production. C) price of the product and quantity supplied. D) quantity demanded and the quantity supplied. Answer: C Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 39) The law of supply includes the statement "other things being equal." These other things include all of the following EXCEPT A) resource prices. B) technology. C) producers' expectations. D) consumer's income. Answer: D Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 40) Explain why there is a direct relationship between price and quantity supplied. Answer: For firms to produce more of a good per time period they have to purchase more materials, hire more labor, and purchase other inputs used to make the good. To get the producer to pay these higher costs it is necessary to increase the price the seller receives for each unit sold. Firms will also increase quantity supplied if the price of that good increases, allowing the firm to gain additional profits. The profits are incentives for the supplier to produce more. Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

41) State the law of supply and explain it. Answer: The law of supply indicates the direct or positive relationship between price and quantity supplied. This law states that when the price of a good increases, sellers will make more of that good available for a specified period of time, other things being equal. Other things being equal, a higher price gives producers more incentive to produce and sell more of that product. Conversely, when the price of a good decreases, sellers will make less of that good available for a specified time period. Diff: 1 Topic: 3.3 Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 3.4 Shifts in Supply 1) Last year there were 10 coffee shops in town. This year there are only 5. Other things being equal, the decrease in the number of coffee shops will A) cause the market supply curve of coffee to shift to the right. B) increase the market demand for coffee. C) cause a decrease in the quantity supplied of coffee at each price. D) have no impact on market supply as long as the demand for coffee remains strong. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 2) Other things being equal, an increase in wages paid to workers in firms making wireless earbuds will cause A) the quantity of wireless earbuds demanded to increase. B) the quantity of wireless earbuds supplied to decrease. C) the supply of wireless earbuds to decrease. D) the demand for wireless earbuds to decrease. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

3) Flour is an input used to produce bread. Suppose that the price of flour rises. As a result A) the supply curve for flour will shift to the right. B) the supply curve for flour will shift to the left. C) the supply curve for bread will shift to the right. D) the supply curve for bread will shift to the left. Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 4) A technological improvement in the production of wireless earbuds would A) increase the demand for wireless earbuds. B) increase the supply of wireless earbuds. C) decrease the demand for wireless earbuds. D) decrease the supply of wireless earbuds. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 5) A per-unit government tax on producers of a good tends to A) reduce the supply of the good. B) increase the supply of the good. C) cause an upward movement along the supply curve. D) not have any effect on the good's supply. Answer: A Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 6) In the long run, the number of firms in an industry may change. If the number of firms increases, then A) the supply curve will shift outward to the right. B) the demand curve will shift outward to the right. C) the supply curve will shift inward to the left. D) the demand curve will shift inward to the left. Answer: A Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

7) Any improvement in overall production technology that produces more output with the same level of inputs causes A) a movement up the supply curve resulting in both a higher equilibrium price and quantity. B) a rightward shift of the supply curve so that more is offered at each price. C) no movement of the supply curve, but a fall in price and a decrease in quantity supplied. D) a leftward shift of the supply curve so that less is offered for sale at each price. Answer: B Diff: 3 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 8) If more foreign plastic plants relocate to the United States, we would expect A) the U.S. supply curve for plastic to shift to the right. B) the U.S. supply curve for plastic would shift to the left. C) that the U.S. plastic market would not respond. D) that U.S. plastic demand might change, but U.S. plastic supply would remain the same. Answer: A Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 9) Which of the following is a determinant of supply? A) tastes and preferences of consumers B) technology C) consumer income D) number of consumers Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 10) All of the following will cause a shift in the supply of wireless earbuds EXCEPT A) a decrease in the prices of wireless earbuds. B) an increase in the cost of producing wireless earbuds. C) a per-unit government subsidy on the production of wireless earbuds. D) a decrease in the number of wireless earbuds manufacturers. Answer: A Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

11) Which of the following will shift today's supply curve to the right? A) Input prices rise. B) Sales taxes increase. C) The goods prices are expected to be higher in the future. D) The goods prices are expected to be lower in the future. Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 12) In general, any ceteris paribus determinant of supply that is favorable to production will A) cause a movement along the supply curve. B) shift the supply curve to the right. C) shift the demand curve to the left. D) shift the supply curve to the left. Answer: B Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 13) Other things being constant, the only way to move along a given supply curve for a product is for A) the product's relative price to change. B) the future relative price of related goods to change. C) the number of sellers to change. D) technological changes to occur. Answer: A Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 14) The effects of a per-unit tax imposed on sales of an industry's product would likely include A) a lower product price at any amount of the product supplied. B) a leftward shift of the market supply curve for the product. C) a leftward movement along the market supply curve for the product. D) none of these. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

15) If the government imposes a per-unit tax on sales of an industry's product, then we would expect A) the supply curve in that industry would shift to the left. B) the supply curve in that industry would shift to the right. C) the demand curve for that industry would shift to the right. D) the demand curve for that industry would shift to the left. Answer: A Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 16) If the price of cotton used in making blue jeans increases, which of the following will occur? A) There will be a movement along an unchanged supply curve for jeans. B) The supply curve for jeans will shift rightward. C) The supply curve for jeans will shift leftward. D) There will be a rightward shift in the supply curve for jeans, followed by a movement along the supply curve. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 17) Which of the following will cause an outward (rightward) shift in the supply curve? A) a reduction in the price of the good B) an increase in the price of labor input C) an increase in the number of consumers D) technological progress Answer: D Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 18) All of the following will cause the supply curve of good A to shift rightward EXCEPT A) a reduction in the prices of inputs used to produce good A. B) an increase in the number of firms in the industry producing good A. C) a decrease in the per-unit tax on good A which producers must pay. D) an increase in the market price of good A. Answer: D Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

19) How does a change in quantity supplied differ from a change in supply? A) A change in quantity supplied shifts the supply curve; a change in supply is a movement along the curve. B) A change in one of the ceteris paribus conditions affects quantity supplied, not supply. C) A change in the price affects quantity supplied, not supply. D) There is no difference. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 20) There is a 10 percent decrease in the price of plastic used by a firm that make more toys. This causes A) a decrease in the quantity of toys supplied. B) an increase in the supply of toys. C) an increase of the quantity supplied of toys. D) a decrease in the supply of toys. Answer: B Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 21) Suppose that producers of bottled water expect that the price of bottled water is going to drop next week. This would cause A) a decrease in the supply of bottled water today. B) an increase in the supply of bottled water today. C) an increase in the demand for bottled water today. D) the selling price of bottled water to rise today. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 22) Each of the following would cause an increase in the supply of TVs EXCEPT A) an improvement in technology. B) a decrease in the cost of labor used to produce TVs. C) an expectation that the price of TVs will rise in the future. D) an increase in the number of TV producers. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

23) Which of the following does NOT cause a rightward shift in the supply curve? A) a reduction in resource costs B) an increase in technology C) a reduction in the price of the good D) a reduction in the expected future price of the good Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 24) A change in the price of a good causes A) an increase in supply. B) a decrease in supply. C) an increase in demand and a decrease in supply. D) a change in quantity supplied. Answer: D Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 25) A change in the ceteris paribus conditions for supply will lead to a A) change in quantity supplied. B) change in supply. C) change in quantity supplied and a change in supply. D) change in how consumers view the quality of the good. Answer: B Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 26) An increase in supply will occur when A) the supply curve shifts downward to the right. B) the supply curve shifts upward to the left. C) the demand curve shifts downward to the left. D) the demand curve shifts upward to the right. Answer: A Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

27) A decrease in supply will occur when A) the supply curve shifts downward to the right. B) the supply curve shifts upward to the left. C) the demand curve shifts downward to the left. D) the demand curve shifts upward to the right. Answer: B Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 28) There will be an increase in supply when A) a consumer's income increases. B) there is an improvement in technology. C) the demand curve shifts. D) the market price rises from $3 to $4. Answer: B Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 29) Which of the following statements is consistent with an increase in supply? A) The price of labor input has increased. B) There has been an advance in technology. C) Consumers' incomes have increased. D) The market price has decreased. Answer: B Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 30) Which of the following statements is consistent with a decrease in supply? A) Prices of raw material inputs have increased. B) There has been an advance in technology. C) Consumers' incomes have increased. D) The market price has decreased. Answer: A Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

31) An increase in the price of input used to produce a product will lead to A) a decrease in the demand for that product. B) a decrease in quantity supplied of that product C) a decrease in the supply of that product. D) an increase in the supply of that product. Answer: C Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 32) An increase in the price of steel to car manufacturers will cause A) the quantity demanded for cars to increase. B) the demand for cars to decrease. C) the quantity supplied of cars to increase. D) the supply curve for cars to shift left. Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

33) Refer to the above figure. The rightward shift of the curve indicates A) an increase in demand. B) an increase in supply. C) a change in quantity demanded. D) a change in quantity supplied. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

34) Refer to the above figure. The rightward shift of the curve could have been caused by A) a technological improvement. B) a technological setback. C) an increase in income. D) a decrease in income. Answer: A Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 35) Which of the following is a likely result of the dramatic decrease in the price of microprocessor chips to computer manufacturers in the last two decades? A) an increase in the demand for computers B) a decrease in the supply of diskettes C) an increase in the supply of computers D) an increase in the quantity supplied of computers Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

36) Refer to the above figure. Moving from point A to point B indicates A) an increase in supply. B) an increase in quantity supplied. C) a decrease in supply. D) a decrease in quantity supplied. Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

37) Refer to the above figure. A movement from point A to point B for a good is most likely a result of A) an increase in the price of that good. B) a decrease in the price of that good. C) an expectation of an increase in the relative price of that good. D) an expectation of a decrease in the relative price of that good. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 38) A subsidy to wheat farmers will A) increase the quantity of wheat demanded. B) decrease the quantity of wheat supplied. C) increase the supply of wheat. D) leave both the supply and demand of wheat unchanged. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 39) Which of the following will NOT affect the supply of trucks? A) an increase in the price of steel B) an improvement in truck production technology C) an increase in the productivity of truck factories D) a decrease in the price of trucks Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 40) Which of the following is a non-price determinant of supply? A) the price of related goods consumers may buy B) technological advances in production C) consumers' incomes D) the number of consumers Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

41) The supply curve will shift to the left when A) the supply of the product increases. B) the demand for the product decreases. C) some producers leave the industry. D) the product becomes fashionable. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 42) When the price of a good rises, there is A) an increase in supply. B) a decrease in supply. C) a decrease in quantity supplied. D) an increase in quantity supplied. Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 43) Which of the following would likely cause an increase in the supply of single-serve coffee makers? A) a decrease in the number of consumers demanding single-serve coffee makers B) an increase in the price of single-serve coffee makers C) a decrease in the cost of manufacturing single-serve coffee makers D) a widespread expectation that the price of single-serve coffee makers will rise in the future Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 44) Which of the following will NOT cause a rightward shift in the supply curve? A) an improvement in technology B) a reduction in resource costs C) a reduction in the expected future price D) none of these Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

45) When producers anticipate that the price of their product will increase in the future, A) the supply curve will shift to the right. B) the supply curve will shift to the left. C) the current production will move along on the supply curve. D) they will immediately lobby Congress to adjust prices now. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 46) The imposition of a per unit tax on a product A) will cause the supply curve to shift downward and to the right. B) will cause the supply curve to shift upward and to the left. C) will reduce the quantity supplied of the product. D) will encourage producers to increase the quantity supplied of the product. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 47) Which of the following will NOT cause market supply to increase? A) an increase in the number of firms supplying the product in the market B) a change in technology which allows a larger level of production at every price C) an increase in the costs of resources used to produce the product D) a decrease in labor costs Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 48) Which of the following would cause an increase in the market supply of drones? A) a decrease in the demand for drones B) an increase in taxes levied on drones C) an increase in the cost of components used to make drones D) an increase in the number of firms making drones Answer: D Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

49) Which one of the following would cause an increase in the supply of planes? A) a decrease in the demand for planes B) an increase in the price of planes C) an increase in taxes applied to plane producers D) an improvement in the technology used to produce planes Answer: D Diff: 3 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 50) Which of the following will shift the supply curve for laptop computers to the left? A) development of a cheaper microchip used in laptop computer production B) a subsidy to the laptop computer industry C) expectations of a future decline in laptop computer prices D) a reduction of the number of firms that make laptop computers Answer: D Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 51) Which of the following will cause a movement along the supply curve for oil? A) new technology to drill oil from existing oil wells B) an increase in the price of oil C) an increase in the number of oil producers D) government tax on oil producers in Texas Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

52) Refer to the above figure. Plastic is an input for producing cellphones. Which diagram shows the effect on the supply of cellphones when the price of plastic has increased? A) graph C B) graph D C) neither graph D) both graphs Answer: B Diff: 3 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 53) Refer to the above figure. Which diagram shows the effect on the market of cellphones when the demand for cellphones has increased? A) graph C B) graph D C) neither graph D) both graphs Answer: C Diff: 3 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 54) Refer to the above figure. Which diagram shows the effect on the market of cellphones when the price of plastic has increased? A) graph C B) graph D C) neither graph D) both graphs Answer: B Diff: 3 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 95 Copyright © 2021 Pearson Education, Inc.

55) If one day a terrible disease were to wipe out over one-half of the orange trees in the United States, which of the following would likely result? A) The supply curve of orange juice would shift downward and to the right. B) The supply curve of orange juice would shift upward and to the left. C) The demand curve for orange juice would shift to the right. D) The demand curve for orange juice would shift to the left. Answer: B Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 56) Suppose the price of steel goes up in the United States. What happens in the market for automobiles that are made of steel? A) Supply shifts upward and to the left. B) Demand shifts left. C) Supply shifts downward and to the right. D) Demand shifts to the right. Answer: A Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

57) Refer to the above figure. Which of the following statements is TRUE? A) Panel A shows an increase in supply and Panel B shows a decrease in supply. B) Both Panels A and B show an increase in supply. C) Panel A shows a change in quantity supplied and Panel B shows a change in supply. D) Panel A shows a change in supply and Panel B shows a change in quantity supplied. Answer: C Diff: 3 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

58) If there is a decline in the price of milk, an input in the production of ice cream, then there will be a(n) A) decrease in the supply of ice cream and a leftward shift of the supply curve. B) decrease in the quantity of ice cream supplied and a movement up along the supply curve. C) increase in the supply of ice cream and a rightward shift of the supply curve. D) increase in the quantity of ice cream supplied and a movement down along the supply curve. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 59) Which of the following will NOT affect the position of the market supply curve for a good? A) The government grants a subsidy to the producers for each unit of a good that they produce. B) The price of the good increases. C) The number of sellers in the market increases. D) There is an increase in the prices of the inputs used in production. Answer: B Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 60) When the amount supplied is greater at each price, there is a(n) A) rightward shift in the supply curve. B) leftward shift in the supply curve. C) upward movement along the supply curve. D) downward movement along the supply curve. Answer: A Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 61) In order to increase the supply of a good, producers must A) convince consumers to reduce the quantity demanded. B) see an increase in quantity supplied by competitors. C) reduce their per-unit costs of producing the good. D) cut back on labor to reduce production costs. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

62) The market supply curve is found by A) surveys of consumer groups. B) vertically summing up the equilibrium prices of individual firms. C) horizontally summing up the supply curves of individual firms. D) estimating what the supply curve would be of one huge firm large enough to serve the entire market. Answer: C Diff: 1 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 63) Suppose that because of unseasonably cold weather in California, a significant portion of the orange crop has been lost to freezing temperatures. This statement means that A) the demand for oranges will rise. B) the equilibrium quantity of oranges will rise. C) the amount of oranges available at various prices will decline. D) the price of oranges will fall. Answer: C Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 64) How is the market supply curve found? In what ways is the process similar to the way the market demand curve is determined? In what ways are they different? Answer: The market supply curve is obtained by horizontally adding individual supply curves. The quantity supplied by each firm for a given price is added up to get the quantity supplied by the market. The process is identical to that for finding the market demand curve. The only difference is that the market demand curve slopes down and the market supply curve slopes up. Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 65) Distinguish between a change in quantity supplied and a change in supply. Answer: A change in quantity supplied is a movement along the supply curve caused by a change in the price of the good. An increase in price causes an increase in quantity supplied. A change in any of the other determinants of supply causes a change in supply. When there is a change in supply, the entire supply curve shifts either to the right or to the left. Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

66) Briefly discuss the determinants of supply other than price. Answer: An increase in the costs of inputs used to produce the good will cause supply to decrease, while an increase in technology will cause supply to increase. The imposition of a tax on the good would cause supply to decrease, while a subsidy on the good would cause supply to increase. An increase in the number of firms producing the good causes the market supply to increase. A change in expectations about future prices also causes current supply to change. Diff: 2 Topic: 3.4 Shifts in Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 3.5 Putting Demand and Supply Together

1) According to the above table, at a price of $1 per unit, which of the following would exist? A) a shortage of 800 units B) a surplus of 800 units C) a surplus of 200 units D) a shortage of 200 units Answer: A Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 2) According to the above table, the market clearing (equilibrium) price would adjust to A) $1. B) $3. C) $4. D) $5. Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

3) According to the above table, a surplus exists when A) the price is $1 per unit. B) the price is $2 per unit. C) the price is $3 per unit. D) the price is greater than $3 per unit. Answer: D Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

4) According to the above figure for a gasoline market, at a price of $1 per gallon of gasoline, there would be A) a shortage of 30 million gallons. B) a surplus of 30 million gallons. C) a shortage of 20 million gallons. D) a surplus of 50 million gallons. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 5) According to the above figure for a gasoline market, what happens when the price per gallon of gasoline jumps from $1 to $4? A) A gasoline surplus is replaced by a gas shortage. B) The market moves from a shortage of 40 million gallons/day to a surplus of 50 million gallons/day. C) The market shortage is replaced by market equilibrium. D) A surplus of 40 million gallons/day results. Answer: D Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 100 Copyright © 2021 Pearson Education, Inc.

6) In a free market, the market price and quantity in the above figure will adjust to equilibrium values of A) $1 per gallon and 50 million gallons. B) $4 per gallon and 10 million gallons. C) $2 per gallon and 60 million gallons. D) $2 per gallon and 30 million gallons. Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 7) According to the above figure for a gasoline market, an increase in the price from $2 to $4 will result in A) a shortage of 30 million gallons. B) an increase in quantity demanded of 10 million gallons. C) an increase in quantity supplied of 20 million gallons. D) an increase in demand of 20 million gallons. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 8) In the above figure, a surplus exists in the gasoline market when the price is A) $1 per gallon. B) $2 per gallon. C) $4 per gallon. D) below $2 per gallon. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 9) According to the above figure, a shortage will occur at a price at which A) quantity demanded equals quantity supplied. B) quantity demanded exceeds quantity supplied. C) quantity supplied exceeds quantity demanded. D) government sets a price above equilibrium. Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 101 Copyright © 2021 Pearson Education, Inc.

10) At a price of P0 in the above figure, which of the following statements is FALSE? A) Quantity demanded equals quantity supplied. B) There is an equilibrium in the market. C) P0 is the market clearing price. D) There is a surplus equal to Q0. Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 11) If the market price falls from P0 to P1 in the above figure, then A) a new equilibrium quantity is established. B) there is a shortage equal to the distance EF. C) there will be a further tendency for price to fall. D) there is a surplus of goods on the market equal to the distance Q1, Q2. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 12) If the market price rises from P0 to P2 in the above figure, then there is a A) surplus equal to the distance Q0, Q2. B) surplus equal to the distance Q1, Q2. C) shortage equal to the distance Q0, Q2. D) shortage equal to the distance Q1, Q2. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

13) Refer to the above figure. The highest price that consumers would be willing to pay for quantity Q2 is A) P2. B) P0. C) P1. D) cannot be determined from the diagram. Answer: C Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 14) Refer to the above figure. Other things being equal, if price is at P2, then we would expect A) price to decline until an equilibrium is achieved at P0. B) consumers to reduce their offering price for the good. C) an excess quantity demanded to occur. D) consumers to bid against each other for goods and force the price still higher. Answer: A Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

15) According to the above table, at a price of $8 per unit, other things constant A) consumers will continue to bid prices upward. B) there will be no tendency for the market to approach an equilibrium. C) a surplus of 100 units will exist. D) a shortage of 80 units will exist. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

16) According to the market data for good X in the above table, a stable equilibrium price is established at A) $2. B) $4. C) $6. D) $8. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 17) Given the market data for good X in the above table, an equilibrium quantity is established at A) 90 units. B) 60 units. C) 30 units. D) 120 units. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 18) In any given market, prices are determined by A) specialization of labor. B) transactions costs. C) supply and demand. D) comparative advantage. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 19) The equilibrium or market clearing price occurs at the point at which A) quantity demanded equals quantity supplied. B) the supply curve intersects the horizontal axis. C) the demand curve intersects the vertical axis. D) there is a shortage of the desired good. Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

20) According to the above figure, a shortage is shown between which two points? A) A and E B) C and B C) A and B D) E and F Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 21) Using the above figure, at which price is there neither excess quantity demanded nor excess quantity supplied? A) P1 B) P2 C) P3 D) none of these Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 22) At a market clearing price A) the quantity demanded will just equal the quantity supplied. B) there will be an excess quantity demanded. C) there will be a tendency for price to rise over time. D) the demand function will shift outward. Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

23) A market is in equilibrium when A) the quantity demanded equals the quantity supplied at the market clearing price. B) the horizontal axis crosses the vertical axis. C) buyers do not desire for the price to be any lower. D) the equilibrium price is below the market price. Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

24) According to the above table, the equilibrium price of earbuds is A) $16. B) $14. C) $12. D) $10. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 25) According to the above table, at a price of $16 per earbud, there is A) an equilibrium. B) a surplus of 3000 earbuds. C) a shortage of 3000 earbuds. D) a shortage of 1500 earbuds. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

26) According to the above table, there is an excess quantity demanded of 1500 earbuds at the price A) $14. B) $12. C) $10. D) $8. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 27) Refer to the above table about a free market of earbuds. When the quantity demanded is 3000 earbuds and the quantity supplied is 1500 earbuds, the market price of earbuds will likely A) decrease to $8. B) decrease to $6. C) increase to $12. D) stay unchanged at $10. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

28) According to the above figure, equilibrium is at point A) E. B) B. C) C. D) D. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 29) According to the above figure, the equilibrium price of DVDs is A) $20. B) $14. C) $10. D) $6. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 30) According to the above figure, at a price of $6 per DVD, there is a A) surplus of 4000 DVDs per month. B) market equilibrium of 4000 DVDs per month. C) shortage of 4000 DVDs per month. D) market equilibrium of 6000 DVDs per month. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 108 Copyright © 2021 Pearson Education, Inc.

31) Suppose a change takes place and the new equilibrium is at point A in the above figure. This change could have been caused by A) an increase in the per-unit tax on DVDs. B) a decrease in the income of consumers. C) a reduction in the wages paid to workers in the DVD industry. D) a reduction in the price of DVD players. Answer: A Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 32) A market requires A) sellers only. B) buyers and sellers. C) government intervention. D) buyers only. Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 33) A surplus occurs whenever A) price is below the equilibrium price. B) price is above the equilibrium price. C) price is equal to the equilibrium price. D) the supply curve is downward sloping. Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 34) If there is a shortage in a free market, then A) consumers will offer to pay a lower price for the good, and the price will fall toward the equilibrium level. B) consumers will offer to pay a higher price for the good, and the price will rise toward the equilibrium level. C) suppliers will decrease their output to match demand. D) suppliers will accept any price below equilibrium. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 109 Copyright © 2021 Pearson Education, Inc.

35) Scalping activity arises when A) the prices of goods are allowed to adjust to their equilibrium levels. B) the quantities of goods demanded and supplied are allowed to adjust to their equilibrium levels. C) the prices of goods are restricted to levels above equilibrium prices. D) the prices of goods are restricted to levels below equilibrium prices. Answer: D Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 36) A shortage will occur when A) the price equals the market clearing level. B) the price is above the market clearing level. C) there is an excess quantity supplied. D) the price is below the market clearing level. Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 37) When there is a shortage I. there is a tendency for price to increase. II. there is an excess quantity demanded. A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 38) When a surplus exists, A) the price is below the market clearing price. B) quantity demanded exceeds quantity supplied. C) an excess quantity demanded exists. D) none of these Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 110 Copyright © 2021 Pearson Education, Inc.

39) Suppose that the price of wheat is above its equilibrium price. You would expect to see A) a shortage on the market that causes prices to increase further. B) an increase in quantity demanded because of the high price. C) a leftward shift of the demand curve because of the high price. D) sellers begin to lower their prices because of the surplus of wheat. Answer: D Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 40) Which of the following is TRUE of the activities of ticket scalpers? A) These activities cannot generate profits for the scalpers unless ticket prices are currently below market clearing levels. B) These activities help reduce the quantities of excess tickets supplied for events in which ticket surpluses currently exist. C) Engaging in these activities enable scalpers to push the price above the market clearing level. D) Engaging in these activities enable scalpers to push the price below the market clearing level. Answer: A Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 41) When there is an excess quantity of a product supplied, there will be A) a tendency for price of the product to increase. B) a tendency for price of the product to fall. C) incentives for consumers to leave the market. D) upward pressure on the price of labor. Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 42) An excess quantity supplied can be corrected by A) a fall in price. B) legally fixing the price at its present level. C) a decrease in demand. D) an increase in supply. Answer: A Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 111 Copyright © 2021 Pearson Education, Inc.

43) Equilibrium in a market occurs when A) demand and supply indicate a small surplus of a good. B) price is at its minimum. C) quantity supplied and quantity demanded are equal at the market clearing price. D) the market price leads to a decrease in quantity demanded. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 44) Another term for the equilibrium price is A) ceteris paribus. B) black market. C) law of demand. D) market clearing price. Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 45) Market clearing price A) refers to a movement along the demand curve. B) refers to a supply curve. C) exists at a the point at which quantity demanded equals quantity supplied. D) refers to a surplus. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 46) Which of the following is NOT true about the equilibrium price? A) the price where a change in quantity supplied occurs B) the price where the demand curve intersects the supply curve C) the price where quantity demanded equals quantity supplied D) the price where there is neither excess quantity demanded or excess quantity supplied Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

47) The market clearing price is A) the price which eliminates excess quantity supplied or excess quantity demanded. B) the price which leaves an excess quantity demanded. C) the price which leaves an excess quantity supplied. D) the lowest price at which a positive quantity supplied exists. Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 48) When there is an excess quantity supplied, A) the market is in equilibrium. B) quantity demanded is greater than quantity supplied. C) quantity demanded is less than quantity supplied. D) prices will remain stable. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 49) If the price of an item can freely adjust, a market will A) always move towards equilibrium. B) always have an excess quantity demanded. C) always have an excess quantity supplied. D) never move towards equilibrium because prices are always increasing. Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 50) A surplus exists A) in equilibrium. B) when quantity supplied is greater than quantity demanded. C) when quantity supplied is less that quantity demanded. D) at the market clearing price. Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

51) A shortage exists A) in equilibrium. B) when quantity supplied is greater than quantity demanded. C) when quantity supplied is less than quantity demanded. D) at the market clearing price. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 52) Another name for a shortage is A) excess quantity supplied. B) excess quantity demanded. C) equilibrium. D) market clearing. Answer: B Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 53) Another name for a surplus is A) excess quantity supplied. B) excess quantity demanded. C) equilibrium. D) market clearing. Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

54) Refer to the above table. The equilibrium price of tablets is A) $500. B) $550. C) $650. D) $700. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 55) Refer to the above table. At a price of $450, there is an A) equilibrium. B) excess quantity supplied of 4,000 tablets. C) excess quantity demanded of 6,000 tablets. D) excess quantity demanded of 9,000 tablets. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 56) Refer to the above table. There is an excess quantity supplied of 2,000 units at a price of A) $450. B) $500. C) $600. D) $700. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

57) Refer to the above figure. The equilibrium price and quantity are A) $2 and 12 units. B) $6 and 9 units. C) $8 and 6 units. D) $10 and 1 unit. Answer: B Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 58) Refer to the above figure. The market clearing price is A) $2. B) $6. C) $8. D) $10. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 59) Refer to the above figure. A surplus will exist when A) the price is between $0 and $6. B) the price equals $6. C) the price equals $10. D) quantity demanded equals 15. Answer: C Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

60) Refer to the above figure. A shortage will exist when A) the price is between $0 and $6. B) the price equals $6. C) the price equals $10. D) quantity demanded equals 3. Answer: A Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 61) Refer to the above figure. Excess quantity supplied will exist when A) the price is between $0 and $6. B) the price equals $6. C) the price equals $10. D) quantity demanded equals 15. Answer: C Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 62) Refer to the above figure. Excess quantity demanded will exist when A) the price is between $0 and $6. B) the price equals $6. C) the price equals $10. D) quantity demanded equals 3. Answer: A Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 63) Refer to the above figure. At a price of $10, excess quantity supplied equals A) 0. B) 12. C) 15. D) infinity. Answer: B Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

64) Refer to the above figure. At a price of $6, excess quantity supplied equals A) 0. B) 12. C) 15. D) infinity. Answer: A Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 65) Refer to the above figure. At a price of $2, excess quantity demanded equals A) 0. B) 3. C) 12. D) 15. Answer: C Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

66) Refer to the above figure. At a price of two cents, the quantity of bubble gum demanded will be A) 3. B) 2. C) 4. D) 5. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

67) Refer to the above figure. At a price of four cents, the quantity of bubble gum supplied will be A) 3. B) 2. C) 4. D) 5. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 68) Refer to the above figure. At a price of four cents, a(n) ________ of bubble gum will exist in the market. A) surplus B) shortage C) excess quantity demanded D) equilibrium quantity Answer: A Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 69) Refer to the above figure. At a price of three cents, a(n) ________ of bubble gum will exist in the market. A) surplus B) shortage C) equilibrium quantity D) excess quantity supplied Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

70) In the above figure, what are the equilibrium price and quantity? A) $40 and 200 units B) $50 and 100 units C) $10 and 200 units D) $30 and 100 units Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 71) In the above figure, what would result if the price was $10? A) a surplus B) a shortage C) equilibrium D) excess supply Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 72) In the above figure, if the price is equal to $40, there is A) a surplus of 50 units. B) a shortage of 100 units. C) an excess quantity demanded of 50 units. D) an excess quantity supplied of 100 units. Answer: A Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

73) If there is a shortage A) fewer producers want to sell the product because it is too scarce. B) consumers will drive down the price further. C) firms will drive up the price to enhance profits. D) the price will decline to the equilibrium level. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 74) Which of the following statements is correct? A) A shortage and scarcity are the same thing. B) A shortage occurs when the quantity demanded is less than the quantity supplied at a price below the market clearing price. C) A shortage occurs when the quantity demanded is greater than the quantity supplied at a price below the market clearing price. D) A shortage occurs when the quantity demanded is less than the quantity supplied at a price above the market clearing price. Answer: C Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

75) Using the above table, at a price of $70, there is A) a surplus of 150 units. B) a shortage of 120 units. C) a surplus of 270 units. D) a shortage of 150 units. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

76) Using the above table, the market clearing price is ________ and equilibrium quantity is ________. A) $55; 80 B) $60; 150 C) $70; 150 D) $150; 150 Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

77) Using the above table, at a price of $5 there will be a A) shortage of 20 units. B) shortage of 10 units. C) surplus of 20 units. D) surplus of 10 units. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 78) Using the above table, the market clearing price for this product is A) $5. B) $4. C) $3. D) $2. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

79) What happens as the result of a shortage? A) There is downward pressure on prices. B) There is upward pressure on prices. C) Consumers begin to view the good as an inferior good because they have a hard time finding it. D) Supply of the good decreases. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 80) What happens as the result of a surplus? A) There is downward pressure on prices. B) There is upward pressure on prices. C) Consumers begin to view the good as an inferior good because it is too commonplace. D) Demand for the good increases. Answer: A Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 81) Suppose that, at a rental rate of $1500 per month, 700 residents wish to rent apartments and that landlords offer 800 apartments available for rent. Which one of the following statements is then TRUE? A) There is a shortage of 100 apartments. B) There is an excess demand for apartments. C) The market clearing rental price of apartments is too low. D) The market clearing rental price of apartments is less than $1500 per month. Answer: D Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

82) Suppose that, at an official ticket price of $500, there are 6,000 Justin Timberlake fans wanting to attend his concert, but only 4,000 ticketed seats are available. Which one of the following statements is then TRUE? A) There will be scalpers outside the arena selling tickets for $500. B) There will be a surplus of tickets. C) The market clearing price of the tickets is less than $500. D) The market clearing price of the tickets is more than $500. Answer: D Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 83) Which of the following situations could generate a shortage? A) Demand for a good increases, resulting in a new higher market clearing price. B) Demand for a good decreases, resulting in a new lower market clearing price. C) Demand for a good increases, but the price is not permitted to rise. D) Demand for a good decreases, but the price is not permitted to fall. Answer: C Diff: 3 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 84) The market clearing price of a good is A) the price at which there is at least some of the good available for everyone. B) the price at which there is no surplus and no shortage. C) the price that consumers prefer. D) the price that producers prefer. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 85) What situation gives rise to a surplus? A) The market clearing price of the good is too high. B) The current price of the good is below its market clearing price. C) The current price of the good is above its market clearing price. D) Supply of the good decreases, but the market price is not permitted to change. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

86) When the current price of an item is greater than the item's market clearing price, A) supply is greater than demand. B) demand is greater than supply. C) quantity supplied is greater than quantity demanded. D) quantity supplied is less than quantity demanded. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 87) When a shortage exists in a market, A) the market clearing price is above equilibrium and market forces will cause the price to fall. B) the quantity demanded is less than the quantity supplied at the existing price. C) the current price is below the market clearing price and the price will rise. D) the quantity supplied is greater than the quantity demanded at the current price. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 88) If the price of a product increases, A) there is an increase in quantity supplied and a decrease in demand. B) there is an increase in supply and a decrease in quantity demanded. C) there is an increase in supply and a decrease in demand. D) there is an increase in quantity supplied and a decrease in quantity demanded. Answer: D Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 89) Which of the following occurs when a market is in equilibrium? A) Quantity supplied is equal to quantity demanded. B) Quantity supplied is more than quantity demanded to satisfy all consumers. C) The price of the good will tend to rise, all else held constant. D) The price of the good will tend to fall, all else held constant. Answer: A Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

90) When there is an excess quantity supplied in the market, A) the price of the product will increase, causing a decrease in demand and an increase in supply. B) the price of the product will increase, causing a decrease in quantity demanded and an increase in supply. C) the price of the product will decrease, causing an increase in quantity demanded and a decrease in quantity supplied. D) the price will increase, causing a decrease in demand and an increase in quantity supplied. Answer: C Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 91) If a scalper for the Super Bowl is able to charge $5,000 for a front-row seat, this suggests that A) at the regular price, there is a surplus of Super Bowl tickets. B) at the regular price, there is a shortage of Super Bowl tickets. C) at the regular price, the quantity of Super Bowl tickets demanded equals the quantity supplied. D) the scalper is making the football fan worse off. Answer: B Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 92) At the market clearing price, A) there is neither a shortage nor a surplus. B) quantity supplied equals quantity demanded. C) the supply and demand curves intersect. D) all of these are correct. Answer: D Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

93) Suppose a shortage for good X exists. Given this information, we know that A) the price of good X will tend to rise toward the equilibrium level. B) the price of good X will tend to fall toward the equilibrium level. C) a government price floor should be imposed above the current price so that the market can work more effectively. D) a government price ceiling should be imposed above the current price so that the market can work more effectively. Answer: A Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 94) A shortage creates a situation that forces prices to ________ while a surplus creates a situation that forces prices to ________. A) decrease; increase B) decrease; decrease C) increase; decrease D) increase; increase Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 95) The demand for orthodontists' services falls as the proportion of the population that obtains braces falls. It may take several years before the new long-run equilibrium for the orthodontic labor market is attained. In the meantime, the orthodontic labor market experiences a(n) A) shortage. B) quality decrease. C) surplus. D) excess demand. Answer: C Diff: 1 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

96) "A shortage is the same thing as scarcity." Do you agree or disagree with this statement? Why? What can cause a shortage to disappear in a market? What can cause scarcity to disappear? Answer: Disagree. Scarcity is the situation where the resources available to produce goods and services are insufficient to satisfy all human wants. Scarcity is a condition of the world. A shortage occurs when the price is below the equilibrium price and quantity demanded at that price is greater than quantity supplied. The shortage can disappear by letting price rise to its equilibrium level. Scarcity will never disappear. Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 97) Given a market equilibrium point, explain, using the concepts of demand and supply, how it is achieved. Answer: Market equilibrium occurs at the point at which the demand curve intersects the supply curve. The quantities demanded and supplied are equal at this point, and the price at this point is the market clearing price. If the price of the item happened to be below the market clearing price, quantity demanded would exceed quantity supplied, and there would be a shortage of the item. Consumers would offer to pay a higher price to obtain the item. The higher price would induce an increase quantity supplied and a decrease in quantity demanded. Eventually, quantity supplied would equal quantity demanded at the higher, market clearing price. Conversely, if the price of the item happened to be above the market clearing price, quantity supplied would exceed quantity demanded, and there would be a surplus of the item. Producers would offer to sell the item at a lower price. The lower price would induce an increase in quantity demanded and a decrease in quantity supplied. Eventually, quantity demanded would equal quantity supplied at the lower, market clearing price. Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 98) How is the equilibrium price determined? What happens if the price is above the equilibrium price? What happens if the price is below the equilibrium price? Answer: The equilibrium price is determined by the point where the demand curve and the supply curve intersect. At this point, quantity demanded and quantity supplied are equal. At a price greater than the equilibrium price there is an excess quantity supplied, or surplus. At a price below the equilibrium price there is an excess quantity demanded or shortage. Diff: 2 Topic: 3.5 Putting Demand and Supply Together Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 4 Extensions of Demand and Supply Analysis 4.1 The Price System and Markets 1) An economic system in which relative prices change to reflect changes in supply and demand for different goods and services is known as a A) socialist system. B) communist system. C) ration. D) market. Answer: D Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 2) In a market system, which component conveys information about what is relatively scarce and what is relatively abundant? A) the number of producers B) the number of consumers C) market price D) the amount of resources used in producing the goods and services Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 3) In a market system, what must take place for quantity demanded to continually be equated with quantity supplied? A) Price controls must be applied by governments. B) Relative prices must be able to adjust to market clearing levels. C) Tastes and preferences of consumers must adjust to eliminate surpluses or shortages. D) Businesses must engage in involuntary, unprofitable exchanges to eliminate surpluses or shortages. Answer: B Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

4) Which of the following statements about markets is correct? I. A market helps resources move to their highest-valued uses by means of prices changes. II. A market represents the exchanges of both buyers and sellers. A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 5) In a market system, the costs associated with exchanging goods are known as A) voluntary costs. B) signaling costs. C) opportunity costs. D) transaction costs. Answer: D Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 6) In a market system, intermediaries in the exchange process are known as A) producers. B) socialists. C) middlemen. D) free agents. Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

7) Which of these would NOT be considered a middleman in a market? A) a produce wholesaler B) a rice farmer C) a smartphone retailer D) a meat distributor Answer: B Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 8) In a price system, changes in prices A) make it difficult for the system to function well. B) imply that people have made mistakes in the past. C) signal to everyone in the system what goods are relatively more or less scarce. D) signal to policy makers what goods should and should not be taxed more. Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 9) The way we know what commodities are relatively scarce or abundant is through A) transaction costs. B) prices. C) price ceilings. D) price floors. Answer: B Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 10) The price system A) is the voluntary exchange system. B) is old fashioned and is no longer used. C) is used only in countries that are developing. D) is used by the government to maintain stable supply of goods. Answer: A Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 3 Copyright © 2021 Pearson Education, Inc.

11) The price system has A) prices fixed by the government. B) prices fixed by the seller. C) voluntary exchange. D) prices fixed by the producer. Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 12) In the price system, A) prices are set by government action. B) consumers alone set the price. C) producers alone set the price. D) prices are set by the interaction of supply and demand. Answer: D Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 13) The price of tea increases. Which of the following is NOT part of the likely chain of events that follows from this price change? A) Some tea consumers reduce their consumption of tea. B) Tea leaf producers increase their production of tea. C) Tea leaf producers increase production. D) Tea leaf producers lay off some more workers. Answer: D Diff: 3 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

14) The signaling aspect of the market system refers to A) legal requirements for contracts and exchanges. B) the price of the good to the consumer and producer. C) the voluntary character of the exchange. D) transaction costs of carrying out exchanges. Answer: B Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 15) The signals in markets are determined A) by supply and demand. B) for all goods by the government through the use of price controls. C) in an unfair manner that ends up hurting the poor. D) by nonprice rationing devices. Answer: A Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 16) The price system features A) exchanges made in currency only. B) voluntary exchange that makes both the consumer and producer better off. C) exchanges made only on a barter basis. D) an exchange in which consumer is made better off and the producer is made worse off. Answer: B Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 17) Voluntary exchange A) is the only way to eliminate scarcity. B) is a nonprice rationing device. C) is trading so that the consumer and producers are better off. D) involves no transactions costs. Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 5 Copyright © 2021 Pearson Education, Inc.

18) Which of the following is NOT an example of a transaction cost? A) the enjoyment of owning the good B) the opportunity cost of time spent looking for stores that sold the good desired C) the cost of returning a defective product D) time spent bargaining over the price of a good Answer: A Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 19) Individuals who specialize in activities that lower transaction costs are A) consumers. B) producers. C) bureaucrats. D) middlemen. Answer: D Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 20) Which of the following is NOT a device to reduce transaction costs? A) shopping centers B) auto dealers located close together C) government prohibitions on advertising D) banks that direct funds from savers to borrowers Answer: C Diff: 3 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

21) Which of the following statements is NOT true about exchanges in the market system? A) In voluntary exchange both parties are better off because of the exchange. B) Exchanges occur only in situations of barter where the market price is irrelevant. C) Prices indicate what is relatively abundant and what is relatively scarce. D) Transaction costs in exchanges include the cost of enforcing a contract as well as the costs of information. Answer: B Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 22) Market clearing prices in a market system act as A) a signaling device. B) a direct measure of resource costs. C) a way for producers to advertise. D) a legally determined rationing device. Answer: A Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 23) The rationing function of prices means that A) government is responsible for setting the prices of basic foods. B) all goods and services are produced by large firms. C) businesses determine what goods consumers should purchase. D) buyers and sellers synchronize their decisions through the price system. Answer: D Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

24) Buyers and sellers receive market signals A) from news announcements of the government. B) through the price system. C) from the gossip columns in the newspapers. D) from their friends and acquaintances. Answer: B Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 25) The market system is also called the price system because A) rising prices are the signal to producers to offer more of a particular good. B) people pay money in markets. C) everything has a price tag. D) inflation is a significant problem. Answer: A Diff: 3 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 26) Which of the following is a main characteristic of exchanges in the market system? A) Decisions to trade are based on individuals' self interest. B) Exchanges are highly regulated by the government. C) Sellers hire economists to determine the market clearing price. D) Exchanges are part of the legislative imperative. Answer: A Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

27) In a market system, how are the price signals established? A) Consumer advocacy groups establish fair prices for items, and most firms follow these pricing guidelines because they don't want to anger their consumers. B) Industry associations establish an acceptable price range for each commodity sold within the industry, and member firms are obligated to abide by association guidelines. C) The forces underlying supply and demand interact to determine a market clearing price. D) Federal legislation establishes maximum prices for most goods, and state governments regulate the prices of any remaining items. Answer: C Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 28) Intermediaries, known as middlemen, specialize in A) reducing transaction costs. B) negotiating high prices for sellers. C) negotiating low prices for buyers. D) encouraging consumers to buy goods on credit, rather than with cash. Answer: A Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 29) Which of the following is NOT a voluntary exchange? A) Jose loses his smartphone on the way home. B) Marie buys groceries. C) Jason pays $20,000 for tuition and fees this semester. D) Emily buys a $500 plane ticket to fly from Miami to Dallas on short notice. Answer: A Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

30) Some Internet companies like Amazon reduce the transaction costs of many purchases by A) providing misleading information about the quality of products. B) providing information about products and firms that supply those products. C) advertising sales at local discount stores. D) paying its employees low wages. Answer: B Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 31) Markets tend to A) exist primarily in towns or cities. B) increase transaction costs. C) reduce transaction costs. D) make exchange more difficult. Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 32) Transaction costs are A) production costs. B) taxes on production. C) regulations on production. D) costs associated with exchange. Answer: D Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

33) When a market clearing price is determined, A) the exchange between buyers and sellers is voluntary. B) the exchange between buyers and sellers is directed by outside factors such as the government. C) the exchange between buyers and sellers benefits only the buyers. D) the exchange between buyers and sellers benefits only the sellers. Answer: A Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 34) Your local grocery store reduces transaction costs to the consumer A) by reducing the consumer's need to travel from food producer to food producer (or manufacturer to manufacturer) to purchase the food staples that the consumer desires. B) by providing a system that directs funds from lenders to borrowers. C) by providing a system of justice to enforce contracts. D) All of these are correct. Answer: A Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 35) Another term for intermediaries who specialize in reducing transaction costs is A) service providers. B) consultants. C) middlemen. D) free riders. Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

36) All of the following reduce the transaction costs for consumers EXCEPT A) eBay. B) a shopping mall. C) a court decision regarding product safety. D) a grocery store. Answer: C Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 37) What is the type of companies that provide services by linking individuals to others with similar interests or to companies that sell certain products? A) not-for-profit firms B) government agencies C) platform firms D) non-transaction firms Answer: C Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 38) Amazon's Home Services website connects customers of appliances with professionals who can install appliances for those customers. As a result of this service, Amazon is a A) loss leader. B) platform firm. C) voluntary firm. D) supermarket. Answer: B Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Application of knowledge

39) The role of platform firms is to A) reduce the amount of market competition among sellers. B) lower transaction costs for buyers and sellers. C) reduce the level of voluntary exchanges in markets. D) reduce the amount of information in the price system. Answer: B Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 40) What are transaction costs? What are some ways in which society reduces transaction costs? Answer: Transaction costs are costs associated with exchanging goods and services. They include information costs associated with finding out price, quality, and other characteristics of the good and the other party in the exchange, and costs of contracting and enforcing the contract. Organized markets, retail stores and shopping malls, advertising, and middlemen are several institutions that have developed to reduce transaction costs. Diff: 2 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 41) What are the terms of exchange and how are these terms related to the price? Answer: The terms of exchange are the terms under which trading takes place. Usually, the terms of exchange specify the price at which the good is traded, which is determined by the interaction of supply and demand. Diff: 1 Topic: 4.1 The Price System and Markets Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

4.2 Changes in Demand and Supply

1) Assume that the initial demand and supply curves in the above figure are DA and SA, respectively. The initial equilibrium price and quantity are A) P1 and E. B) P3 and F. C) P1 and G. D) P2 and F. Answer: A Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 2) Refer to the above figure. Suppose the demand curve shifts from DA to DB, while the supply curve remains at SA. Which of the following statements is FALSE? A) There has been an increase in demand. B) Supply has increased. C) More consumers in the market might have caused the demand curve to shift. D) The new equilibrium price is P2, and the new equilibrium quantity is F. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

3) Refer to the above figure. Suppose that the supply curve shifts from SA to SB while the demand curve shifts from DA to DB. Which of the following is TRUE about the results of the shifts in the supply and demand curves? A) The equilibrium price increases while the equilibrium quantity remains unchanged. B) Both the equilibrium price and equilibrium quantity increase. C) The equilibrium price remains unchanged while the equilibrium quantity increases. D) Both the equilibrium price and equilibrium quantity remain unchanged. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 4) Refer to the above figure. Suppose that the supply curve shifts from SA to SB while the demand curve remains at DA. Which of the following is TRUE? A) Only quantity supplied has increased. B) Only quantity demanded has decreased. C) Supply has increased. D) Supply has decreased. Answer: C Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 5) Other things being equal, suppose that the demand for wheat in constant quality units increases. The increase in demand will cause A) a surplus of wheat. B) a higher equilibrium price and higher equilibrium quantity of wheat. C) fall in the market clearing price of corn, a substitute for wheat. D) a higher equilibrium quantity, but a lower equilibrium price of wheat. Answer: B Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

6) Suppose that consumer income increases and that ground meat is an inferior good. Which of the following will occur in the market for ground meat? A) Market clearing price will rise, and equilibrium quantity will rise. B) Market clearing price will fall, and equilibrium quantity will fall. C) Market clearing price will rise, and equilibrium quantity will fall. D) Market clearing price will fall, and equilibrium quantity will rise. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 7) Suppose that there is an improvement in technology in the market for Samsung phones. Which of the following is TRUE? A) Supply will increase and the market clearing price will fall. B) Supply will increase and the market clearing price will rise. C) Demand will increase and the market clearing price will rise. D) Demand will increase and the market clearing price will fall. Answer: A Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 8) Suppose that demand for portable power banks increases, and simultaneously, the supply of portable power banks increases. Which of the following would you conclude definitely will occur in the market for portable power banks? A) The market clearing price will rise. B) The market clearing price will fall. C) The equilibrium quantity will rise. D) The equilibrium quantity will fall. Answer: C Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

9) Suppose there is a simultaneous increase in the demand for rice and increase in the supply of rice. Which of the following will occur as a result of these simultaneous events? A) Both the market clearing price and equilibrium quantity will rise. B) The market clearing price will fall, but the equilibrium quantity will rise. C) The market clearing price may rise, fall, or stay the same, but the equilibrium quantity will rise. D) The market clearing price will fall, but the equilibrium quantity may rise, fall, or stay the same. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 10) Suppose you are told that the equilibrium price of bananas has increased, while the equilibrium quantity of bananas has fallen. You are also told that either the demand changed or supply changed, but not both. Which of the following must have occurred? A) Demand increased. B) Demand decreased. C) Supply increased. D) Supply decreased. Answer: D Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 11) Which of the following will cause, other things being equal, a leftward movement along the supply curve for smart TVs? A) an improvement in the technology of producing smart TVs B) an increase in resource costs for producing smart TVs C) a reduction in the price of smart TVs D) an expectation that the price of smart TVs will be lower in the future Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

12) Suppose we observe the following two simultaneous events in the market for beef. First, there is a decrease in the demand for beef due to changes in consumer tastes. And second, there is a reduction in beef cattle supply due to climate change. We know with certainty that these two simultaneous events will cause which of the following? A) no change in the equilibrium quantity and a reduction in the equilibrium price B) an increase in the equilibrium quantity and in the equilibrium price C) a decrease in the equilibrium quantity and an indeterminate change in the equilibrium price D) a decrease in the equilibrium quantity and an increase in the equilibrium price Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 13) Suppose Brad Pitt and Angelina Jolie wear matching platinum jewelry in their new movie. After the movie is released, suppose that consumers increase their demand for the jewelry and at the same time manufacturers increase the supply of the jewelry. As a result A) the equilibrium quantity will increase, and there is an indeterminate change in the equilibrium price. B) the equilibrium quantity and price are both indeterminate. C) the equilibrium quantity will decrease, and the equilibrium price will increase. D) the equilibrium price and quantity will both decrease. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 14) As demand for wireless earbuds increases, other things being equal, we can expect A) a decrease in both the relative price and quantity of wireless earbuds. B) a decrease in the supply of wireless earbuds. C) more wireless earbuds to be produced. D) an excess number of wireless earbuds in the market. Answer: C Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

15) If both the demand for and the supply of smartphones are increasing, which of the following statements is TRUE? A) The consumer should buy a smartphone now since the price will be higher in the future. B) The consumer should wait and buy a smartphone later since the price will be lower in the future. C) The price of a smartphone will be the same in the future as it is now. D) It is impossible to know, given only this information, whether the prices of smartphones will go up or down in the future. Answer: D Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 16) If demand decreases while supply increases, then the equilibrium price A) always decreases. B) always increases. C) may increase, decrease, or stay the same. D) never changes. Answer: A Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 17) If demand increases while supply simultaneously decreases, then the equilibrium quantity A) always increases. B) always decreases. C) can never change. D) None of these Answer: D Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

18) If other factors remain unchanged, technological progress in producing good A definitely will lead to A) an increase in the market clearing price of good A and a decrease in the equilibrium quantity of good A. B) an increase in both the market clearing price and the equilibrium quantity of good A. C) a decrease in the market clearing price of good A and an increase in the equilibrium quantity of good A. D) a decrease in both the market clearing price and the equilibrium quantity of good A. Answer: C Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 19) With respect to the market clearing price and the equilibrium quantity of good A, increases in the demand for and the supply of good A will definitely A) increase the market clearing price of good A but have an uncertain impact on the equilibrium quantity of A. B) reduce the market clearing price and the equilibrium quantity of good A. C) increase the market clearing price and the equilibrium quantity of good A. D) increase the equilibrium quantity of good A but have an uncertain impact on the market clearing price of A. Answer: D Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 20) With respect to the market clearing price and the equilibrium quantity for good B, an increase in the demand for and a decrease in supply of the good definitely will A) increase the market clearing price and the equilibrium quantity of good B. B) decrease the market clearing price and the equilibrium quantity of good B. C) increase the market clearing price of good B but lower the equilibrium quantity of B. D) increase the market clearing price of good B but have an uncertain impact on the equilibrium quantity of B. Answer: D Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

21) If equilibrium price falls and the equilibrium quantity of the good purchased decreases, what has happened to either the supply curve or to the demand curve? A) Supply increased. B) Demand decreased. C) Demand increased. D) Supply decreased. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 22) A change in an equilibrium price can result from I. A change in demand II. A change in supply A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 23) An increase in supply, other things being equal, will cause which of the following to occur? A) quantity supplied to decrease B) quantity demanded to increase C) a rightward shift in the demand curve as the price falls D) a leftward shift in the demand curves as the price increases Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 24) Suppose the price of tomato sauce falls. In the market for pizza, in which tomato sauce of a popular ingredient, one would expect that A) the supply of pizza would increase, and the price would fall. B) the demand for pizza would increase, and the price would increase. C) the demand for pizza would decrease, and price would fall. D) the supply of pizza would decrease, and price would rise. Answer: A Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 21 Copyright © 2021 Pearson Education, Inc.

25) The prices of certain goods, such as ice and gasoline, often increase after a natural disaster such as a hurricane. The economic explanation for this observation is that A) people panic in disaster situations. B) disasters bring out the worst in people. C) the disaster temporarily reduces the supply of the goods and increases the demand for the goods. D) the disaster temporarily reduces the supply of the goods and reduces the demand for the goods. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 26) People often complain about price gouging after a disaster such as a wildfire. Suppose the government successfully prevented price increases due to the disaster. We would expect A) reconstruction to take longer because the quantity supplied of new materials would increase more slowly. B) reconstruction to take less time because the demand for materials would increase faster. C) reconstruction never to occur. D) reconstruction to take less time because the government could rebuild more quickly when people are not in the way. Answer: A Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 27) In the labor market, adjustments to changes in supply and demand A) usually occur instantly. B) usually take time to occur. C) do not apply, since the labor market does not respond to supply and demand forces. D) do not apply, since wages in the labor market always go up. Answer: B Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

28) Hospitals announce that there are not enough nurses available to keep them fully staffed. Economically speaking, what does this announcement mean? A) The market wage for trained nurses is currently above the equilibrium wage. B) There is currently a surplus of nurses in this market. C) The market wage for nurses will eventually rise to the market clearing wage. D) The market will adjust very rapidly to correct this imbalance because anyone can be a nurse without any training. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 29) Holding supply constant, a reduction in demand leads to A) lower prices and higher quantity supplied. B) lower prices and lower quantity supplied. C) higher prices and higher quantity supplied. D) higher prices and lower quantity supplied. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 30) A wildfire destroyed a large amount of orange crops in California, leading to A) a decrease in supply of oranges. B) a decrease in quantity supplied of oranges. C) a decrease in demand for oranges. D) a decrease in quantity demanded for oranges. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 31) In recent years, the price of wireless earbuds has fallen, while the quantity exchanged of wireless earbuds has risen. We can conclude that this is most likely a result of A) a decrease in supply while demand remained constant. B) an increase in demand while supply remained constant. C) an increase in demand that exceeded an increase in supply. D) an increase in supply that exceeded an increase in demand. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 23 Copyright © 2021 Pearson Education, Inc.

32) Holding supply constant, a decrease in demand leads to A) lower prices and higher quantity supplied. B) lower prices and lower quantity supplied. C) higher prices and higher quantity supplied. D) higher prices and lower quantity supplied. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 33) The decrease in the price of gasoline to a national average of less than $2.5 during the summer of 2020 was most likely a result of A) an increase in demand due to reduced summer driving. B) an increase in supply resulting from higher refinery output. C) an increase in demand due to increase in summer driving along with a decrease in supply resulting from reduced refinery output. D) an increase in supply resulting from higher refinery output along with a decrease in demand in summer driving. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 34) Holding demand constant, a reduction in supply leads to A) lower prices and higher quantity demanded. B) lower prices and lower quantity demanded. C) higher prices and higher quantity demanded. D) higher prices and lower quantity demanded. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 35) Holding demand constant, an increase in supply leads to A) lower prices and higher quantity demanded. B) lower prices and lower quantity demanded. C) higher prices and higher quantity demanded. D) higher prices and lower quantity demanded. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 24 Copyright © 2021 Pearson Education, Inc.

36) If price increases and the quantity purchased increases, we know that A) supply increased. B) supply decreased. C) demand increased. D) demand decreased. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 37) The price of a good always changes when A) either a shortage or a surplus occurs. B) quantity demanded and quantity supplied are constant. C) there is an increase in demand and an increase in supply. D) there is a decrease in demand and a decrease in supply. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 38) The price of labor in the poultry industry has just increased. For poultry, this will lead to A) an increase in price and a decrease in quantity. B) an increase in price and an increase in quantity. C) a decrease in price and a decrease in quantity. D) a decrease in price and an increase in quantity. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

39) Refer to the above table for smartphones. Suppose there are technological advances in the production of smartphones. The new equilibrium price will be A) $275. B) $375. C) less than $275. D) between $275 and $375. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 40) Refer to the above table for smartphones. Suppose the demand for smartphones rises because there are more Wifi hot spots. The new equilibrium price will be A) $200. B) $275. C) more than $275. D) impossible to be determined given the information. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 41) An increase in the equilibrium quantity of good B can be caused by A) an increase the price of inputs utilized in producing good B. B) an increase in the price of good B. C) a technological improvement in the process of producing good B. D) a reduction in the number of producers of good B. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 26 Copyright © 2021 Pearson Education, Inc.

42) An increase in the price of labor used to produce good A will lead to A) an increase in the market clearing price of good A. B) an increase in the supply of good A. C) a decrease in the demand for good A. D) an increase in the demand for good A. Answer: A Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 43) The market clearing price of corn has just increased. Which of the following could have caused this change? A) a reduction in demand B) a reduction in supply C) an increase in quantity demanded D) an increase in quantity supplied Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 44) Suppose the equilibrium quantity of ethanol has decreased. Which of the following could have caused this change? A) a decrease in demand B) an increase in supply C) an increase in quantity demanded D) an increase in quantity supplied Answer: A Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 45) The market clearing price of computer modems has just decreased. Which of the following could have caused this change? A) a decrease in supply at the same time that demand increases B) an increase in supply at the same time that demand decreases C) a decrease in supply with demand unchanged D) an increase in demand with supply unchanged Answer: B Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

46) Firms that produce 90 percent of all smart TVs have shut down their facilities for maintenance. In the smart TV market this will lead to A) an increase in price and a decrease in quantity. B) an increase in price and an increase in quantity. C) a decrease in price and a decrease in quantity. D) a decrease in price and an increase in quantity. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 47) A technological advancement has just occurred in the computer chip industry. In the computer chip market this will lead to A) an increase in price and a decrease in quantity. B) an increase in price and an increase in quantity. C) a decrease in price and a decrease in quantity. D) a decrease in price and an increase in quantity. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 48) The economy is undergoing a recession that has reduced consumers' incomes. In the smartphone market, this will most likely lead to A) an increase in price and a decrease in quantity. B) an increase in price and an increase in quantity. C) a decrease in price and a decrease in quantity. D) a decrease in price and an increase in quantity. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 49) Coffee has just been found to increase your expected life span by 5 years if you consume it every day. In the market for coffee, this information will lead to A) an increase in price and a decrease in quantity. B) an increase in price and an increase in quantity. C) a decrease in price and a decrease in quantity. D) a decrease in price and an increase in quantity. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 28 Copyright © 2021 Pearson Education, Inc.

50) Goods X and Y are complementary goods. An increase in the price of good X has occurred. In the market for good Y this will lead to A) an increase in price and a decrease in quantity. B) an increase in price and an increase in quantity. C) a decrease in price and a decrease in quantity. D) a decrease in price and an increase in quantity. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 51) Goods X and Y are complementary goods. A decrease in price of good X has occurred. In the market for good Y, this will lead to A) an increase in price and a decrease in quantity. B) an increase in price and an increase in quantity. C) a decrease in price and a decrease in quantity. D) a decrease in price and an increase in quantity. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 52) An increase in supply causes A) quantity supplied to decrease. B) supply and price to increase. C) price to decrease. D) price to increase. Answer: C Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 53) A severe drought has devastated cocoa plants, causing an increase in the price of chocolate. In the market for chocolate chip cookies, A) a surplus will arise. B) supply has decreased and price has increased. C) quantity has decreased and price has decreased. D) quantity demanded has increased. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 29 Copyright © 2021 Pearson Education, Inc.

54) More farmers have recently entered the wheat industry. In addition there has been a technological advancement in the fertilizer industry providing wheat farmers with a cheaper and a more effective fertilizer. In the market for wheat, the effects these changes will have on the equilibrium price and quantity are A) price will increase, and quantity will decrease. B) price will increase, and the effect on quantity is indeterminate. C) price will decrease, and quantity will increase. D) price will decrease, and the effect on quantity is indeterminate. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 55) In the automobile industry, workers have just negotiated a new contract giving workers a large raise. There has also been an increase in the number of licensed drivers who are in the market for a new car. In the market for new automobiles, the effects that these changes will have on the equilibrium price and quantity are A) price will increase, and quantity will decrease. B) price will increase, and the effect on quantity is indeterminate. C) price will decrease, and quantity will increase. D) price will decrease, and the effect on quantity is indeterminate. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 56) There has recently been an increase in the price of dairy products used in the production of ice cream. Lower temperatures have also induced people to consume less ice cream. In the market for ice cream, the effects these changes will have on equilibrium price and quantity are A) price will increase, and quantity will decrease. B) quantity will decrease, and the effect on price is indeterminate. C) price will decrease, and quantity will increase. D) price will decrease, and the effect on quantity is indeterminate. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

57) Following adjustments to a new equilibrium in a market, the equilibrium quantity remains unchanged, but the market clearing price is now lower. Which of the following could definitely have caused this outcome? A) Demand and supply both increased. B) Demand and supply both decreased. C) Demand increased, and supply decreased. D) Demand decreased, and supply increased. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 58) An increase in demand and a decrease in supply will lead to A) unambiguous increases in both price and quantity. B) unambiguous decreases in both price and quantity. C) an unambiguous increase in quantity, but the effect on price is indeterminate. D) an unambiguous increase in price, but the effect on quantity is indeterminate. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 59) An increase in demand and an increase in supply will lead to A) unambiguous increases in both price and quantity. B) unambiguous decreases in both price and quantity. C) an unambiguous increase in quantity, but the effect on price is indeterminate. D) an unambiguous increase in price, but the effect on quantity is indeterminate. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 60) A decrease in demand and a decrease in supply will lead to A) unambiguous increases in both price and quantity. B) unambiguous decreases in both price quantity. C) an unambiguous decrease in price, but the effect on quantity is indeterminate. D) an unambiguous decrease in quantity, but the effect on price is indeterminate. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

61) A decrease in demand and an increase in supply will lead to A) unambiguous increases in both price and quantity. B) unambiguous decreases in both price and quantity. C) an unambiguous decrease in price, but the effect on quantity is indeterminate. D) an unambiguous decrease in quantity, but the effect on price is indeterminate. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 62) Following adjustments to a new equilibrium in a market, the market clearing price remains unchanged, but the equilibrium quantity is now lower. Which of the following could definitely have caused this outcome? A) Demand and supply both increased. B) Demand and supply both decreased. C) Demand increased, and supply decreased. D) Demand decreased, and supply increased. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 63) The income of consumers increases. and the wage rate in the beef industry increases. As a result A) the price of beef stays the same and the quantity sold can either increase or decrease, depending on whether the change in demand is greater than the change in supply. B) the price of beef increases and the quantity sold can either increase, decrease or stay the same depending on whether the change in demand was greater than the change in supply. C) the equilibrium quantity sold increases and price can either increase or decrease, depending on whether the change in demand is greater than the change in supply. D) the equilibrium quantity sold can either increase or decrease and the price can either increase or decrease, depending on whether the change in demand was greater than the change in supply. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

64) The supply of cheese comes from milk. The price of cheese will decrease if A) the supply of milk decreases. B) the supply of cheese decreases. C) the price of milk increases. D) the demand for cheese decreases. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 65) The more flexible prices are, the A) greater demand shifts have to be to bring about a new equilibrium. B) larger the shifts in supply will be after a change in demand. C) greater the reliance by sellers to change the nominal price. D) more quickly a shock to the market can be absorbed. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 66) Suppose a hurricane causes a great deal of destruction in Florida. After the hurricane, it takes much longer than usual for the reconstruction of homes to take place. A possible explanation for this is A) greed by suppliers of construction materials increased. B) government prevented price gouging during the reconstruction period. C) prices of construction materials fell in the rest of the nation D) environmental restrictions on lumbering in the Pacific Northwest were relaxed. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 67) For which situation would we expect the adjustment speed to be the fastest? A) The demand for surgeons increases. B) A large increase in birth rates leads to an increase in elementary school teachers. C) The demand for movie videos increases. D) The demand for office space in downtown Chicago increases. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

68) What will happen when there is a rightward shift in the demand curve? A) The product price will instantaneously adjust downward. B) Product prices do not change in this situation. C) Producers will decrease the product price. D) A new, higher price is not instantaneously achieved, but the price will rise over time. Answer: D Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 69) During the 2016 Summer Olympics in the city of Ro, some Rio residents rented rooms to visitors. This behavior A) helped reduce the shortage of hotel rooms caused by the high demand during the Olympics. B) reduced the demand for tickets to the Olympics since many local residents left town while they rented out space in their homes. C) helped raise the prices that visitors paid for hotel rooms in Rio. D) raised the demand for hotel rooms in Rio and should have been prevented by the city of Rio. Answer: A Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 70) List prices on new cars do NOT change very often, so A) the real price of cars is very inflexible. B) the prices of new cars can only be flexible if there are changes in the cost of materials. C) price flexibility is not an important feature in the auto market. D) price flexibility shows up primarily through the negotiations between buyers and sellers. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 71) After an increase in the demand for construction workers, the market will attain its new longrun equilibrium faster if A) wages are flexible. B) wages are inflexible, forcing new people to enter the market. C) unions restrict the number of new construction workers. D) people ignore the shortage in the short run. Answer: A Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 34 Copyright © 2021 Pearson Education, Inc.

72) To enhance their prestige, some country clubs like to point to the fact that they have a waiting list for new members. Even at clubs with high initiation fees, it is common that prospective members have to wait three or more years before there is room for them on the membership rolls. How do these country clubs set the price of membership to ensure that they have a waiting list? A) Set the membership price above the market clearing price. B) Set the membership price below the market clearing price. C) Set the price so that the quantity supplied of memberships exceeds the quantity demanded. D) Set the price at a level that will generate a surplus of memberships. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 73) Suppose new research shows that soy products derived from soybeans provide more health benefits than previously thought. At the same time, drought conditions result in extensive damage to the soybean crop. What will be the combined impact of these two factors on the equilibrium price and quantity of soybeans? A) Price will decrease, but the effect on quantity is indeterminate. B) Price will increase, but the effect on quantity is indeterminate. C) Quantity will decrease, but the effect on price is indeterminate. D) Quantity will increase, but the effect on price is indeterminate. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 74) Suppose that an early frost damages the California orange crop. As a result, the price of Texas oranges increases. Ceteris paribus, which one of the following statements best explains this situation? A) The supply of California oranges decreased, causing the supply of Texas oranges to increase, which resulted in a higher price. B) The supply of California oranges decreased, causing the supply of Texas oranges to decrease, which resulted in a higher price. C) The supply of California oranges decreased, causing their price to increase, and thus causing the demand for Texas oranges to increase. D) The demand for California oranges fell because of the freeze, and this led to a higher demand for Texas oranges. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

75) A newspaper headline asserts: "Falling Demand Pushes Down Housing Prices." This headline A) incorrectly implies that the demand for housing can change, whereas in fact only the quantity of housing demanded can change. B) incorrectly implies that the price of housing will rise when demand increases. C) incorrectly implies that more housing will be demanded at higher prices. D) correctly implies that a decrease in demand will decrease the market clearing price. Answer: D Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 76) Suppose you observe that the price of a good increases and that the quantity of this good sold also increases. If only the demand curve or the supply curve shifts, this suggests that A) supply increased over time while demand remained the same. B) supply decreased over time while demand remained the same. C) demand increased over time while supply remained the same. D) demand decreased over time while supply remained the same. Answer: C Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 77) People consume more fresh fruit in the summer than during the rest of the year, yet the prices of fresh fruit are lower in the summer than in other seasons. What accounts for this? A) Fresh fruit is not subject to the law of supply. B) The supply of fresh fruit increases in the summer. C) Fresh fruit is an inferior good. D) Fresh fruit is not subject to the law of demand. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

78) Suppose you observe that the price of movie admissions decline and that the number of people attending movies declines as well. If only the demand curve or the supply curve shifts, this suggests that A) movies are a normal good and incomes have increased. B) high salaries for Hollywood actors have increased the cost of movie making. C) movie theaters have experienced an increase in their operating costs due to increases in the minimum wage. D) admission prices for other types of entertainment, such as live shows and sporting events, have also declined. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 79) Flowers are more expensive on Valentine's Day than at other times of the year, yet sales of flowers are highest on that day. How does economic theory account for this? A) An increase in demand pushes up the market clearing price of flowers. B) People buying the flowers are irrational. C) Flowers are not subject to the law of demand D) Florists know that there are no substitutes for flowers, so they take advantage of consumers on Valentine's Day. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 80) In which of the following situations will both market clearing price and the equilibrium quantity increase? A) an increase in demand with no change in supply B) an increase in supply with no change in demand C) a decrease in supply with no change in demand D) a decrease in demand with no change in supply Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

81) In which of the following situations will both market clearing price and the equilibrium quantity decrease? A) an increase in demand and no change in supply B) an increase in supply with no change in demand C) a decrease in supply with no change in demand D) a decrease in demand with no change in supply Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 82) In which of the following situations will market clearing price increase and the equilibrium quantity decrease? A) an increase in demand with no change in supply B) an increase in supply with no change in demand C) a decrease in supply with no change in demand D) a decrease in demand with no change in supply Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 83) In which of the following situations will market clearing price decrease and the equilibrium quantity increase? A) an increase in demand with no change in supply B) an increase in supply with no change in demand C) a decrease in supply with no change in demand D) a decrease in demand with no change in supply Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

84) If demand and supply both increase, A) the equilibrium quantity definitely will increase and market clearing price definitely will decrease. B) the equilibrium quantity definitely will increase and market clearing price definitely will increase. C) the equilibrium quantity definitely will increase but the change in market clearing price cannot be determined without more information. D) market clearing price definitely will increase but the change in the equilibrium quantity cannot be determined without further information. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 85) If demand and supply both decrease, A) the equilibrium quantity definitely will decrease, and the market clearing price definitely will decrease. B) the equilibrium quantity definitely will decrease, and the market clearing price definitely will increase. C) the market clearing price definitely will decrease, but the change in the equilibrium quantity cannot be determined without more information. D) the equilibrium quantity definitely will decrease, but the change in market clearing price cannot be determined without more information. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 86) If demand increases and supply decreases, A) the market clearing price definitely will increase, and the equilibrium quantity definitely will increase. B) the market clearing price definitely will increase, and the equilibrium quantity definitely will decrease. C) the market clearing price definitely will increase, but the change in the equilibrium quantity cannot be determined without more information. D) the equilibrium quantity definitely will decrease, but the change in the market clearing price cannot be determined without more information. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

87) If demand decreases and supply increases, A) the market clearing price will decrease, and the equilibrium quantity will increase. B) the market clearing price will decrease, and equilibrium quantity will decrease. C) the equilibrium quantity will decrease, but the change in the market clearing price cannot be determined without more information. D) the equilibrium price will decrease, but the change in the equilibrium quantity cannot be determined without more information. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 88) Suppose that the supply curve remains unchanged. If the demand curve shifts to the right, A) the market clearing price definitely will decrease. B) the market clearing price definitely will increase. C) there will be no change in the market clearing price. D) the market will collapse. Answer: B Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 89) If supply increases and demand decreases, A) the market clearing price definitely rises, and the equilibrium quantity definitely falls. B) the market clearing price definitely rises, and the effect on the equilibrium quantity is indeterminate. C) the market clearing price definitely falls, and the effect on the equilibrium quantity is indeterminate. D) the effect on the market clearing price is indeterminate, and the equilibrium quantity definitely falls. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

90) If both supply and demand simultaneously decrease, A) the market clearing price definitely rises, and the equilibrium quantity definitely falls. B) the market clearing price definitely rises, and the effect on the equilibrium quantity is indeterminate. C) the market clearing price definitely falls, and the effect on the equilibrium quantity is indeterminate. D) the effect on the market clearing price is indeterminate, and the equilibrium quantity definitely falls. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 91) If supply and demand both simultaneously increase, A) the market clearing price definitely rises, and the equilibrium quantity definitely falls. B) the market clearing price definitely rises, and the effect on the equilibrium quantity is indeterminate. C) the market clearing price definitely falls, and the effect on the equilibrium quantity is indeterminate. D) the effect on the market clearing price is indeterminate, and the equilibrium quantity definitely rises. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 92) We cannot predict the effect on the market clearing price, but know that the equilibrium quantity will increase when A) supply increases and demand decreases. B) supply and demand for a product simultaneously decrease. C) supply and demand for a product simultaneously increase. D) supply decreases and demand increases. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

93) We cannot predict the effect on the market clearing price, but know that the equilibrium quantity will decrease when A) supply increases and demand decreases B) supply decreases and demand increases. C) supply and demand for a product simultaneously decrease. D) supply and demand for a product simultaneously increase. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 94) We cannot predict the effect on the equilibrium quantity, but know that the market clearing price will decrease when A) supply increases and demand increases. B) supply decreases and demand decreases. C) supply decreases and at the same time demand increases. D) supply increases and at the same time demand decreases. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 95) We cannot predict the effect on the equilibrium quantity, but know that the market clearing price will increase when A) supply decreases and at the same time demand increases. B) supply increases and demand increases simultaneously. C) supply and demand decreases simultaneously. D) supply and demand increases simultaneously. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

96) If supply decreases and demand increases, A) the market clearing price definitely rises, and the equilibrium quantity falls. B) the market clearing price definitely rises, and the equilibrium quantity is indeterminate. C) the market clearing price definitely falls, and the effect on the equilibrium quantity is indeterminate. D) the effect on the market clearing price is indeterminate, and the equilibrium quantity definitely falls. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 97) If both the demand curve and the supply curve shift to the right, we can unambiguously conclude that the A) market clearing price will increase. B) market clearing price will decrease. C) equilibrium quantity will increase. D) equilibrium quantity will decrease. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 98) Which one of the following could account for an increase in the market clearing price of portable power banks? A) a decrease in demand for portable power banks B) an increase in supply of portable power banks C) an increase in supply along with a decrease in demand D) an increase in demand along with a decrease in supply Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

99) In 2017, destruction to U.S. gasoline refineries was caused by back-to-back storms along the U.S. Gulf Coast—Hurricane Harvey and Hurricane Irma. In one week, the average price of a gallon of gasoline in the United States increased by about 20 cents. Which of the following best explains why these events pushed up the price of gasoline? A) The demand curve for gasoline shifted to the left along the supply curve for gasoline. B) The supply curve for gasoline shifted to the left along the demand curve for gasoline. C) The demand curve for gasoline shifted to the right along the supply curve for gasoline. D) The supply curve for gasoline shifted to the right along the demand curve for gasoline. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 100) In 2010, a British Petroleum oil rig exploded in the Gulf of Mexico. The explosion resulted in a major oil spill and a decrease in the supply of oil. At the same time, the average price of gasoline decreased. Which of the following best explains the decrease in the price of gasoline? A) The quantity demanded of gasoline increased. B) The demand for gasoline decreased, and the effect of the decrease in demand on the gasoline price was greater than the price effect of the decrease in supply. C) The demand for gasoline increased, and the effect of the increase in demand on the gasoline price was less than the price effect of the decrease in supply. D) The demand for gasoline remained unchanged. Answer: B Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 101) The market for gasoline in May is in equilibrium, at a market clearing price of $3 per gallon. After Memorial Day, the demand curve for gasoline increases, which causes A) the demand curve for gasoline to shift to the right, creating a shortage at $3 per gallon which causes the market clearing price of gasoline to rise. B) the demand curve for gasoline to shift to the right, creating a shortage at $3 per gallon which causes the market clearing price of gasoline to fall. C) the demand curve for gasoline to shift to the left, creating a shortage at $3 per gallon which causes the market clearing price of gasoline to rise. D) the demand curve for gasoline to shift to the left, creating a shortage at $3 per gallon which causes the market clearing price of gasoline to fall. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge

102) Suppose the price of crude oil used to produce gasoline rises significantly. At the same time, consumers purchase electric cars in great numbers. In the market for gasoline, demand shifts to the ________ and supply shifts to the ________. A) left; left B) left; right C) right; left D) right; right Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 103) Suppose the price of crude oil used to produce gasoline rises significantly. At the same time, consumers purchase electric cars in great numbers. In the market for gasoline, the market clearing price ________ and the equilibrium quantity ________. A) definitely falls; is indeterminate B) is indeterminate; definitely falls C) definitely falls; definitely rises D) definitely rises; is indeterminate Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Application of knowledge 104) Economists assume that when there is a change in supply and/or demand, the market clearing price returns to the equilibrium A) quickly. B) slowly. C) after a protracted negotiation process. D) after an adjustment period. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

105) When the supply and/or demand curve shift, the new market clearing price is A) reached instantaneously. B) reached only after the government intervenes in the market. C) reached after some period of adjustment. D) never reached. Answer: C Diff: 1 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 106) Suppose the price of steel decreases. In the market for automobiles, we would expect which of the following to occur? A) The market clearing price will fall and the equilibrium quantity will rise. B) The market clearing price will rise and the equilibrium quantity will fall. C) Both the market clearing price and the equilibrium quantity will fall. D) Both the market clearing price and the equilibrium quantity will rise. Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 107) If the demand for a product remains the same and the supply falls, A) the market clearing price will fall and the equilibrium quantity will rise. B) the market clearing price will rise and the equilibrium quantity will fall. C) both the market clearing price and the equilibrium quantity will fall. D) both the market clearing price and the equilibrium quantity will rise. Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 108) If one day it was discovered that lime juice caused cancer, which of the following would likely result? A) The supply curve for lime juice would shift to the right. B) The supply curve for lime juice would shift to the left. C) The demand curve for lime juice would shift to the right. D) The demand curve for lime juice would shift to the left. Answer: D Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

109) If the demand for a product rises and the supply stays the same, A) the market clearing price will fall and the equilibrium quantity will rise. B) the market clearing price will rise and the equilibrium quantity will fall. C) both the market clearing price and the equilibrium quantity will fall. D) both the market clearing price and the equilibrium quantity will rise. Answer: D Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 110) If the demand for a product falls and the supply stays the same, A) the market clearing price will fall and the equilibrium quantity will rise. B) the market clearing price will rise and the equilibrium quantity will fall. C) both the market clearing price and the equilibrium quantity will fall. D) both the market clearing price and the equilibrium quantity will rise. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 111) If both buyers and sellers expect the price of a commodity to rise in the future, it is likely that the market clearing price ________ and the equilibrium quantity ________. A) will fall; cannot be predicted B) will rise; cannot be predicted C) cannot be predicted; will fall D) cannot be predicted; will rise Answer: B Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 112) If both buyers and sellers expect the price of a commodity to fall in the future, it is likely that the market clearing price ________ and the equilibrium quantity ________. A) will fall; cannot be predicted B) will rise; cannot be predicted C) cannot be predicted; will fall D) cannot be predicted; will rise Answer: A Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

113) When supply and demand for a product increase simultaneously, we A) can predict that both the market clearing price and the equilibrium quantity will increase. B) can predict that both the market clearing price and the equilibrium quantity will decrease. C) cannot predict the market clearing price, but know that the equilibrium quantity will increase. D) cannot predict the change in either the equilibrium quantity or the market clearing price. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 114) When supply and demand for a product decrease simultaneously, we A) can predict that both equilibrium price and quantity will increase. B) can predict that both equilibrium price and quantity will decrease. C) cannot predict equilibrium price, but know that equilibrium quantity will decrease. D) cannot predict the change in either the equilibrium quantity or equilibrium price. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 115) When supply increases and at the same time demand decreases, we A) can predict that both equilibrium price and quantity will increase. B) can predict that both equilibrium price and quantity will decrease. C) cannot predict equilibrium quantity, but know that equilibrium price will decrease. D) cannot predict the change in either the equilibrium quantity or equilibrium price. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 116) Suppose there is a simultaneous increase in demand and increase in supply. Given this information, we know with certainty that A) both the equilibrium price and the equilibrium quantity will increase. B) the equilibrium price will increase, and the equilibrium quantity will increase. C) the equilibrium quantity will increase. D) the equilibrium price will increase. Answer: C Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

117) If producers must receive a higher price to be induced to produce any quantity, we can conclude that A) supply decreased. B) demand decreased. C) both supply and demand increased. D) demand increased. Answer: A Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 118) In the market for domestic avocados, what would happen to the market clearing price and the equilibrium quantity if there was a drought in avocado growing areas? A) The market clearing price would rise, and the equilibrium quantity would rise. B) The market clearing price would fall, and the equilibrium quantity would rise. C) The market clearing price would rise, and the equilibrium quantity would fall. D) The market clearing price would fall, and the equilibrium quantity would fall. Answer: C Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

119) Using a graph, show a market equilibrium. Suppose the costs of inputs increase. How is this shown on the graph? Explain what is happening in the market. Answer:

In the graph, the original equilibrium is at E, where the demand curve and the supply curve intersect. Price is P1 and quantity is Q1. The increase in costs of inputs causes the supply to decrease, shown by a shift of the supply curve to the left (S1). At price P1, there is an excess quantity demanded equal to Q1 - Q3. Price rises to P2, causing quantity demanded to decrease until the new equilibrium at E is reached. The new price is P2 and the new quantity is Q2. Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 120) Suppose that the market for coffee is in equilibrium at a price of $9.50 per pound and a monthly quantity of 20 million pounds. News of a drought in Brazil arrives so that people know that the supply of coffee months from now will be sharply reduced. What, if anything, will happen in the coffee market now? Explain. Answer: The expectations of reduced supplies and higher prices in the future will cause current demand to increase and the market clearing price to rise. Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

121) Suppose that initially a market is in equilibrium at a price of $10 and a quantity of 5000 units per day. Several months later, the market is in a new equilibrium at a price of $5 and a quantity of 5000 units per day. What happened in the market? Answer: For price to fall, either demand had to decrease or supply had to increase, or both. If demand decreased while supply remained constant, the quantity would have decreased too, and if supply increased while demand remained constant, the quantity sold would have increased. Therefore, both demand decreased and supply increased in such a way that the quantity did not change. Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 122) Describe the market process that should occur if the price of a product is below its equilibrium price; now describe what would occur if the price is above its equilibrium price, assuming no market interference. Answer: If price is below its equilibrium price, quantity demanded will be greater than quantity supplied; as a consequence the market price will rise due to competition among buyers. If price is above its equilibrium price, quantity supplied will be greater than quantity demanded and the market price will fall due to competition among sellers. In either case, the adjustment will continue until both quantity supplied and demanded are equal at the equilibrium point. Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 123) Would it take longer for a labor market to move to a new equilibrium for house painters or architects? Why? Answer: It would take longer for the market for architects to move to a new equilibrium, other things being equal. It takes more time in training to become an architect, and the knowledge one has is more specialized. Hence, it would take longer for the increase in quantity supplied to reach a new equilibrium after an increase in demand for architects than for house painters. For a decrease in demand, house painters can find similar jobs at similar pay more easily than can an architect. Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking

124) Assume that CDs are a normal good and that the price of stereo equipment falls while the labor costs of producing CDs increase. What will happen in the market for CDs? Answer: Since stereo equipment is a complementary good to CDs, a decrease in the price of stereo equipment causes the demand for CDs to increase. The increase in labor costs causes the supply of CDs to decrease. The price of CDs will increase, but the quantity sold in the market could increase, decrease, or remain the same. The quantity effect depends on how much demand increased relative to how much supply decreased. Diff: 3 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 125) Suppose local educators argue that teachers' salaries are too low. At the same time it is said that the school district received 750 applications for 5 new openings. Are salaries too low? Explain. Answer: It is difficult to claim salaries are too low when there are so many teachers who desire to work in the district. The number of applicants suggests that salaries are above the equilibrium wage rather than below the equilibrium wage. Diff: 2 Topic: 4.2 Changes in Demand and Supply Learning Outcome: Micro-4: Explain how supply and demand function in competitive markets AACSB: Analytical thinking 4.3 The Rationing Function of Prices 1) In economic terms, the total price of a pound of meat for an individual who has waited in line is A) the money price paid to the butcher for the pound of meat. B) the money price of meat relative to the price of bread or other necessity. C) the money price of the meat plus the opportunity cost of time spent waiting in line. D) the money price of an equal amount of meat substitute, such as beans and rice. Answer: C Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

2) According to the text, during World War II rationing was conducted in the U.S. through the use of A) queuing. B) lotteries. C) coupons. D) force. Answer: C Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 3) In a market, the rationing function of prices results in A) long waiting lines. B) a price ceiling. C) an equilibrium between supply and demand. D) a shortage or surplus. Answer: C Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 4) Queuing is a way to ration goods A) on a first-come, first-serve basis. B) through prices. C) through the use of political power. D) through markets. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

5) Which of the following statements about a price system is TRUE? I. Prices ration goods and services. II. Prices indicate relative scarcity. A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 6) Ways to ration goods include A) first-come, first-served. B) political power. C) prices. D) All of these. Answer: D Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 7) A long line at the campus bookstore at the beginning of the term is an example of A) price rationing. B) an ineffective price ceiling. C) a non-price rationing device. D) an ineffective price floor. Answer: C Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

8) Other things being equal, a higher price induces A) buyers to reduce the amount they want to buy and sellers to increase the amount they are willing to sell. B) buyers to increase the amount they want to buy and sellers to reduce the amount they are willing to sell. C) buyers to reduce the amount they want to buy and sellers to reduce the amount they are willing to sell. D) buyers to increase the amount they want to buy and sellers to increase the amount they are willing to sell. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 9) Prices in a market economy perform a rationing function because they reflect A) the demand of all buyers in the market. B) the extent to which the goods are necessities. C) the strength of the supply curve. D) the relative scarcity of the goods. Answer: D Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 10) In a world of scarcity, there has to be some way to ration the available resources. According to economists, the most efficient use of available resources occurs when rationing occurs via A) queuing. B) rationing. C) political power. D) the price system. Answer: D Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

11) Which of the following will tend to occur when a surplus exists in a market? A) Supply will increase and demand will decrease until the surplus disappears. B) Supply will decrease and demand will increase until the surplus disappears. C) The price will tend to rise over time. D) The price will tend to decrease over time. Answer: D Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 12) In a market system, relative scarcities of resources are indicated by A) supply and demand being out of equilibrium. B) surpluses. C) excess demand and excess supply. D) relative market prices. Answer: D Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 13) The rationing function of prices refers to A) the situation when government must intervene in a market when there is a large shortage or surplus. B) the synchronization of decisions by buyers and sellers that leads to an equilibrium. C) the synchronization of decisions by buyers and sellers through the direction of government agencies. D) the situation when only the rich get the goods they want. Answer: B Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

14) All other factors being constant, a reduction in price tends to cause which of the following? A) an increase in supply and an increase in demand B) a reduction in supply and an increase in demand C) an increase in quantity supplied and a reduction in quantity demanded D) a reduction in quantity supplied and an increase in quantity demanded Answer: D Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 15) Prices can achieve the rationing function when A) prices are flexible. B) prices are inflexible. C) they are controlled by the government. D) price controls are in place and ration coupons are used too. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 16) When prices are used as a rationing device, goods that are relatively more scarce than they used to be will have A) greater demand. B) lower excess demands. C) higher prices. D) long queues. Answer: C Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

17) Which of the following statements is NOT true about the rationing of goods? A) Goods can only be rationed by price. B) Goods can be rationed on a first come first serve basis. C) Goods can be rationed by random. D) Goods can be rationed by the use of coupons. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 18) Prices ration goods to A) the people who most deserve it. B) the people with the lowest opportunity cost of time. C) the people willing and able to pay the highest price. D) the richest people. Answer: C Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 19) In a freely operating market system, queuing is most likely to occur when A) selling necessities. B) the market clearing price increases. C) demand fluctuates unpredictably and quickly. D) demand increases gradually over time. Answer: C Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

20) In situations in which prices cannot be used to signal relative scarcities of goods, which of the following can serve as a rationing mechanism? A) queuing B) political power C) random assignment D) All of these Answer: D Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 21) Rationing through the price system A) leads to an inefficient use of available resources. B) leads to high prices. C) works only with government interference. D) leads to an efficient use of available resources. Answer: D Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 22) Rationing of resources, goods, and services A) is not required under the price system. B) is required because of scarcity. C) must be done by the government. D) happens only when the price is zero. Answer: B Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

23) Rationing occurs for goods A) that have a positive price. B) that have a zero price. C) that have a negative price. D) that are not manufactured. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 24) Rationing goods on the basis of price is a direct result of A) scarcity. B) queuing. C) government intervention. D) the profit motive. Answer: A Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 25) What would happen in the market for rice if its demand increased but the price was NOT allowed to change? A) There would be a surplus of rice. B) There would be a shortage of rice. C) The supply of rice would increase. D) The supply of rice would decrease. Answer: B Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

26) Why does a sports car cost more than a truck? A) because sports car manufacturers are greedier than truck manufacturers B) because sports cars are priced higher in order to make them attractive as status symbols C) because more scarce resources are required to produce a sports car than to produce a truck D) because truck manufacturers know that their customers have relatively low incomes Answer: C Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 27) Why does an economy need a rationing mechanism? A) because of scarcity B) because it preserves the power of the wealthy C) because it eliminates poverty D) All of these are correct. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 28) Prices play a role in a market A) because they distribute scarce goods to those consumers who value them most highly. B) because when prices are in equilibrium, product shortages or surpluses can occur. C) because they help eliminate poverty. D) because they eliminate scarcity. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 29) Which of the following statement is FALSE? A) Only the price system can be used to ration goods. B) Random assignment can be a method of rationing. C) Coupons can be used to ration goods. D) Queuing can be used for rationing. Answer: A Diff: 1 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

30) Which one of the following statements is TRUE? A) An effective price ceiling results in a surplus of the good. B) An effective price floor results in a shortage of the good. C) When the market clearing price of a good is the equilibrium, then everyone can afford it. D) The market clearing price of a good reflects its relative scarcity. Answer: D Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 31) All of the following are methods of rationing goods EXCEPT A) political power. B) the profit motive. C) first come, first served. D) prices. Answer: B Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 32) Because of scarcity, rationing is A) unimportant because people get what they want. B) necessary because people cannot get everything they want. C) unimportant because prices clear markets. D) not a problem because governments can determine what everybody wants. Answer: B Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

33) Which of the following are ways to ration goods and services? A) price B) physical force C) political power D) All of these are correct. Answer: D Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 34) The price rationing mechanism of a freely functioning market leads to the most efficient use of resources because A) all gains from mutually beneficial trade are captured. B) the government regulates the market. C) of the rise of the legislative apparatus that supports trade. D) the Supreme Court determines market activities. Answer: A Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 35) Which rationing system leads to the most efficient use of available resources? A) free market B) physical force C) first come, first served D) random assignment Answer: A Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

36) "Scarcity implies that some way of rationing goods must be found." Explain what this statement means. How is this rationing done? Answer: Scarcity means that there are not enough goods and services to satisfy unlimited human wants. When more people want something than can have it, some way must be found to determine who gets the available units. This process is rationing. Rationing can be done by using prices to ration a good to those most willing and able to pay the highest price. First-come-firstserved rations by queues, lotteries ration on the basis of chance, discrimination rations on the basis of racial, ethnic, or gender preferences, and so on. Diff: 2 Topic: 4.3 The Rationing Function of Prices Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 4.4 Price Ceilings 1) Price ceilings are designed to A) establish a maximum allowable price. B) allow free market prices to be achieved. C) create surpluses where none existed before. D) None of these. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 2) In order to be effective, a price ceiling A) must be set above equilibrium price. B) must be set below equilibrium price. C) must be set at equilibrium price. D) must be a negative price level. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

3) If the government sets a maximum price at which a good or service can be sold, it thereby creates A) a price floor. B) a black market price. C) a price ceiling. D) a free market price. Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 4) Price ceilings are adopted in most cases because A) the government views the current equilibrium price as too high for consumers. B) the government wants to create surpluses. C) the government favors a non-intervention policy. D) producers need incentives to produce more of the good or service. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 5) Which of the following statements is FALSE? A) The rationing function of prices is not allowed to freely operate when the government imposes price controls. B) Price controls may take the form of price ceilings or price floors. C) Price ceilings below the equilibrium price can cause black markets to develop. D) Rent controls are examples of price floors. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

6) Price ceilings set below the equilibrium price cause A) shortages. B) surpluses. C) a new market equilibrium. D) a greater number of exchanges. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 7) Price floors A) provide free market incentives for producers. B) create surpluses by setting the price above equilibrium. C) create shortages by setting the price above equilibrium. D) are used by advocates of the free market. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) A price ceiling set below a market equilibrium price causes A) a shortage. B) a surplus. C) producers to receive higher prices. D) consumers to pay higher prices. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) Governments may intervene in private markets through A) rationing by political power. B) price floors. C) price ceilings. D) All of these. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

10) Price controls may be thought of as A) a restraint on the rationing function of prices. B) useful tools that promote production. C) necessary in market economies. D) the freeing-up of free market forces. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) If a price floor is set below the current market clearing price, then A) a surplus must immediately occur. B) a shortage must immediately occur. C) there will be incentives for black markets to develop. D) quantity demanded will remain equal to quantity supplied at the current market clearing price. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) Excess quantity demanded may result from A) a government-imposed minimum price above market equilibrium. B) a government-imposed maximum price below market equilibrium. C) an oversupply of output. D) technological progress. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

13) If a price ceiling is set above the current market clearing price, then A) a surplus must immediately occur. B) a shortage must immediately occur. C) there will be incentives for black markets to develop. D) quantity demanded will remain equal to quantity supplied at the current market clearing price. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) A price floor above the market clearing price typically results in I. an excess quantity supplied II. a shortage III. an excess quantity demand A) I only B) II only C) III only D) II and III only Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) Which of the following is most likely to generate a surplus? A) a price floor B) a price ceiling C) an illegal market D) all of these Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

16) A price ceiling is A) the lowest price a seller can charge for a good without losing all her customers. B) a legal minimum price that can be charged for a particular good or service. C) a legal maximum price that can be charged for a particular good or service. D) the lowest price a buyer can pay for a good without having to report the purchase to the government. Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) Assume that the market clearing price for wireless earbuds is $10, but that the maximum price that can be charged is $9. This is an example of A) a price control that will lead to a surplus of wireless earbuds on the market. B) a price floor that will lead to a shortage of wireless earbuds on the market. C) markets failing to ration a fixed quantity of wireless earbuds. D) a price ceiling that will likely lead to a shortage of wireless earbuds on the market. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 18) A price floor that is set above market equilibrium will cause A) an excess quantity demanded. B) a shortage. C) a surplus. D) queuing on the part of consumers. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

19) A maximum legal price that may be charged for a particular good or service is known as a A) price floor. B) price ceiling. C) black market. D) price support. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

20) Refer to the above figure. Other things being equal, when the government imposes a price floor at P2, then we would expect A) the quantity demanded is Q2. B) a surplus will occur. C) price to decline until an equilibrium is achieved at P0. D) consumers to bid against each other for goods and force the price even higher. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

21) Refer to the above figure. If government sets the maximum legal price of gasoline at $2 per gallon, then the $2 limit acts as A) a price floor. B) a price ceiling. C) an equilibrium price. D) a just price. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 22) Refer to the above figure. At a price of $2 per gallon, there is A) a surplus of 20,000 gallons per week. B) a shortage of 40,000 gallons per week. C) a shortage of 80,000 gallons per week. D) a shortage of 60,000 gallons per week. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

23) Refer to the above figure. At a price of $2 per gallon, the quantity demanded of gasoline is A) 80,000 gallons per week. B) 100,000 gallons per week. C) 60,000 gallons per week. D) 140,000 gallons per week. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 24) Refer to the above figure. If the government set a price floor of $3.50 per gallon, there would be A) an excess quantity demanded equal to 100,000 gallons. B) an excess quantity supplied equal to the distance BD. C) an excess quantity supplied equal to the distance BF. D) an excess quantity supplied equal to 100,000 gallons. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 25) Government policies such as price controls, rent controls, and quantity restrictions have the effect of A) promoting the attainment of an unhindered market equilibrium. B) allowing quantity demanded to adjust to equality with aggregate supply. C) creating excess quantities demanded or excess quantities supplied. D) pushing prices to market clearing levels more rapidly than private market forces. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

26) When a government imposes price controls, the result is that A) the rationing function of prices is not allowed to function freely. B) the price system operates more efficiently. C) all trades are as mutually beneficial to each party as possible. D) scarcity usually disappears. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27) When the government sets a maximum price that can be charged for a good or service, it creates A) a price support. B) a price floor. C) a white market. D) a price ceiling. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 28) A black market is a market in which A) goods are traded at prices above their legal maximum prices. B) sales taxes are effectively doubled. C) goods are sold at outlet prices. D) sales take place exclusively at outlet prices. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

29) If a price ceiling were established above the equilibrium price, A) it would have no effect on the quantity demanded. B) it would create a shortage. C) it would create a surplus. D) None of these. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 30) A price ceiling below the market clearing price results in I. excess quantity demand II. excess quantity supplied III. entry of new producers A) I only B) II only C) III only D) Both I and III Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 31) Which of the following is NOT a predictable result of a price ceiling set below the market clearing price? A) an illegal market in the good B) excess quantity supplied C) excess quantity demanded D) lines to purchase the product Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

32) Price ceilings often generate A) market clearing prices. B) rapid increases in supply to meet the excess demand. C) equilibriums that utilize rationing by price. D) black markets. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33) An example of a black market is A) a wholesale market. B) a discount market. C) scalping. D) barter. Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 34) An effective price ceiling usually generates A) fire sales as firms try to unload their excess inventories. B) higher nominal prices. C) the use of nonprice rationing devices. D) happy sellers and dissatisfied buyers. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 35) A market in which a price-controlled good is sold at an illegally high price is known as A) a flooring market. B) a ceiling market. C) a black market. D) a supermarket. Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

36) Which of the following statements is most accurate regarding who benefits and loses from establishing a minimum wage above the market clearing wage? A) Individuals who obtain jobs benefit because they earn a higher wage, but some individuals lose because employers will not hire them at the minimum wage. B) All workers benefit equally from the establishment of the minimum wage because just as many workers as before remain employed, and all earn the higher minimum wage. C) All employers benefit equally from the establishment of the minimum wage because they are able to hire fewer workers at a lower wage. D) All employers lose because they must pay the higher minimum wage to the same number of employees as they did before the minimum wage was established. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 37) A price floor set below the equilibrium price will cause which of the following? A) an increase in demand B) a shortage C) a surplus D) None of these Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 38) If the government imposed a price ceiling on soda above this good's current market clearing price, there would be A) a shortage of soda at the ceiling price. B) a surplus of soda at the ceiling price. C) an increase in the price of soda. D) no change in the price of soda. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

39) A price ceiling set below the market clearing price will tend to cause which of the following? A) a surplus B) a shortage C) an increase in demand D) a reduction in supply Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 40) A price ceiling set above the equilibrium price will cause which of the following? A) an increase in supply B) a surplus C) a shortage D) no effect on either the price or quantity Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) A price ceiling is A) the lowest price a seller can charge without losing all of its customers. B) a legal minimum price below which a good or service cannot be sold. C) a legal price above which a good or service cannot be sold. D) a nonprice rationing device. Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 42) Price controls A) exist when firms decide that they want to charge a higher price for their product. B) exist when consumers boycott a product. C) are government-mandated minimum or maximum prices that may be charged for goods. D) are the benefit of discount stores like Sam's Club. Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 77 Copyright © 2021 Pearson Education, Inc.

43) Nonprice rationing devices are required A) because the price system does not allocate resources efficiently. B) when there are price floors but not when there are price ceilings. C) so that prices will go back to equilibrium. D) to allocate goods when there is a price ceiling. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 44) All of the following are examples of nonprice rationing devices EXCEPT A) price controls. B) queues. C) black markets. D) waiting lists. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 45) In the 1970s, the government placed price ceilings on gasoline prices. A shortage of gasoline occurred, and long lines formed at the pumps. Some gas stations required that in addition to paying the price on the pump you had to buy a blank will. The action of having to purchase the will in order to purchase gas is known as A) a surplus. B) a price support. C) the price system. D) a black market. Answer: D Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

46) Price controls often generate A) more efficient markets. B) black markets. C) rapid adjustment to market-clearing prices. D) greater price flexibility. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 47) Suppose the market clearing price for gasoline is $2.5 per gallon. Now suppose that policy makers pass a law requiring that the maximum price that can be charged is $2.3 per gallon. Such a situation is an example of A) a price control that will lead to a surplus of gasoline on the market. B) a price floor that will lead to a shortage of gasoline on the market. C) a price ceiling that will lead to a shortage of gasoline on the market. D) a price floor that will lead to a surplus of gasoline on the market. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 48) Suppose the market clearing price is $10 and the price ceiling is $8. The price that prevails in the market will be A) $10. B) $8. C) less than $8. D) $0. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

49) Suppose the market clearing price is $15 and the price ceiling is $16. The price that prevails in the market will be A) $16. B) $15. C) less than $15. D) more than $16. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 50) A price ceiling established below the market clearing price will usually cause A) nonprice rationing. B) an excess supply. C) no change in the market clearing price. D) a decrease in the market clearing price. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

51) In the above figure, a shortage could be caused by a government price ceiling set at A) $1.00. B) $2.00. C) $2.50. D) $3.00. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

52) Refer to the above figure. A price control has been set which has led to a shortage. This means that a A) price ceiling has been set at P1. B) price floor has been set at P1. C) price ceiling has been set at P2. D) price floor has been set at P2. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 53) Refer to the above figure. A price control has been set which has led to a surplus. This means that a A) price ceiling has been set at P1. B) price floor has been set at P1. C) price ceiling has been set at P2. D) price floor has been set at P2. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

54) Refer to the above figure. If a price ceiling of $3 was set A) the quantity sold would be 80 units. B) there would be a surplus of 40 units. C) there would be a shortage of 40 units. D) there would be a shortage of 20 units. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 55) Refer to the above figure. If a price floor of $5 was set A) the quantity sold would be 80 units. B) the quantity sold would be 60 units. C) the quantity demanded would be 100 units. D) there would be a shortage of 20 units. Answer: B Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

56) Refer to the above figure. If a price floor of $5 was set A) the quantity sold would be 80 units. B) there would be a surplus of 40 units. C) there would be a shortage of 40 units. D) there would be a shortage of 20 units. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 57) Refer to the above figure. If a price floor of $3 was set A) the quantity sold would be 80 units. B) there would be a surplus of 40 units. C) there would be a shortage of 40 units. D) there would be a shortage of 20 units. Answer: A Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

58) Refer to the above figure. A price ceiling has been set at P1, and a black market has opened. The equilibrium black market price will be A) below P1. B) between P1 and P3. C) above P3. D) P2. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 59) Refer to the above figure. A price ceiling has been set at P1, and a black market has opened. The equilibrium black market quantity will be A) below Q1. B) above Q3. C) between Q1 and Q3. D) Q2. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

60) When are black markets likely to arise? A) when the government removes a price floor B) when the government enforces a price ceiling C) when there is a surplus of a good D) when the quantity supplied of a good exceeds the quantity demanded Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

61) Refer to the above figure. Suppose the government imposes a minimum wage rate of $20.00 per hour. This will likely result in A) a surplus of labor. B) a shortage of labor. C) an equilibrium in the labor market. D) an increase in the demand for labor. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

62) Which of the following is a price floor? A) rent controls B) minimum wage rates C) a freeze on upward-moving gasoline prices D) college tuition caps Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 63) Government imposed price controls often lead to A) illegal trades of the good. B) the most efficient use of resources. C) the equilibrium solution in terms of price and quantity. D) maximization of profits. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 64) A price ceiling represents A) a maximum price that can be legally charged for a product or service. B) a minimum price that can be legally charged for a good or service. C) a lottery imposed upon producers by the government. D) a first come, first served mechanism for controlling prices. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 65) A price floor represents A) a maximum price that can be legally charged for a product or service. B) a minimum price that can be legally charged for a good or service. C) a lottery imposed upon producers by the government. D) a first come, first served mechanism for controlling prices. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 87 Copyright © 2021 Pearson Education, Inc.

66) An effective government imposed price ceiling will result A) in a surplus on the market. B) in a shortage on the market. C) in additional revenue for the government. D) in prices for the product falling in the future. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 67) Suppose a price ceiling is set above the equilibrium price. Now suppose that policy makers decide to raise the price ceiling. This increase in the price ceiling will cause which of the following to occur? A) The surplus in the market will increase. B) The surplus in the market will decrease. C) The shortage in the market will increase. D) None of these Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 68) Suppose a price ceiling is currently set below the equilibrium price. Now suppose that policy makers decide to lower the price ceiling. This reduction in the price ceiling will cause which of the following to occur? A) The shortage in the market will decrease. B) The shortage in the market will increase. C) The surplus in the market will decrease. D) The surplus in the market will increase. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

69) When a government increases an effective price ceiling for a product, A) the shortage in the market will be reduced. B) the shortage in the market will be increased. C) the surplus in the market will be reduced. D) the surplus in the market will increase. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 70) When the government sets a price floor which is above the equilibrium price, A) a surplus will develop. B) a shortage will develop. C) the equilibrium price will be maintained. D) a price ceiling will follow. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 71) A black market A) can arise when government imposes a price ceiling below the market clearing price. B) can arise when government imposes a price floor below the market clearing price. C) was created when after-hours trading was permitted on some stock exchanges. D) is a market where products with outdated expiration dates are sold. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

72) Refer to the above figure. If the government imposes a price floor of $60 A) the quantity of goods that will be traded is 100. B) the quantity of goods that will be traded is 200. C) the quantity of goods that will be traded is 150. D) the quantity of goods that will be traded is 0. Answer: A Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 73) Refer to the above figure. If the government imposes a price ceiling of $20 A) the quantity of goods that will be traded is 100. B) the quantity of goods that will be traded is 200. C) the quantity of goods that will be traded is 150. D) the quantity of goods that will be traded is 0. Answer: A Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

74) Refer to the above figure. A surplus occurs if the government imposes A) a price floor at $60. B) a price floor at $20. C) a price ceiling at $60. D) a price ceiling at $20. Answer: A Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 75) Refer to the above figure. A shortage occurs if the government imposes A) a price floor at $60. B) a price floor at $20. C) a price ceiling at $60. D) a price ceiling at $20. Answer: D Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 76) Refer to the above figure. If the government imposes a price ceiling of $60 A) the quantity traded will be 150, and the price will be $40. B) the quantity traded will be 100, and the price will be $60. C) the quantity traded will be 200, and the price will be $60. D) the quantity traded will be 150, and the price will be $60. Answer: A Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 77) Refer to the above figure. If the government imposes a price floor of $20 A) the quantity traded will be 150, and the price will be $20. B) the quantity traded will be 100, and the price will be $20. C) the quantity traded will be 200, and the price will be $20. D) None of these. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 91 Copyright © 2021 Pearson Education, Inc.

78) Refer to the above figure. A price floor of $60 results in A) a shortage of 100 units. B) a shortage of 200 units. C) a surplus of 100 units. D) a surplus of 200 units. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 79) Refer to the above figure. A price ceiling of $20 results in A) a shortage of 100 units. B) a shortage of 200 units. C) a surplus of 100 units. D) a surplus of 200 units. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 80) Price controls A) do not include black markets. B) are another name for the price system. C) do not include rent controls. D) interfere with the rationing function of prices. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

81) Suppose that 50,000 tickets were sold at $400 for an NBA game at Madison Square Garden in New York. The game was sold out and some fans could not get tickets. This suggests that A) selling price was below equilibrium price. B) selling price was above equilibrium price. C) selling price was at equilibrium. D) the game was advertised too heavily. Answer: A Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 82) Scalping at major sporting events is an example of A) a surplus caused by the existence of price ceilings. B) the operation of rationing by the market. C) a black market caused by a price ceiling. D) a black market caused by a price floor. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 83) A black market may occur when A) the government imposes a price floor below the market clearing price. B) the government imposes a price ceiling below the market clearing price. C) the government imposes a price ceiling above the market clearing price. D) the government does not impose either a price ceiling or a price floor. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

84) An effective price ceiling occurs when A) the government sets a maximum price for a good above the equilibrium price. B) the government sets a minimum price for a good above the equilibrium price. C) the government sets a minimum price for a good below the equilibrium price. D) the government sets a maximum price for a good below the equilibrium price. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 85) Instituting a rent control program will most likely lead to A) a shortage of rental units. B) overly elaborate and expensive construction. C) an efficient allocation of existing units among consumers. D) an excess quantity supplied of rental units. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 86) Which of the following must occur as a result of ceilings on apartment rents that are set below market clearing rental rates? A) Property owners respond to the ceilings by increasing maintenance and repairs. B) Property owners respond to the ceilings by constructing new apartment buildings. C) There is a decrease in the quantity of apartments that prospective tenants wish to rent. D) There is a decrease in the quantity of apartments that property owners offer for rent. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

87) The objective of rent controls is to A) ensure an adequate supply of rental housing for the poor. B) keep rents below levels that would be observed in a freely competitive market. C) encourage the construction of new rental units. D) raise revenue for the local government. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 88) Rent controls often have adverse effects, including A) too much housing in a community. B) deterioration in the quality of existing rental units. C) too much construction of new rental units in the community. D) income transfers from the poor to landlords. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 89) In New York City, apartment rent can be adjusted only when a tenant leaves. This leads A) people to change apartments often. B) landlords to encourage tenants to stay in their apartments. C) tenants to stay in apartments longer than they would otherwise. D) businesses to build new rental units. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 90) In the housing market, rents serve the purpose of A) making landlords rich. B) rationing the availability of existing housing. C) providing an entry by the government into the housing market. D) increasing tax collections by the community. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 95 Copyright © 2021 Pearson Education, Inc.

91) The textbook points out that rent controls have A) benefited upper-income or existing tenants. B) had no effect on the market for housing. C) greatly benefited the homeless. D) attracted increases in low-income housing. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 92) Who bears the costs of a program to control rents at a maximum level? A) landlords or owners of housing units B) consumers who face difficulty moving to a more suitable apartment C) homeless who cannot find rental units D) all of these Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 93) The textbook suggests that rent controls A) actually contribute to the housing boom in an area where they are applied. B) actually contribute to the housing shortage in the area where they are applied. C) are used in a government kickback scheme. D) have no effect on the local housing market. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

94) Of the following groups, who gains from rent controls? A) landlords B) construction workers and their union leaders C) poor people who have a hard time earning enough income to pay high rents D) high-income people who live in rent-controlled apartments Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 95) Under rent controls A) apartments tend to be nicer than they would be under freely competitive markets. B) landlord-tenant relationships are more harmonious than under freely competitive markets. C) the quantity demanded of rental units is less than it would be under freely competitive markets. D) the number of rental units available for rent is lower than under freely competitive markets. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 96) The City Council of Happy Village is thinking about imposing rent controls. If they put rent controls in place, which constituency are they trying to please? A) landlords B) all taxpayers C) existing tenants D) all voters Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

97) Rent controls are A) when rents are set above the market clearing level to aid landlords. B) used to provide incentives to contractors to build new apartments. C) used to generate revenue for the local government. D) when rents are set below the market clearing level. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 98) When rent controls establish a legal maximum rental rate below the equilibrium rental rate A) quantity demanded exceeds quantity supplied. B) quantity supplied exceeds quantity demanded. C) demand exceeds supply. D) supply exceeds demand. Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 99) Who is most likely to benefit from rent controls? A) consumers who are able to obtain apartments at the controlled rents B) consumers who are unable to obtain apartments at the controlled rents C) landowners who can lease the apartments at the controlled rents D) the government that controls the rents Answer: A Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 100) Rent controls are an example of a A) price floor. B) price ceiling. C) price floor for the consumer and a price ceiling for the producer. D) nonprice rationing device. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 98 Copyright © 2021 Pearson Education, Inc.

101) An effective rent control will A) lead to a surplus of housing units. B) keep rents below the competitive market level. C) keep rents above the competitive market level. D) be set at the price where quantity supplied equals quantity demanded. Answer: B Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 102) Which of the following is one of the functions of rental prices? A) to redistribute income from landlords to renters B) to redistribute income from renters to landlords C) to signal to the local government when taxes on rental units should be increased D) to ration the use of existing housing for current consumers Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 103) Which of the following is an example of a price ceiling? A) the minimum wage B) agricultural price supports C) rent controls D) None of these is correct. Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

104) Which of the following is NOT a function of rental prices? A) to stimulate the construction of new housing B) to ration the existing housing stock C) to provide housing to individuals below market value D) to allocate existing scarce housing among different people Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 105) The adverse effects of rent controls include A) keeping rental rates too high in a normal market. B) excessive construction of new rental housing. C) reduced incentive to construct new rental housing. D) increased incentives for people to purchase their own homes. Answer: C Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 106) Who benefits primarily from rent controls? A) construction workers B) poor people looking for low-income housing C) all who want to rent D) only renters who are able to get units at below-market rates Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

107) Which of the following is a possible outcome of setting a legal maximum rental rate below the market clearing rental rate? A) an increase in the quantity of rental housing supplied B) a decrease in the quantity of rental housing demanded C) a black market in rental housing D) a surplus of rental housing Answer: C Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 108) Which of the following is NOT an attempt to evade rent controls? A) make life unpleasant for tenants B) require tenants to get furniture from the landlord C) subletting D) using the courts to challenge the sublease of a tenant Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 109) Under rent controls A) there is a shortage of rental units. B) the quantity supplied of rental units is greater than it would be under freely competitive markets. C) there is less government involvement in rental markets overall because there is a better supply of low-income housing. D) all renters are better off than under freely competitive markets. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

110) Rent controls primarily benefit A) property owners. B) people looking for rental units. C) builders. D) people who already occupy rental units. Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 111) The long-run effect of rent control on an area includes A) rampant building of new low-income housing. B) many new luxury apartments new luxury apartments will be built. C) new investors into the real estate market in the area. D) less investment into the real estate market in the area. Answer: D Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 112) Rent control is an example of A) a price floor. B) a price ceiling. C) the rationing function of prices not working. D) the government increasing the demand for certain products. Answer: B Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

113) What would happen in the market for rental housing in your community if the local government legally mandated rents that were below the market clearing price? A) There would be a surplus of rental housing. B) There would be a shortage of rental housing. C) The demand for rental housing would increase. D) The supply of rental housing would decrease. Answer: B Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 114) Which group of individuals most likely benefits from rent controls? A) the unemployed who fail to obtain rental housing B) low-income wage earners who fail to obtain rental housing C) single parent families without savings or other financial assets who fail to obtain rental housing D) upper-income professionals who rent apartments at the price ceiling rate Answer: D Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 115) Which of the following would likely result as a consequence of rent controls? A) a reduction in the rate of construction of rental housing units B) unimproved buildings and apartment complexes C) limits on tenant mobility D) All of these are correct. Answer: D Diff: 1 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

116) In a city that has rent control for apartments, there is A) less turnover of apartments. B) a surplus of apartments available to rent. C) a shortage of renters in the city. D) neither a surplus nor a shortage of apartments. Answer: A Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 117) Suppose that the current equilibrium price of gasoline is $3.50 per gallon and that the government passes a law that requires the price to be no more than $3 per gallon. What will be the effects? Answer: The fall in price from $3.50 to $3 causes quantity demanded to increase and quantity supplied to decrease, which creates a shortage. Some way must be found to ration the gasoline that is supplied. The government may provide people with coupons that are necessary to use to buy gasoline. Alternate ways to ration the gasoline are for gas station attendants to receive illegal payments or gifts, queuing, favoritism, or any number of other ways. Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 118) In some developing countries and in some former Communist countries, people exchange their domestic currencies for foreign currencies such as the dollar in black markets. Why would this practice go on? Answer: The country must have some restrictions on currency exchange. Some countries have made it illegal to exchange the domestic currency for dollars beyond some minimum amount while others set official exchange rates. If the official exchange rate differs from the "market" exchange rate, it is likely black markets will form. Diff: 3 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

119) Finding an apartment in New York City is difficult. People even scan the obituaries in the hopes of finding an apartment. Provide an economic explanation for this. Answer: Rental rates in New York City are controlled and set below market clearing rates. Under the rent controls, people don't want to give up their apartments since rents can be adjusted when a tenant leaves and a new tenant enters. This means that apartment vacancies are rare, and people who want an apartment must consider all possibilities, including death, that would generate a vacancy. Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 120) Who gains and who loses from rent controls? Answer: Those who gain are people who live in an apartment at a rent below market level. The benefits are less if they live in their apartment because of the lower rents and would really prefer to live in an apartment with different amenities. Landlords lose income. People who want to rent an apartment but cannot find one or who live in an apartment very different from what they really want lose also. Diff: 2 Topic: 4.4 Price Ceilings Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 4.5 Price Floors and Quantity Restrictions 1) In which decade did the U.S. federal government first establish a system of agricultural price supports? A) 2000s B) 1970s C) 1950s D) 1930s Answer: D Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

2) In the United States, government-imposed price supports are most often associated with A) agricultural products. B) industrial products. C) consumer electronics. D) high tech products. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 3) What is the result of an agricultural support price established above the equilibrium price? A) The market gravitates toward and remains in equilibrium. B) There will be excess quantity supplied of the product involved. C) There will be excess quantity demanded the product in this market. D) Since the support price is set above the equilibrium price, it will have no impact on the market price. Answer: B Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 4) Agriculture price supports that establish a price floor at which agricultural products may be purchased that exceeds the market clearing price A) create a shortage of agricultural products. B) result in the quantity of these products supplied exceeding the quantity demanded at the floor price. C) benefit taxpayers, who receive subsidies from producers that the price support program forces to sell to the government at an artificially established price. D) benefit consumers, who are willing and able to purchase more agricultural products at the floor price. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

5) One result of the agriculture price supports cited in the text is that A) sometimes surplus food is given away. B) food shortages result in most cases. C) small farms receive most of the benefits. D) None of these. Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) Of the following groups, which benefits most from a government price support program that establishes a floor price for an agricultural product that is higher than the product's market clearing price and buys up any surplus? A) consumers, who purchase more units of the product than they did before the price support program was implemented B) taxpayers, who no longer must provide funds to purchase surplus units of the product once the price support program is in place C) producers, who earn a higher price on the sale of each unit and also sell more units, thereby unambiguously earning higher revenues D) the government, which receives subsidy payments from producers that are required to sell more of the product at a higher price under the government's program Answer: C Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 7) Government intervention in agriculture usually involves A) price ceilings in order to keep food prices low. B) price ceilings in order to subsidize U.S. exports. C) price supports in order to keep farm incomes high. D) price supports in order to keep agricultural imports low. Answer: C Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

8) Who ultimately benefits from price supports in agriculture? A) consumers B) grocery store owners C) farmers D) exporters Answer: C Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) When the government sets a price floor which is below the equilibrium price, A) a surplus will develop. B) a shortage will develop. C) the equilibrium price will be maintained. D) a price ceiling will follow. Answer: C Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

10) Refer to the above figure for the corn market. The government wants to set an effective price support in the corn market. To be effective the price should be set A) below P1. B) at P1. C) at P2. D) at P3. Answer: D Diff: 3 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) Refer to the above figure. A price support set at P3 will A) lead to a surplus of Q3 minus Q1. B) lead to a shortage of Q3 minus Q1. C) lead to an equilibrium quantity of Q2. D) be ineffective. Answer: A Diff: 3 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

Strawberries (pounds)

12) Consider the above table. Assuming the government imposes a price floor on strawberries of $8 per pound, what would be the likely result? A) a surplus of 2,000 pounds of strawberries B) a shortage of 2,000 pounds of strawberries C) No change, equilibrium would prevail. D) The quantity demanded of strawberries would fall to zero. Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 13) Consider the above table. Assuming the government imposes a price ceiling on strawberries of $4 per pound, what would be the likely result? A) a surplus of 2,000 pounds of strawberries B) a shortage of 2,000 pounds of strawberries C) No change, equilibrium would prevail. D) The quantity demanded of strawberries would fall to zero. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 14) Consider the above table. If the government imposes a price ceiling on strawberries of $8 per pound, what would be the likely result? A) a surplus of 2,000 pounds of strawberries on the market B) a shortage of 2,000 pounds of strawberries on the market C) Market equilibrium will be reached. D) The quantity demanded of strawberries would fall to zero. Answer: C Diff: 3 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 110 Copyright © 2021 Pearson Education, Inc.

15) Which of the following will likely occur when price floors in agriculture are implemented? A) Quantity supplied will exceed quantity demanded. B) Quantity demanded will exceed quantity supplied. C) Farmland will be underutilized. D) Supply will decrease. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 16) If the federal government sets a minimum price for wheat at $5.00 per bushel when the equilibrium price is $4.50, then A) a surplus will be created causing the price to fall to the equilibrium price of $4.50. B) a permanent surplus will develop because the government established the minimum price at $5.00. C) a shortage will be created causing the price to rise to the equilibrium price of $4.50. D) a permanent shortage will develop because the government established the minimum price at $5.00. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) When the government establishes a minimum price for an agricultural product above the equilibrium price, the government is creating a(n) A) price ceiling. B) elevated price. C) price floor. D) surplus price. Answer: C Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

18) If the government created a surplus of an agricultural product due to price supports, how might they dispose of this surplus? A) give it away to a foreign country B) purchase it and store it away C) have the farmer destroy the crop D) Any of these answers might be a successful tool in disposing of agricultural surpluses. Answer: D Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 19) Which of the following is most likely to benefit from government established price floors in agriculture? A) large farm owners and corporate farms B) small farmers C) cattle ranchers D) low income farmers Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 20) Federally provided agricultural subsidies in the United States have ________ with the passage of the 2002 Farm Security Act and the 2007 Food, Security, and Bioenergy Act. A) been abolished B) been maintained C) increased to the level of EU price supports D) been made a function of tax revenues Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

21) What has been the market outcome of government-enforced price floors for agricultural products? A) Not enough food has been produced. B) Farmers have been made worse off. C) A shortage of agricultural products has resulted. D) A surplus of agricultural products has resulted. Answer: D Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 22) Price floors in agriculture lead to A) efficient farming techniques being employed. B) surpluses of supported farm products. C) more competition in farming. D) the most efficient market solution. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 23) All of the following result from price floors in agriculture EXCEPT A) surpluses of agricultural products that have price floors. B) higher prices to consumers for agricultural products that have price floors. C) lower prices to consumers for agricultural products that have price floors. D) governmental bureaucracy. Answer: C Diff: 3 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

24) One effect of a minimum wage in the market for low-skilled labor is A) a shortage of low-skilled labor. B) a surplus of low-skilled labor. C) no effect in the market for low-skilled labor. D) an increase in demand for low-skilled labor. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 25) A minimum wage is an example of a A) price ceiling. B) price floor. C) black market. D) market clearing price. Answer: B Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 26) In the United States, the minimum wage is defined as A) the wage that the youngest job entrant into the job market makes. B) the lowest wage that a corporation should pay a worker if the corporation wants to ensure that its employees are well trained. C) the lowest hourly wage rate a firm may legally pay its workers, as legislated by the U.S. government. D) the wage ceiling above which a firm no longer must pay its employees additional benefits. Answer: C Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

27) In the United States, the wage floor legislated by government below which it is generally illegal to pay workers is known as A) the minimum wage. B) the wage ceiling. C) the employment gap. D) the going wage. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 28) Which of the following is an effect of a minimum wage law that establishes a wage floor above the current market clearing wage? A) surplus labor, or unemployment B) a decrease in the market clearing wage C) a decrease in the quantity of labor supplied D) an increase in the supply of labor Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

29) According to the above figure, the market clearing wage rate is A) We. B) Wm. C) We - Wm. D) Wm + We. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 30) According to the above figure, if the government imposes a minimum wage equal to Wm, the effect will be A) a reduction in employment from Qe to Qm. B) an increase in employment from Qe to Qm. C) a decrease in labor supplied, from C to E. D) an increase in labor supplied, from A to E. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

31) If an excess quantity of labor demanded exists in a free market, there is a tendency for A) quantity supplied to rise. B) the wage rate to fall. C) quantity demanded to fall. D) the wage rate to rise. Answer: D Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 32) The effect of legislation establishing a minimum wage above the market clearing wage is A) unemployment. B) a shortage of labor. C) higher wages for all workers. D) a shift of the demand for labor curve. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33) As a result of establishing a legal minimum wage above the market clearing wage, A) there will be a shortage of workers. B) firms will hire fewer workers. C) firms will hire more workers. D) fewer workers will want to work. Answer: B Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

34) Refer to the above figure. A minimum wage has been set at WM. The amount of unemployment is A) zero. B) at Qe. C) QS minus QD. D) not computable from the information given. Answer: C Diff: 3 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 35) A reduction in the minimum wage will tend to cause which of the following? A) a reduction in poverty B) an increase in the number of workers employed C) an increase in the quantity supplied of labor D) a reduction in the quantity demanded of labor Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 36) An increase in the minimum wage will tend to cause which of the following to occur? A) an increase in the size of the surplus of labor B) a leftward shift in the demand for labor C) a rightward shift in the supply of labor D) a reduction in the unemployment rate Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 118 Copyright © 2021 Pearson Education, Inc.

37) Since the minimum wage rate began it has typically stayed at about what percentage of the average manufacturing wage? A) 5-10% B) 20-30% C) 40-50% D) 80-90% Answer: C Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 38) Many economists estimate that for every 10% increase in relative minimum wage rates, there is a corresponding decrease in employment of those affected equal to A) 5-10%. B) 1-2%. C) 10-20%. D) 50-70%. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 39) The minimum wage laws seek to A) penalize employers that are not complying with labor laws. B) assure a minimum standard of payment for work. C) assure that all workers are paid the same wage rate. D) help teenagers find work. Answer: B Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

40) The effect of a legal minimum wage set above the equilibrium wage rate is A) an excess quantity of labor demanded. B) an excess quantity of labor supplied. C) an increase in the quantity of labor demanded. D) a decrease in quantity of labor supplied. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) Minimum wages are examples of A) a price floor. B) a price ceiling. C) the rationing function of prices not working. D) government increasing the demand for certain products. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 42) An import quota is an example of A) a price ceiling. B) a price floor. C) a queuing device. D) a quantity restriction. Answer: D Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 43) An import quota for sugar results in an increase in A) the domestic market price of sugar. B) the domestic demand for sugar. C) the domestic market supply of sugar. D) sugar imports. Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 120 Copyright © 2021 Pearson Education, Inc.

44) Government-imposed quantity restrictions A) generate a higher price for the good than would prevail under freely competitive markets. B) generate a lower price for the good than would prevail under freely competitive markets. C) do not affect the price of the good because quantity restrictions always ban sale of the good completely. D) can cause prices to either be higher or lower, but always cause excess quantities supplied to develop. Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 45) An example of a quantity restriction is A) the minimum wage. B) an import quota. C) rent controls. D) price supports in agriculture. Answer: B Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 46) An import quota will A) lead to a shift of the demand curve. B) leave the equilibrium price unchanged and increase the quantity sold. C) limit the amount of a foreign good that can be brought into the United States. D) limit the amount of a good local producers can make. Answer: C Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

47) A supply restriction that restricts the amount of a good that can be imported is a(n) A) white market. B) tariff. C) black market. D) import quota. Answer: D Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 48) An import quota is A) a quantity restriction. B) a price ceiling. C) a price floor. D) a direct tax on imports. Answer: A Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 49) When the government restricts the quantity of a good to zero, A) an underground market develops. B) there is none of the good available anywhere. C) people's demand for the product evaporates. D) producers stop all production. Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

50) If the government should decide to legalize marijuana, all other things remaining the same, we should expect to see A) a decrease in the price of marijuana. B) an increase in the price of marijuana. C) a decrease in the demand for marijuana. D) an increase in the use of imported versus domestic marijuana. Answer: A Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 51) A supply restriction on imported goods, such as the government's restriction of imported oil for many years, is referred to as A) an export quota. B) an import quota. C) a price floor. D) a price ceiling. Answer: B Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 52) An import quota is a limit on the A) number of foreign workers allowed to work in a country. B) number of container ships allowed to enter the territorial waters of the United States. C) value of low-priced foreign goods that are allowed to be imported into the United States. D) amount of a product that may be imported. Answer: D Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

53) A limit on the amount of avocados that can be imported into the United States is an example of A) the rationing function of prices protecting United States avocado farmers. B) a price floor set by the government. C) a price ceiling set by government. D) an import quota. Answer: D Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 54) When import quotas are imposed by a government, A) the domestic producers always lower the prices of their products to ensure that their products are sold. B) the government is trying to discourage consumers from buying foreign-made goods. C) the supply of the product on the domestic market increases. D) the price ceiling for the product has to be lowered. Answer: B Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 55) An unexpected import restriction imposed on mangoes by the USDA A) will reduce the price of mangoes in the United States. B) will increase the price of mangoes in the United States. C) will discourage American producers of mangoes. D) will reduce the price of mango juice in the United States. Answer: B Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

56) An import quota A) is a price ceiling imposed on an imported good. B) is a price floor imposed on an imported good. C) is a supply restriction limiting the quantity of a good that can be imported. D) is a legislative requirement stating that firms which import some of their merchandise must hire a certain number of immigrant workers. Answer: C Diff: 1 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 57) The difference between quantity restrictions and price ceilings as to their effect on the market is that A) only price ceilings make the market inefficient. B) only quantity restrictions make the market inefficient. C) while some consumers gain from price ceilings, no consumers gain from quantity restrictions. D) while price ceilings are efficient, quantity restrictions are not. Answer: C Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 58) Explain how agricultural price supports work and what the effects of the supports are. Answer: Under agricultural price supports, the government sets the price of an agricultural product above the equilibrium price. Consequently, there is an excess quantity of the product supplied. To keep the price at the floor level, the government must buy the surplus. Hence, consumers pay higher prices for the product, and taxpayers pay higher taxes to fund the government's purchases of the product. Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

59) What are the effects of an increase in the minimum wage? Who would be most affected? Answer: An increase in the minimum wage induces the quantity supplied of labor to increase and the quantity demanded of labor to fall, generating a surplus or an increase in unemployment. Since minimum wage legislation tends to affect lower skilled workers the most, the lowest skilled workers are most likely to be unemployed. These are often minority teenagers. Diff: 2 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 60) The U.S. government imposes import quotas on many agricultural products, especially products that receive price supports. Offer an economic explanation for this. Answer: If the price supports generate a price in the United States for a product that is above the price in other countries, producers in other countries would increase production with the intention of selling the units in the United States. But, with price supports, the government must purchase all extra units to maintain the price. With imports from abroad, this would get very expensive. Hence, imports are limited through quotas. Diff: 3 Topic: 4.5 Price Floors and Quantity Restrictions Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 4.6 Appendix B: Consumer Surplus 1) Consumer surplus is A) the total difference between the total amount that consumers actually pay for an item and the total amount that they would have been willing to pay. B) the total difference between the total costs firms incur in producing an item and the utility consumers derive from purchasing the item. C) the total difference between the total amount that consumers would have been willing to pay for an item and the total amount that they actually pay. D) the total difference between the utility consumers derive from purchasing an item and the total costs firms incur in producing the item. Answer: C Diff: 1 Topic: 4.6 Appendix B: Consumer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

2) When consumers would have been willing to pay higher prices at various quantities consumed than the market clearing price, the differences are called A) consumer surplus. B) scarcity. C) opportunity cost. D) producer surplus. Answer: A Diff: 1 Topic: 4.6 Appendix B: Consumer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 3) Total consumer surplus in a market is measured as the A) area bounded above the market clearing price and beneath the market demand curve. B) area bounded below the market clearing price and above the market supply curve. C) vertical distance from the horizontal (quantity) axis to the market clearing price. D) horizontal distance from the vertical (price) axis to the equilibrium quantity. Answer: A Diff: 2 Topic: 4.6 Appendix B: Consumer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 4) For a given market demand curve, if the market clearing price increases, then the amount of consumer surplus will A) increase. B) decrease. C) become negative. D) None of these due to insufficient information. Answer: B Diff: 2 Topic: 4.6 Appendix B: Consumer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

5) The difference between the total amount that people would have been willing to pay for the total quantity produced and consumed in a market and what they actually pay at the market clearing price is called A) production excess. B) excess demand. C) market surplus. D) consumer surplus. Answer: D Diff: 1 Topic: 4.6 Appendix B: Consumer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 6) Nathan is willing to pay up to $3 for an ice cream, but he actually pays $2 for it. The consumer surplus of the ice cream for Nathan A) is $2. B) is $1. C) is $3. D) cannot be determined without information about the market structure. Answer: B Diff: 1 Topic: 4.6 Appendix B: Consumer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Application of knowledge 4.7 Appendix B: Producer Surplus 1) Producer surplus is A) the total difference between the total amount that producers actually receive for an item and the total amount that they would have been willing to accept. B) the total difference between the total costs firms incur in producing an item and the utility consumers derive from purchasing the item. C) the total difference between the total amount that consumers are willing to pay for an item and the total amount that producers would like to receive. D) the total difference between the utility consumers derive from purchasing an item and the total costs firms incur in producing the item. Answer: A Diff: 1 Topic: 4.7 Appendix B: Producer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

2) When producers would have been willing to accept lower prices at various quantities produced than the market clearing price, the differences are called A) producer surplus. B) monopoly profits. C) opportunity cost. D) consumer surplus. Answer: A Diff: 1 Topic: 4.7 Appendix B: Producer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 3) Total producer surplus in a market is measured as the A) area bounded above the market clearing price and beneath the market demand curve. B) area bounded below the market clearing price and above the market supply curve. C) vertical distance from the horizontal (quantity) axis to the market clearing price. D) horizontal distance from the vertical (price) axis to the equilibrium quantity. Answer: B Diff: 2 Topic: 4.7 Appendix B: Producer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 4) For a given market demand curve, if the market clearing price increases, then the amount of producer surplus will A) decrease. B) increase. C) become negative. D) None of these due to insufficient information. Answer: B Diff: 2 Topic: 4.7 Appendix B: Producer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

5) The difference between what producers receive at the market clearing price and the total amount that they would have been willing to accept for the total quantity produced in a market is called A) production excess. B) excess demand. C) market surplus. D) producer surplus. Answer: D Diff: 1 Topic: 4.7 Appendix B: Producer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 6) If a producer is willing to receive at least $3 for a pen that she manufactures but she actually receives $8 for it. The producer surplus of the pen for that producer is A) $2. B) $5. C) $9. D) -$5. Answer: B Diff: 1 Topic: 4.7 Appendix B: Producer Surplus Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Application of knowledge 4.8 Appendix B: Gains from Trade within a Price System 1) The gains from trade within a price system is A) the sum of consumer surplus and producer surplus. B) consumer surplus less producer surplus. C) consumer surplus divided by producer surplus. D) consumer surplus multiplied by producer surplus. Answer: A Diff: 1 Topic: 4.8 Appendix B: Gains from Trade within a Price System Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking

2) The gains from consumer surplus and producer surplus occur when A) both consumers and producers engage in voluntary exchange. B) consumers are willing to buy a good but producers are not willing to provide it. C) producers are willing to provide a good but consumers are not willing to pay for it. D) the government supplies the good instead of firms. Answer: A Diff: 1 Topic: 4.8 Appendix B: Gains from Trade within a Price System Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 3) The total gains from trade within a price system is A) the area beneath the market demand curve and above the market clearing price plus the area above the market supply curve and beneath the market clearing price. B) the area beneath the market supply curve and above the market clearing price plus the area above the market demand curve and beneath the market clearing price. C) the area beneath the market demand curve and above the market clearing price minus the area beneath the market supply curve and beneath the market clearing price. D) always equal to zero. Answer: A Diff: 1 Topic: 4.8 Appendix B: Gains from Trade within a Price System Learning Outcome: Micro-2: Interpret and analyze information presented in different types of graphs AACSB: Analytical thinking 4.9 Appendix B: Price Controls and Gains from Trade 1) If the government imposes a price ceiling that is lower than the market clearing price, then A) both consumer surplus and producer surplus will stay the same. B) consumer surplus will decrease while producer surplus will increase. C) both consumer surplus and producer surplus will decrease. D) both consumer surplus and producer surplus will increase. Answer: C Diff: 2 Topic: 4.9 Appendix B: Price Controls and Gains from Trade Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

2) If the government imposes a price floor that is higher than the market clearing price, then A) both consumer surplus and producer surplus will stay the same. B) consumer surplus will decrease while producer surplus will increase. C) both consumer surplus and producer surplus will decrease. D) both consumer surplus and producer surplus will increase. Answer: C Diff: 2 Topic: 4.9 Appendix B: Price Controls and Gains from Trade Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 3) The total amount of consumer surplus and producer surplus is at its maximum when A) consumers and producers are allowed to trade at the market clearing price. B) the government imposes a price floor that is higher than the market clearing price. C) the government imposes a price ceiling that is lower than the market clearing price. D) free market exchanges do not exist. Answer: A Diff: 2 Topic: 4.9 Appendix B: Price Controls and Gains from Trade Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 4) As compared to the market clearing price, the total amount of consumer surplus and producer surplus is A) greater for a government-imposed price floor that is higher than that market clearing price. B) greater for a government-imposed price ceiling that is lower than that market clearing price. C) the same as a government-imposed price floor that is higher than that market clearing price. D) smaller for a government-imposed price ceiling that is lower than that market clearing price. Answer: D Diff: 2 Topic: 4.9 Appendix B: Price Controls and Gains from Trade Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 5 Public Spending and Public Choice 5.1 Market Failures and Externalities 1) Which of the following terms describes the situation in which all resources are able to move to their highest-valued uses via voluntary exchange? A) government intervention B) a market failure C) economic efficiency D) an externality Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 2) Market failure occurs when A) a good is too expensive for the market to provide. B) an unrestrained market economy leads to too few or too many resources going to a specific economic activity. C) one good is superior to another and drives it out of the market. D) the stock market experiences a very large loss. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 3) Consumers are sovereign when A) prices are decided by sellers. B) a few consumers exercise coercion on sellers and other consumers. C) they can prevent market failure. D) they have the freedom to decide what they wish to purchase. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

4) Market failures A) prevent the price system from attaining economic efficiency. B) result in quantities and prices that are socially desirable. C) strengthen economic efficiency by forcing unprofitable firms to close. D) weaken the argument for government intervention in the economy. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 5) A market failure likely occurs when A) the consumption of a good generates an effect on third parties. B) firm production lacks an externality on third parties. C) consumers are sovereign but firms are not sovereign. D) there is no much competition in a market. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 6) Which of the following is a benefit of the price system? A) the existence of positive externalities B) the production of public goods C) Consumers have what they want since politicians and business managers decide what is to be produced. D) the freedom of consumers to decide what they want to purchase Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 7) Which of the following statements is NOT true about the price system? A) The price system allows resources to flow from low-valued uses to high-valued uses. B) Firms have total control over what consumers can buy. C) Individuals have freedom to purchase what they want. D) The price system allows for economic efficiency. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

8) Market failures A) are usually caused by government interference in the economy. B) prevent the price system from attaining economic efficiency. C) encourage people to purchase more of a good than they really want. D) encourage businesses to produce more of a good than they really want to. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 9) When there are too few or too many resources going to an economic activity, A) a public good exists. B) a market failure exists. C) consumer sovereignty exists. D) scarcity of resources no longer exists. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 10) The price system allocates resources efficiently EXCEPT when A) consumers decide they want more of a good. B) resources are utilized to produce the highest-valued goods and services. C) voluntary exchange exists. D) the production of a good affects parties other than its buyers and sellers. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 11) When market failures occur, A) the invisible hand will correct for the market failures. B) the price system will correct the market failures. C) buyers and sellers will correct the market failures. D) the government can step in to correct the market failures. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

12) Market failures occur when A) externalities exist. B) economic efficiency increases. C) there is an increase in demand. D) there is a change in quantity demanded. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 13) When the price system fails to generate an efficient allocation of resources, A) the market will always correct it. B) consumers will spend less. C) business will produce more. D) too few or too many goods will be produced. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 14) An example of a market failure is A) a firm is dumping toxic waste that is making people sick. B) when not everyone who wants to see a major league football game can. C) when there is an increase in gasoline demand and a shortage develops. D) when the market prices of some vehicles are too high for some buyers. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 15) Market failures include all of the following EXCEPT A) buyers pay for all the costs involved in the production of goods and services. B) public goods. C) positive externalities. D) negative externalities. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

16) A situation in which a market economy leads to too few or too many resources going to a particular economic activity is known as A) competition. B) excessive competition. C) creative destruction. D) a market failure. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 17) Ideally, a price system allows A) firms to act in such a way that they eliminate scarcity. B) consumers to satisfy all their wants. C) resources to move from lower-valued uses to higher-valued uses through voluntary exchange. D) government policy makers to allocate resources to the uses which they consider to be in the best interests of society. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 18) Market failure occurs when A) the price system fails to generate an efficient allocation of resources. B) the price system fails to generate an equal distribution of income. C) the price system fails to generate an equal distribution of wealth. D) the price system allows consumers to make their own decisions. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 19) A price system is considered to be efficient when A) it fails to have the goods that consumers want. B) an underground market develops. C) all resources are allocated to the highest-valued uses. D) firms produce more than what consumers want. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

20) When misallocation of resources for production of a good results in spillover effects on third parties, there is a A) market failure. B) government failure. C) consumer failure. D) productive failure. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 21) A situation in which a benefit or a cost associated with an economic activity spills over to third parties is called A) a public good. B) a merit good. C) an externality. D) the free-rider problem. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 22) An example of third parties in the market of trucks is A) a pedestrian that is affected by the polluted air from trucks. B) a seller of a truck. C) a buyer of a truck. D) None of these belongs to third parties. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 23) An externality can best be defined as A) a party not directly involved in a transaction. B) a consequence of a transaction that spills over to affect third parties. C) a right of an owner to use and exchange property. D) a cost associated with the production of one more unit of output. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

24) All of the following illustrate how government can correct for positive externalities EXCEPT A) subsidies. B) regulation. C) government financing and production. D) charging effluent fees. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 25) Which of the following leads to an underallocation of resources to a specific economic activity? A) external costs B) external benefits C) marginal costs D) effluent benefits Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 26) A result of a positive externality in the production of a good is that A) the price system will over-allocate resources to the production of that good or service. B) the price system will under-allocate resources to the production of that good or service. C) the market supply will be too high. D) the market demand will be too high. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 27) Which of the following is an example of a negative externality? A) There is an increase in injuries to pedestrians caused by accidents resulting from electronic billboards distracting drivers. B) The opening of a new shopping mall increases the business of nearby restaurants. C) A consumer pays a higher price than another consumer does for the same product. D) Consumers pay a sales tax in addition to the price of a product. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

28) Suppose that one firm produces a product that results in negative external costs to society. This information suggests that A) resources are under-allocated to the firm. B) the equilibrium market price of the product includes the external costs borne by society. C) resources are over-allocated to the firm. D) at the market price, quantity demanded is less than quantity supplied. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 29) When an external cost exists in the production of a good, firms tend to A) under-produce the good since society pays these costs. B) over-produce the good. C) keep production constant throughout the year. D) under-allocate resources to the production of the good. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 30) If production of an item results in negative external costs, then A) the market price is below the socially preferred price that reflects the external costs. B) the market price is above the socially preferred price that reflects the external costs. C) market forces will always correct the problem. D) the market quantity is too low from society's point of view. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 31) Which of the following will LEAST likely generate positive external effects to society? A) education B) a comic book C) health care D) requiring drivers to undergo a test for alcohol consumption Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

32) Suppose that the market price of good X equals the firm's cost of producing that good, but it does not reflect any costs imposed on society. Which of the following is FALSE? A) The good is priced too low. B) An external benefit is associated with good X. C) Resources are over-allocated in the production of good X. D) Too much of good X is being produced. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 33) When a good causes positive external benefits to accrue to third parties, an unfettered market will A) under-allocate resources to the good causing the benefit. B) over-allocate resources to the good causing the benefit. C) cause the equilibrium quantity, established before the benefit is taken into account, to be produced more efficiently. D) eliminate such goods. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 34) Society is likely to over-allocate resources to produce goods that A) are public goods. B) are merit goods. C) generate positive externalities. D) generate negative externalities. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 35) Which of the following often involves positive external benefits? A) water pollution B) drunken driving C) inoculation programs D) tobacco smoking Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 9 Copyright © 2021 Pearson Education, Inc.

36) A negative externality is a situation in which A) there is a spillover of benefits. B) a cost associated with an economic activity is borne by a third party. C) a firm is paying in excess of the total costs of producing a good. D) None of these Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 37) When a steel producer pollutes the air, economists argue that there is A) efficiency, if production is at its maximum level. B) a positive externality. C) an external cost. D) a cost paid solely by the steel producer. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 38) An external cost, such as the cost generated by pollution, is A) a cost paid by consumers of the product. B) a cost paid by producers of the product. C) a cost paid by a third party or by society at large. D) not a true opportunity cost of production. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 39) Pollution is caused by a market failure, in an industry in which there is A) unemployment. B) an over-allocation of resources in production. C) excess demand. D) excessive cost borne by the firm. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

40) A negative externality such as pollution can be corrected by A) a subsidy to producers. B) a tax on producers. C) a subsidy to consumers. D) a stimulus to production. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 41) An externality exists when A) goods are sold in specific geographic locations. B) some of the benefits or costs associated with a good are borne by third parties. C) the government taxes a good. D) the government subsidizes a good. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

42) According to the above figure and given that supply is initially at S1, if steel mills ignore the cost of pollution, the equilibrium quantity of steel will most likely be A) Q1. B) Q2. C) Q2 - Q1. D) None of these. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 43) According to the above figure, if steel mills ignore the cost of pollution, then the supply curve will A) shift from S1 to S2. B) shift from S2 to S1. C) remain at S1. D) shift either to the left or the right, but it is impossible to say without more information. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge

44) According to the above figure, if steel mills are charged an effluent fee in order to bear the cost of pollution, what happens to the equilibrium price and equilibrium quantity? A) They are unchanged. B) They change from P1 and Q1 to P2 and Q2. C) They change from P2 and Q2 to P1 and Q1. D) The equilibrium price increases from P1 and P2, but the equilibrium quantity is unchanged. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 45) Suppose that a per-unit subsidy is granted to each individual who consumes a product providing external benefits to society at large. Each individuals demand curve will shift ________, and the market demand curve for the product will shift ________. A) to the right; to the right B) to the right; to the left C) to the left; to the left D) to the left; to the right Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 46) The No-Good Company produces goods that provide damages to society-at-large. If consumers of No-Good's products fail to take external benefits into account, A) the demand curve will be too far to the left. B) the supply curve will be too far to the left. C) the demand curve will be too far to the right. D) the supply curve will be too far to the right. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 47) Government can correct for negative externalities by A) decreasing taxes. B) increasing taxes or regulation. C) allowing the market system to correct the problem. D) decreasing the costs to those responsible for the externality. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 13 Copyright © 2021 Pearson Education, Inc.

48) In graphical form,the effect of imposing a tax on a good is shown as A) a leftward shift of the market supply curve. B) a rightward shift of the market supply curve. C) a downward movement along the market supply curve. D) no change to the market supply curve. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 49) If the production of a product results in significant external costs, an appropriate government policy might be to A) subsidize the production of the good. B) tax producers and thus shift the supply curve to the left. C) tax consumers' incomes and thus shift the demand curve to the left. D) subsidize consumers since the good is being under-consumed. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 50) An effluent fee A) is a reward to companies using production methods that create positive externalities. B) is also called a pollution subsidy. C) gives a firm the right to pollute if it pays a tax on what it discharges. D) is intended to influence the market by increasing supply and decreasing price. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 51) To correct for the underproduction of products with positive externalities, the government must A) provide the incentives for the private sector to produce and consume the good. B) provide tougher regulations on the industry. C) increase taxes on the industry. D) fine the industry. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

52) Assume the production of a good gives rise to external benefits. The government may increase efficiency by A) subsidizing consumption of the good. B) requiring all producers of the good to be licensed. C) taxing production of the good. D) imposing taxes on the good. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 53) When the production of one good spills benefits over to third parties, the government should consider all of the following EXCEPT A) subsidizing the consumption of the good. B) subsidizing the production of the good. C) creating tax incentives to encourage more consumption. D) taxing the production or consumption of the good. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 54) A government action that can help correct positive externalities is A) a tax on producers of the good that provides external benefits. B) a subsidy to consumers of the good that provides external benefits. C) an effluent fee charged to producers of the good that provides external benefits. D) regulations aimed at reduced production by sellers of the good that provides external benefits. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 55) A government subsidy is typically used A) to correct a negative externality. B) to provide a government-inhibited good. C) to reduce inflation. D) to correct a positive externality. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

56) A subsidy is sometimes used by the government to correct the problems associated with A) negative externalities. B) positive externalities. C) public goods. D) monopolies. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 57) When costs spill over to third parties, there is a(n) A) cost overrun. B) excessive competition. C) negative externality. D) government subsidy. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 58) Which of the following is NOT an example of a negative externality? A) inoculation against disease B) pollution C) playing a boom box loudly in a crowded park D) rush hour traffic Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 59) Which of the following is an example of a positive externality? A) something obtainable at a zero price B) a lower crime rate for a community in which residents receive more education C) increased purchases of landscaping services by a homeowner that boost a neighbor's property value D) a discount for consumers buying in large quantity Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

60) A paint firm has just announced that it will be building a new plant in a small town that is currently experiencing a high level of unemployment. The new plant will create 500 new jobs in the area and will occupy unused land at the edge of town. The plant will also dump some harmful chemicals into the town's river. From an economic standpoint this dumping of chemicals A) is unimportant since the firm is reducing the unemployment in the region. B) creates a negative externality. C) is the production of a public good. D) creates a positive externality. Answer: B Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 61) Which of the following is an example of a positive externality? A) a neighbor's flower garden that you enjoy seeing B) traffic congestion C) an increased supply of chocolate lowers chocolate prices for all consumers D) pollution Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 62) Which of the following is NOT an example of an externality? A) A cookie company emits a wonderful aroma in the air that makes people smile. B) The neighbor's wind chimes interfere with your sleep. C) A firm lays off 100 workers. D) Cancer-causing chemicals are dumped into the drinking water supply of a city. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 63) Many beach-goers leave plastic bottles on beaches instead of putting them in trash cans. This is an example of a A) public good. B) positive externality. C) neutral externality. D) negative externality. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 17 Copyright © 2021 Pearson Education, Inc.

64) A retail shop has an outside display which has the time and temperature that is always correct. This is an example of A) an interference in the workings of the price system. B) a breakdown in communication between the shop and its customers. C) a negative externality. D) a positive externality. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 65) Which of the following is an example of a negative externality? A) A person buys a car that is a lemon. B) A worker is injured on the job. C) A new restaurant's success causes another to go out of business. D) A large wind turbine in a house's backyard ruins the view of other homeowners. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 66) Markets tend to overallocate resources to the production of a good when A) there are negative externalities. B) there are positive externalities. C) there are public goods produced. D) equilibrium occurs. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 67) Markets tend to underallocate resources to the production of a good when A) there are negative externalities. B) there are positive externalities. C) there are public goods produced. D) equilibrium occurs. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

68) Which of the following statements is NOT true of external benefits? A) External benefits lead to an underallocation of resources to the production of the good that has the external benefit. B) External benefits lead to a price in the market that is too high. C) External benefits lead to too few of the goods that have the external benefit being produced. D) External benefits are a good thing for the allocation of resources because people are getting something at no cost. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 69) Which of the following statements is TRUE of external costs? A) External costs should not be corrected since people will bear the costs whether they are corrected or not. B) There are no good ways to correct for external costs. C) When external costs exist, the price of the good will be deceptively low leading to an overallocation of resources. D) External costs should only be corrected for if the correction will not increase the market price. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 70) When negative externalities exist, the private market equilibrium represents a A) market price which is too low and a market quantity which is too low. B) market price which is too low and a market quantity which is too high. C) market price which is too high and a market quantity which is too low. D) market price which is too high and a market quantity which is too high. Answer: B Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 71) When positive externalities exist, the private market equilibrium represents a A) market price which is too low and a market quantity which is too low. B) market price which is too low and a market quantity which is too high. C) market price which is too high and a market quantity which is too low. D) market price which is too high and a market quantity which is too high. Answer: C Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

72) Flowers provide services to beekeepers because the bees use the pollen to make honey. This is an example of A) a positive externality, and too many flowers exist in society. B) a positive externality, and too few flowers exist in society. C) a negative externality, and too many flowers exist in society. D) a negative externality, and too few flowers exist in society. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 73) To correct for negative externalities, the government A) should allow the price system do the correction. B) can impose a tax. C) can provide a subsidy to consumers. D) should create a public good. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 74) To correct for positive externalities the government A) should allow the price system to do the correction. B) can impose a tax. C) can give a subsidy. D) should create a public good. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 75) A tax is sometimes used by government to correct the problems associated with A) negative externalities. B) positive externalities. C) internal benefits. D) external benefits. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

76) A subsidy is sometimes used by government to correct the problems associated with A) negative externalities. B) positive externalities. C) internal benefits. D) external costs. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 77) The funds that polluters pay that gives them the right to discharge into the air or water a certain amount of pollution are A) special subsidies. B) regulation fees. C) external costs. D) effluent fees. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 78) The purpose of an effluent fee is to A) reduce the amount produced of a good and to raise the market price. B) correct for pollution while keeping the price of the good the same as before the correction. C) reward people producing externalities. D) encourage producers to keep the quantity produced the same while lowering the price. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 79) The purpose of an effluent fee imposed on a firm is A) to increase output of its product by increasing the resources allocated to production. B) to increase output of its product by reducing the resources allocated to production. C) to reduce output by increasing production costs thereby reducing resources used. D) None of these Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

80) An effluent fee is more effective when imposed on A) the firm or producer of the product which generates pollution. B) the consumer of the product. C) neither the producer nor the consumer of the product. D) the supplier of the raw material used by the firm. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 81) An effluent fee is a A) subsidy given to the producer of a positive externality. B) charge to a polluter that gives the right to discharge pollution into the air. C) fine imposed on a polluter for dumping illegal pollution. D) charge for a public good. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 82) A possible solution to the problems of external benefits is A) to tax those receiving the extra benefits. B) production of the good by government. C) effluent fees. D) to restrict the amount of the good through direct government regulation. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

A shift from S1 to S2 reflects the change that happens when a negative externality is taken into account. A shift from D1 to D2 reflects the change that happens when a positive externality is taken into account. 83) Refer to the above figures. Which of the panels would be consistent with the situation in which external costs exist? A) Panel 1 B) Panel 2 C) Panels 1 and 2 D) neither panel Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 84) Refer to the above figures. Which of the panels would be consistent with the situation in which external benefits exist? A) Panel 1 B) Panel 2 C) Panels 1 and 2 D) neither panel Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge

85) Refer to the above figures. A negative externality exists that has not been corrected. Price and quantity will be A) P1 and Q1. B) P2 and Q2. C) P3 and Q3. D) P4 and Q4. Answer: A Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 86) Refer to the above figures. A positive externality exists that has not been corrected. Price and quantity will be A) P1 and Q1. B) P2 and Q2. C) P3 and Q3. D) P4 and Q4. Answer: C Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 87) Refer to above figures. Prior to the shift of the curves, which panel and which curve involve the existence of negative externality? A) Panel 1 and S1 B) Panel 1 and S2 C) Panel 2 and D1 D) Panel 2 and D2 Answer: A Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

88) Refer to the above figures. A negative externality existed but has been corrected. Price and quantity will be A) P1 and Q1. B) P2 and Q2. C) P3 and Q3. D) P4 and Q4. Answer: B Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 89) Refer to the above figures. If a positive externality that existed becomes corrected, price and quantity will become A) P1 and Q1. B) P2 and Q2. C) P3 and Q3. D) P4 and Q4. Answer: D Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 90) Refer to the above figures. An external cost exists. This will lead to an A) underproduction equal to Q1 minus Q2. B) overproduction equal to Q4 minus Q3. C) underproduction equal to Q4 minus Q3. D) overproduction equal to Q1 minus Q2. Answer: D Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

91) Refer to the above figures. An external benefit exists. This will lead to an A) underproduction equal to Q1 minus Q2. B) overproduction equal to Q4 minus Q3. C) underproduction equal to Q4 minus Q3. D) overproduction equal to Q1 minus Q2. Answer: C Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 92) Refer to the above figures. Externalities exist in both panels. After correcting for the externalities the prices should be A) P1 and P3. B) P1 and P4. C) P2 and P4. D) P2 and P3. Answer: C Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

93) Refer to the above figure. An external cost exists. The amount of that cost is represented by A) P2. B) Q1. C) the vertical distance between point A and the supply curve S1. D) the distance between C and A. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 26 Copyright © 2021 Pearson Education, Inc.

94) Refer to above figure in which negative externality existed. The government imposes a $1.00 pollution tax on the producer. Supply shifts leftward. A) This tax will be shifted entirely to the consumer. B) This tax will be borne entirely by the producer. C) The amount of the tax shifted to the consumer depends on the consumer's elasticity of the demand curve. D) The tax will be divided into equal amounts between consumer and producer. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge

95) Refer to the above figure. An external benefit exists. The amount of that benefit is represented by A) P4. B) the vertical distance between D1 and D2. C) the distance between G and F. D) P3. Answer: B Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 96) If the government wishes to correct the existence of a negative externality, it could A) grant subsidies to consumers to stimulate demand. B) impose a tax on the producers to reduce supply. C) impose taxes on consumers to stimulate demand. D) grant subsidies to producers to reduce supply. Answer: B Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

97) Graphically, the presence of an external cost that is ignored by producers can be shown as A) a market supply curve to the left of the market supply curve for where the producers have to pay for the external cost. B) a market supply curve to the right of the market supply curve for which the producers have to pay for the external cost. C) a market supply curve the same as the market supply curve for which the producers have to pay for the external cost. D) the absence of a market supply curve. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 98) The government might provide a subsidy when A) a negative externality exists. B) an effluent fee has been unsuccessful. C) it wants to increase the amount of a good consumed. D) it wants to transform a negative externality into a positive externality. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 99) In graphical form, the presence of an external benefit that is ignored by consumers can be shown as A) a market demand curve to the left of the market demand curve for which the consumers take the external benefit into account. B) a market demand curve to the right of the market demand curve for which the consumers take the external benefit into account. C) a market demand curve the same as the market demand curve for which the consumers take the external benefit into account. D) the absence of a market demand curve. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

100) All of the following are ways that the government can correct for positive externalities EXCEPT A) by subsidizing the consumption of the good. B) producing the good itself. C) by regulation. D) by assessing an effluent fee. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

101) In the above figure, market equilibrium at point E yields the quantity X. The quantity the socially optimal quantity. Point E indicates that currently there is A) a negative externality. B) a positive externality. C) a public good. D) a positive externality with subsidy. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

102) In the above figure, market equilibrium at point E yields the quantity X. The quantity X* is socially optimal amount. The government can achieve the optimal outcome by A) setting the price at P1. B) establishing a tax of P3 - P1 per unit of the good sold. C) establishing a tax of P3 - P2 per unit of the good sold. D) setting the price at P4. Answer: B Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

103) Refer to the above figure. The market equilibrium quantity is Q1. Point Q2 represents the optimal amount of production. This indicates that there is A) a public good which should be produced. B) regressive taxation of the product. C) a positive externality. D) a negative externality. Answer: C Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

104) Refer to the above figure. The market equilibrium quantity is Q1. Point Q2 represents the optimal amount of production. The government can achieve the optimal outcome by A) setting the price at P3. B) providing a per-unit subsidy to consumers equal to P3 - P1. C) providing a per-unit subsidy to consumers equal to P2 - P1. D) establishing a tax equal to P2 - P1 per unit of the good sold. Answer: B Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 105) In a free market system, competition generates economic efficiency only when A) individuals take into account the full opportunity cost of their actions. B) consumers are motivated by a sense of the greater good, not their own self-interest. C) firms are motivated by a sense of the greater good, not their desire for profit. D) economic decisions are taken out the hands of individuals and placed in the hands of government officials. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 106) Costs that spill over to third parties are called A) opportunity costs. B) external costs. C) variable costs. D) public costs. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 107) What would happen in a free market system when production of a good generates negative externalities? A) There is a shortage of the good. B) There is a surplus of the good. C) The equilibrium quantity of the good is less than the efficient amount. D) The equilibrium quantity of the good is more than the efficient amount. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 31 Copyright © 2021 Pearson Education, Inc.

108) A firm that produces chemical solvents creates some air pollution because of the emissions from its manufacturing facilities. A tax is imposed on the firm, equal to the costs of environmental damage caused by a unit of the emissions. What is the result? A) The quantity of chemical solvents produced now will be the efficient amount. B) Demand for the chemical solvents will increase. C) Demand for the chemical solvents will decrease. D) Consumers of the chemical solvents will be willing to pay the full amount of the tax, and so the quantity produced will be unaffected. Answer: A Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 109) Positive externalities arise when A) an unprofitable firm is shut down. B) a profitable firm is regulated. C) tax rates are reduced. D) production of a good generates benefits that spill over to third parties. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 110) When does a subsidy that benefits consumers result in a more efficient allocation of a resource? A) when the good being produced or consumed is not scarce B) when the good being produced or consumed generates a negative externality C) when the good being produced or consumed generates a positive externality D) when the equilibrium price of the good is one that consumers don't like Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

111) An externality is A) a third-party benefit or cost that is associated with the production of a good. B) when external forces such as war or flood affect the market. C) government intervention in the markets. D) transaction costs. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 112) When there is an external benefit, the unregulated market A) overproduces the good or service. B) underproduces the good or service. C) reaches the most efficient solution. D) maximizes public welfare. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 113) When there is an external cost, the unregulated market A) overproduces the good or service. B) underproduces the good or service. C) reaches the most efficient solution. D) minimizes public welfare. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 114) Inoculations of children against infectious diseases are A) an example of an external benefit. B) an example of an external cost. C) dangerous for society. D) an example of a public good. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

115) When a person throws a cigarette out of a car window and starts a brush fire, this is A) an example of an external benefit. B) an example of an external cost. C) an example of a public good. D) an example of market power. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 116) The government corrects for externalities in all of the following ways EXCEPT A) taxes. B) regulation. C) lobbying. D) subsidies. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 117) A situation in which the market system allocates too few resources to the production of a given activity is known as A) market allocation. B) market failure. C) market efficiency. D) market signaling. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 118) When a firm produces a product that creates external costs, A) the firm produces a level of output larger than would be produced without the external cost. B) the firm produces a level of output smaller than would be produced without the external cost. C) the firm produces a level of output which would be the same as it would produce without the external cost. D) the market provides the efficient level of output even with the existence of the external cost. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

119) If external benefits are taken into account in the market, A) the demand curve would shift to the left. B) the supply curve would shift to the left. C) the demand curve would shift to the right. D) the supply curve would become vertical. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 120) "Second-hand" smoke is an often cited disadvantage of allowing smoking in restaurants. In economics, "second-hand" smoke is referred to as a(n) A) capital good. B) externality. C) economic cost. D) negative investment. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 121) Graphically, the effects of an external benefit can be shown as A) a market demand curve that is to the left of the market demand that includes external benefits. B) a leftward shift of the market supply curve. C) a downward movement along the market demand curve. D) a rightward shift of the market demand curve. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 122) If a producer were forced to absorb the cost of a spillover from the production of a good, this would likely cause the supply curve for the good to A) shift out. B) shift to the left. C) shift to the right. D) None of these are correct. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

123) Which of the following might be considered a positive externality? A) the pollination of an orange grove due to bees kept by a nearby beekeeper B) individuals who did not get the flu, yet did not receive a flu shot when those around them did receive the shot C) better fishing resulting from increased lake temperatures generated by the nearby power plant D) All of these are correct. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 124) Which of the following might be a method that the government could use to correct a negative externality? A) an effluent fee on waste from the production of goods that create negative externalities B) government subsidies to producers of goods that create negative externalities C) financing additional production of goods that create negative externalities D) encouraging overallocation of resources of production of goods that create negative externalities Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 125) Which of the following might be a method that the government could use to promote the production of a good that generates positive externalities? A) subsidies B) regulations C) financing additional production D) All of these are correct. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 126) Graphically, the effect of a government subsidy on a good is shown as A) a leftward shift of the market demand curve. B) a rightward shift of the market demand curve. C) a downward movement along the market demand curve. D) no change to the market demand curve. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

127) Market failure means that A) the strike organized by unionized employees fails to achieve its goal. B) too many outdated products are offered for sale in the local supermarket. C) there is overallocation or underallocation of resources to certain economic activity. D) an unexpectedly harsh winter shuts down a factory. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 128) An economic activity in which benefits or costs affect third parties is called A) a public good. B) a third-party good. C) the exclusion principle. D) an externality. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 129) One way of addressing the associated market failure that generates both private costs and external costs is for this activity to be A) left alone. B) taxed. C) subsidized. D) banned. Answer: B Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 130) External costs can be defined as A) the cost associated with private production, but partially borne by society. B) the sum of all private production costs. C) the cost of running the federal government. D) the cost of providing all public goods and services. Answer: A Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

131) When government intervenes in the production process because external costs exist, it typically attempts to shift the industry's A) demand curve to the right. B) demand curve to the left. C) supply curve to the right. D) supply curve to the left. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 132) When government intervenes in the production process because external benefits exist, it typically attempts A) to impose a tax on each unit produced. B) to shift the market's demand curve to the left. C) to shift the market's demand curve to the right. D) to shift the market's supply curve to the left. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 133) Whether an externality is positive or negative, it is always A) evaluated by the Supreme Court of the United States. B) evaluated by the government. C) evaluated by the impact on the third party. D) judged by the profitability of the firm producing the product. Answer: C Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 134) An effluent fee is an example of A) a government policy to correct for an external benefit. B) a government policy to promote the production of a product with an external cost. C) a government policy to promote the production of a product with an external benefit. D) a government policy to correct for an external cost. Answer: D Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

135) An example of a negative externality created in the market system would be A) poverty. B) unemployment. C) a change in one consumer's tastes and preferences. D) water pollution. Answer: D Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 136) All of the following generate positive externalities EXCEPT A) public health programs. B) a lower marginal tax rate for a household's income. C) requiring proof of inoculation before entering college. D) requiring proof of inoculation before entering elementary school. Answer: B Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 137) One way that the government encourages the production of a good with positive externalities is to offer A) an effluent fee. B) a market to pollute. C) a subsidy. D) a pollution tax. Answer: C Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 138) If the production of ukuleles creates a negative externality that is NOT corrected for by the government, the equilibrium quantity of ukuleles is A) higher than optimal. B) lower than optimal. C) efficient. D) at a optimal level. Answer: A Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

139) Explain what economic efficiency is. How does a price system lead to economic efficiency? Answer: Market efficiency is when the exact amount of resources are allocated to a certain economic activity or production of a good or service. The price system enables resources to be allocated to those that are willing and able to buy them at a price at which suppliers are willing and able to produce a good or service. In this way, the price system allocates resources to their higher value option. Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 140) What is market failure? How can the government correct market failure? Answer: Market failure is a situation in which the market economy leads to too few or too many resources going to a specific economic activity as a result of externalities. External costs lead to too much supply in a market than otherwise. In this case, the government can correct the market outcome by imposing a tax and regulation. On the contrary, external benefits lead to too little market demand than otherwise. In this case, the government can correct the market outcome with subsidies and regulation. Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

141) What is an effluent fee? Graphically, show how an effluent fee can correct an externality. Answer:

An effluent fee is a charge to a polluter that gives the right to discharge into the air or water a certain amount of pollution. In the above figure, the market equilibrium is point E, with price of P1 and output of Q1. The external cost of the pollution is equal to the distance FE, so an effluent fee equal to FE causes the firms to produce fewer units. The optimum is at E*, with price of P*, and output of Q*. Diff: 3 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 142) What is an externality? How do positive and negative externalities differ in their effects? How can government action correct positive and negative externalities? Answer: An externality is a cost or benefit of an economic activity that is borne by third parties. A good generating a positive externality is underproduced and underconsumed. A good generating a negative externality is overproduced and overconsumed. The government can correct a positive externality by either producing the good itself or by providing a subsidy equal to the external benefit, and can correct a negative externality by either imposing a tax equal to the external cost or by direct regulation. Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

143) Explain why an external cost leads to an over-allocation of resources to the production of a good. Answer: An external cost is the cost associated with the production of a good that is not borne by the seller. Rather, the cost is borne by third parties. The seller calculates the amount of the good to produce by comparing private benefits and costs. By ignoring the external costs, the seller produces more of the good than would be the case if the seller actually had to bear the full costs of production. Hence, the seller overallocates resources to the production of the good. Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 144) Explain why an external benefit leads to an under-allocation of resources to the production of a good. Answer: An external benefit is the benefit associated with the consumption of a good that is not borne by the buyer. Rather, the benefit is borne by third parties. The buyer calculates the amount of the good to consume by comparing private benefits and costs. By ignoring the external benefit, the buyer consumes less of the good than would be the case if the buyer actually received the full benefits of consumption. Hence, society under allocates resources to the production of the good. Diff: 2 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 145) What is the consequence of a positive externality in a market? What is the consequence of a negative externality? Why those consequences occur? Answer: A positive externality leads to the equilibrium quantity of goods in a market that is less than the efficient amount from the society's perspective. A negative externality leads to the equilibrium quantity of goods in a market that is more than the efficient amount. A positive externality is not taken into account by consumers and hence is not reflected in the position of the market demand curve. This leads to an equilibrium market quantity below the socially preferred level. In contrast, a negative externality is not taken into account by producers and hence is not reflected in the position of the market supply curve. This leads to an equilibrium market quantity above the socially preferred level. Diff: 1 Topic: 5.1 Market Failures and Externalities Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

5.2 The Other Economic Functions of Government 1) The economic functions of government differ from the political functions of government in that A) the economic functions are carried out by the federal government, while the political functions are carried out by state and local governments. B) the economic functions include policies that affect income redistribution, while the political functions involve things that affect the way exchange is carried out. C) the economic functions involve things that affect the way exchange is carried out while the political functions include policies that affect income redistribution. D) the economic functions are carried out by state and local governments, while the political functions are carried out by the federal government. Answer: C Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 2) Public goods are A) rival and exclusive. B) rival, but not exclusive. C) exclusive, but not rival. D) neither exclusive nor rival. Answer: D Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 3) In the United States, which of the following is NOT a generally accepted economic function of government? A) providing public goods B) distributing consumer goods C) ensuring economy-wide stability D) promoting competition in the marketplace Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

4) The economic role of the legal system might best be described as A) promoting the productive efficiency of competitive markets. B) identifying and producing public goods. C) establishing the "rules of the game" and acting as a referee when disputes arise among market participants. D) identifying and producing merit goods. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 5) Which of the following is NOT an economic function of the U.S. government? A) promoting competition B) providing public goods C) promoting price stability D) encouraging production of government-inhibited goods Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) Which of the following is NOT an economic function of government? A) providing a legal system B) ensuring economic stability C) providing government-inhibited goods D) promoting competition Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

7) Which of the following statements is TRUE? A) Government spending as a percent of total national income has continuously decreased since the 1950s. B) Transfer payments are money payments made by the government for which no goods or services are currently received. C) Education is the largest category of federal government expenditures. D) Transfers in kind include Welfare, Social Security, and unemployment insurance benefits. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) In the United States, the idea that the federal government should undertake actions to stabilize business activity A) was established in the Declaration of Independence. B) is a relatively new idea that developed in the years during and after the Great Depression. C) has been around since the early 1700s. D) developed during World War I. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) The legal system in the United States tends A) to support monopolies. B) to actively discourage unionization. C) to discourage the entry of new firms into industries. D) to promote competition. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

10) The U.S. legal system mainly engages in activities that A) are dedicated to producing private goods. B) focus on income redistribution. C) involve defining and protecting property rights. D) focus on producing public goods. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) Federal antitrust laws in the United States are intended to A) promote competition by prohibiting monopolies. B) promote income equality. C) create new monopolies. D) create only government-owned organizations. Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) To protect the competitive economic system by restricting the formation of monopolies, the government has passed and enforced A) rationing systems. B) antitrust laws. C) the imposition of taxes on certain goods. D) zoning laws. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

13) Federal antitrust laws in the United States are enforced A) solely by the Federal Trade Commission. B) solely by the Department of Justice. C) by the Department of Justice and by the Federal Trade Commission. D) by the Department of Commerce. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) Which of the following does NOT describe the intended purpose of the antitrust laws of the United States? A) to promote competition within the economic system B) to reduce the power of monopolies C) to prohibit certain economic activities that promote trade D) to restrict the formation of monopolies Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) U.S. antitrust laws view monopolies as undesirable because A) monopolies restrain trade and promote inefficiencies. B) monopolies create inferior products. C) monopolies produce only capital goods. D) monopolies produce only cheap, low quality goods. Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

16) The purpose of antitrust legislation is A) to reduce unemployment. B) to reduce the power of monopoly. C) to increase the power of monopoly. D) to maximize employment for a given price level. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) A firm that has a great deal of control over the price of a good is said A) to function in a black market. B) to create an externality. C) to have monopoly power. D) to be in an antitrust position. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 18) Which one of the following is NOT a characteristic of public goods? A) They are indivisible. B) It is difficult to charge people on the basis of how much they use. C) Public goods can be used by increasing numbers of people at no additional cost. D) Public goods are subject to the principle of rival consumption. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 19) When a Canadian citizen enjoys military protection in Canada without contributing to the cost of Canada's defense budget, then A) this Canadian citizen is a free rider. B) Canada is a free rider. C) this citizen receives no benefits if Canada is attacked. D) Canada's defense budget will run out of funds. Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 48 Copyright © 2021 Pearson Education, Inc.

20) Which of the following is an example of the free-rider problem? A) a neighbor who refuses to help pay for a street light that is intended to help reduce crime B) a student who refuses to buy a college catalog C) a law enforcement officer who receives a uniform from the police department D) a fast food employee who is provided food at work Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 21) Public goods are A) any goods or services produced by the government. B) provided to additional users at no additional cost. C) provided only by the capitalistic system. D) provided only by the communist system. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 22) The principal feature of private goods is that A) they cannot be rented or purchased. B) consumption by one person reduces the quantity available to others. C) no one can be excluded from consumption of the product. D) externality problems associated with their production are always negative. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 23) One characteristic of a public good is that it A) is available for consumption by only a few individuals at any particular time. B) always eliminates the free-rider problem. C) can be consumed simultaneously by many individuals. D) can be easily subdivided into small units. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

24) Which of the following would be best classified as a private good? A) a missile defense system B) police force C) radio frequency D) clothing Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 25) Public goods are unlikely to be provided by the private sector because A) the production of the good creates negative externalities. B) no one can be excluded from the consumption of the good. C) the consumption of the good creates negative externalities. D) the exclusion principle does not apply to public goods. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 26) The free-rider problem is encountered when A) someone benefits from the consumption of a public good without paying his or her full share. B) all individuals who consume a public good pay for it. C) all goods consumed and produced are private goods. D) all individuals are willing to pay for what they consume. Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 27) In the absence of government, A) public goods are likely to be overprovided. B) market failure is less likely to occur. C) public goods are likely to be underprovided. D) the free-rider problem is more likely to occur. Answer: C Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

28) The opportunity cost of providing a public good to an additional individual is A) infinite. B) zero. C) impossible to determine. D) high because of the exclusion principle. Answer: B Diff: 3 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 29) Private goods are those goods A) that violate the principle of rival consumption. B) for which no public market exists. C) that can only be consumed by one individual at a time. D) to which the non-exclusion principle applies. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 30) Which of the following goods is NOT subject to the free-rider problem? A) a public park B) the local police force C) public fireworks D) a mass transit system Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 31) The distinguishing characteristic of private goods is that A) the principle of rival consumption does not apply to them. B) their use is exclusive to the people who purchase them. C) they can be sold but not rented. D) they can be sold or rented, but not borrowed. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

32) A fundamental aspect of public goods is that they A) are just like private goods EXCEPT that everybody wants to consume the same amount. B) have positive externalities. C) are characterized by the principle of rival consumption. D) can be consumed jointly by many people simultaneously. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 33) Which of the following is an example of a public good? A) Amtrak rail transport services B) services of the U.S. Post Office C) the provision of medical care D) the provision of national defense Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 34) Public goods are characterized by the free-rider problem because A) no one can be excluded from the benefits of public goods once they are produced. B) public goods are usually things that people really do not want to consume. C) public goods are characterized by the principle of rival consumption. D) public goods can easily be subdivided into small units. Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 35) Which of the following types of goods is subject to the free-rider problem? A) a private good B) a public good C) a product that creates a positive externality D) a product that creates a negative externality Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

36) Which of the following is best characterized as a public good? A) a public library B) a church C) primary education D) police protection Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 37) Public goods are basically A) rival in consumption. B) nonrival in consumption. C) depletable in consumption. D) nondepletable in consumption. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 38) Which event was most important in promoting the belief that the U.S. government should work to ensure economy-wide stability? A) World War II B) the Civil Rights Movement C) the California Gold Rush D) the Great Depression Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 39) What are the three goals of the Employment Act of 1946? A) keep the peace, improve public education, and protect the environment B) improve the education system, provide more job training, and expand the number of government jobs C) full employment, price stability, and economic growth D) full employment, better schools, and lower income taxes Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

40) The Employment Act of 1946 reflects which one of the following functions of government? A) providing a legal system B) improving economy-wide stabilization C) correcting externalities D) providing public goods Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) Which law specifically mandated the federal government's responsibility for economy-wide stability? A) the Employment Act of 1946 B) the Sherman Act of 1890 C) the Glass-Steagall Act of 1933 D) the Volcker Act of 1960 Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 42) The economic functions of government include A) determining prices. B) setting wages in the public sector. C) protecting property rights. D) welfare. Answer: C Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

43) All of the following are economic functions of the government EXCEPT A) providing a legal system. B) determining the wage rate for most jobs. C) promoting competition in the market. D) providing public goods. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 44) The economic functions of the government deal with A) discouraging smoking in youths. B) making sure supply equal demand. C) promoting economic efficiency. D) excess demand. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 45) Providing public goods is a(n) A) economic function of government. B) political function of government. C) economic and political function of government. D) price system function. Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

46) The political functions of government differ from the economic functions of government in that A) the political functions relate to income distribution while the economic functions relate to the way exchange is carried out. B) the political functions are performed at the federal government while the economic functions are at the state and local government levels. C) the political functions involve elections and the court systems while the economic functions involve taxation and transfers. D) the President deals with the economic functions while Congress deals with the political functions. Answer: A Diff: 3 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 47) The difference between the economic and political functions of government is that A) the economic function is concerned with the Federal Taxation system while the political function is not. B) the economic function is concerned with correcting for market failures while the political function is not. C) the economic function is concerned with the reallocation of income while the political function is not. D) the economic function encourages merit goods while the political function discourages demerit goods. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 48) The provision of a legal system is an important economic function of the government because A) lawyers and judges tend to be high-income people. B) people need to feel safe when they go to work. C) the legal system affects how exchange takes place through its enforcement of contracts. D) the legal system affects the distribution of income through its awarding of damages in accident claims. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 56 Copyright © 2021 Pearson Education, Inc.

49) Which of the following legal subjects is most concerned with the economic function of the legal system? A) criminal law B) public goods C) antitrust legislation D) civil rights Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 50) The government tries to protect the competitive economic system by passing and enforcing A) price controls. B) tariff legislation. C) antitrust laws. D) building codes and zoning laws. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 51) A government agency charged with enforcing antitrust laws is A) the Federal Reserve Board. B) the National Labor Relations Board. C) the Council of Economic Advisors. D) the Federal Trade Commission. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 52) Private goods are goods A) that carry a price. B) for which price is greater than zero. C) for which the more one person has the less is available for someone else. D) that are produced by the government. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 57 Copyright © 2021 Pearson Education, Inc.

53) All of the following are characteristics of public goods EXCEPT A) public goods can be used by more people at no additional cost. B) the good can be consumed by everyone at the same time without reducing what is available for anyone else. C) the exclusion principle. D) the goods are perfectly divisible. Answer: D Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 54) Public goods are desired because A) people want and value them but the private sector will not make them available. B) we want the government to spend our tax dollars. C) they came in small units. D) they make supply equal to demand for private goods. Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 55) An example of a public good is A) software produced by Microsoft. B) housing subsidies. C) the car I own. D) the fire department. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 56) The distinguishing characteristic of a public good is A) noncompetitive production. B) durability. C) exclusivity. D) nonrival consumption. Answer: D Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

57) Which of the following statements is TRUE about the difference between a public and private good? A) Both public and private goods are owned by individuals but public goods can be shared while private goods cannot be shared. B) The government produces private goods while corporations produce public goods. C) Consumption of a private good by one person reduces the amount available for others while the consumption of a public good does not reduce the amount available for others. D) Resources are used to produce private goods but are not used to produce public goods. Answer: C Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 58) The difference between a private good and a public good is that A) private goods are government-sponsored goods while public goods are government-inhibited goods. B) externalities are always created in the production process but not in the production of public goods. C) private goods make us happy while public goods do not. D) the exclusion principle applies to a private good but not to a public good. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 59) Which of the following is an example of a public good? A) flood control B) post office C) health care D) college education Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Application of knowledge

60) A lighthouse that serves a dangerous coastal area is built. The lighthouse cost $2 million to build and serves 100 ships a month. If the shipping in the area increases so that 300 ships pass by a month, the increase in additional costs of providing the light to these new ships is A) $2 million. B) $100,000. C) $5,000. D) $0. Answer: D Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Application of knowledge 61) A free rider is someone who A) hops on the bus without paying the correct bus fare. B) enjoys the trees I have planted and does not compensate me for them. C) creates a negative externality. D) buys a ticket for a movie. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 62) The free-rider problem is A) the use of private goods in one state by residents of another state. B) the incentive that people have to avoid paying for a public good. C) the incentive that people have once they are receiving welfare to keep getting welfare. D) that people cannot be forced to accept public goods. Answer: B Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 63) Celine enjoys the fragrance coming from her neighbors' flowers. The fragrance for Celine is is an example of A) a negative externality. B) a private good. C) the need for antitrust legislation. D) a free rider problem. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Application of knowledge 60 Copyright © 2021 Pearson Education, Inc.

64) The free-rider problem plagues public goods because A) public goods are not produced by profit-maximizing firms and hence can be produced only at a loss to society. B) once public goods are produced it is not possible to exclude anyone from consuming these goods. C) the government can refuse to serve a citizen. D) the public doesn't care about public goods. Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 65) A fundamental reason that governments provide public goods is that A) those goods are subject to the free-rider problem. B) negative externalities are part of the production process of those goods. C) public goods are merit goods. D) those goods are perfectly divisible. Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 66) A homeless family is given a government subsidy for an apartment in an affordable housing project. The apartment A) is not subject to the principle of rival consumption. B) is not a public good. C) has widespread benefits and concentrated costs. D) is subject to the free-rider problem. Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 67) Private schools are able to exclude students from attending classes they offer unless students have been accepted and paid tuition and fees. This suggests that education is A) subject to the principle of rival consumption. B) subject to the free-rider problem. C) not subject to the exclusion principle. D) a public good. Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

68) Which of the following functions of government gives property owners the incentive to use their property efficiently? A) making sure that courts are lenient on people who steal private property B) the protection of property rights C) the enforcement of antitrust legislation D) the financing of public goods Answer: B Diff: 3 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 69) Why does our government enforce antitrust legislation? A) because monopolies are known to be unfair to their stockholders B) because monopolies are known to be unfair to their employees C) because the government wants to create competition in markets in the interests of promoting efficiency D) because the government wants to create competition in markets in the interests of promoting an equal distribution of income Answer: C Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 70) Which of the following is the best example of a public good? A) inoculation against a contagious disease B) a streetlight C) garbage collection D) access to broadband networks Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

71) Why are public goods provided by the government, rather than by the private sector? A) because they are large-scale projects that require the kind of financing only governments can generate through the issuance of bonds B) because it would be difficult for a private sector firm to make a profit providing a public good, since consumers who benefit would not have to pay for it C) because no one really benefits from public goods D) because private sector firms do not have the foresight to plan for public goods Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 72) When does the free-rider problem arise? A) when someone who benefits from a good does not have to contribute to paying for it B) when a firm does not have to advertise, because its customers recommend the product to their friends C) when policymakers ignore opportunity costs in making decisions D) when production of a good generates pollution Answer: A Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 73) Which of the following would be considered an economic function of government? A) providing a legal system B) promoting competition C) providing public goods D) All of these are correct. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

74) The legal system provided by the government is necessary for the smooth working of markets because A) it keeps criminals off of the streets. B) it defines and protects property rights. C) it is set up in the U.S. constitution. D) it ensures that producers maximize their profits. Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 75) The U.S. antitrust laws A) aid monopolies in their quest to dominate the market for a good or service. B) are outdated and rarely used anymore. C) promote competition. D) are administered by the Department of Commerce. Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 76) Public goods A) are overproduced by unrestrained markets. B) are simply private goods that the government provides. C) cannot be consumed by more than one person without the degradation of the value of the good. D) can be consumed by more than one person without degradation of the value of the good. Answer: D Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 77) Public goods face the A) principle of rival consumption. B) free-rider problem. C) law of overproduction. D) exclusion principle. Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

78) Which of the following could best be categorized as a public good? A) an apartment in a public housing project B) a pumpkin pie C) public fireworks D) a race track Answer: C Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 79) The "principle of rival consumption" applies to which of the following? A) national defense B) the free-rider problem C) the exclusion principle D) a private good Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 80) The concept that a student is enjoying the benefits of police protection even though she does pays taxes is called A) the free-rider problem. B) the negative externality principle. C) the principle of rival consumption. D) the principle of anti-trust. Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Application of knowledge 81) Many nations are consistently accused of enjoying the benefits of membership in the United Nations, yet they provide few or no funds to support the organization. This is an example of A) the principle of rival consumption. B) the free-rider problem. C) the negative externality problem. D) the property rights problem. Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 65 Copyright © 2021 Pearson Education, Inc.

82) An important characteristic of private goods is A) the nonexclusion principle. B) the principle of rival consumption. C) the principle of joint consumption. D) the principle of conspicuous consumption. Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 83) The non-exclusion principle means A) no one can be excluded from the benefits of a public good, even if the person does not pay for it. B) no one can be excluded from the benefits of a private good, even if only one person pays for it. C) no one who pays for a public good can be excluded from receiving the benefits of a public good. D) people who do not pay for a public good can be excluded from receiving its benefits. Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 84) Which of the following would be classified as a public good? A) state lotteries B) telephone service C) Internet service subscription D) police protection Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 85) A characteristic of a public good is that a public good is provided A) to some businesses, but not to others. B) only in some states. C) to low income residents in some states. D) to many individuals at no additional cost. Answer: D Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

86) Receiving a voucher for an apartment in a public housing project would be an example of a good that satisfies A) the principle of rival consumption. B) the definition of a public good. C) the definition of a good with a positive externality. D) the nonexclusion principle. Answer: A Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 87) To an economist, a free rider is a person who A) uses private goods without paying for them. B) benefits from consuming public goods without paying for them. C) consumes demerit goods. D) uses the public transportation system without paying for it. Answer: B Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 88) A characteristic of a public good is A) rival consumption. B) the exclusion principle. C) the free-rider problem. D) clear property rights. Answer: C Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 89) Explain why economists consider it to be one of the economic functions of government to provide a legal system. Answer: A market economy relies heavily on contracts and property rights. Property rights must be defined and protected if people are going to make investments in resources, and if people are going to exchange assets. Contracts must also be enforced. By providing a legal system, the government can ensure that a market system will function better. Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

90) How do public goods differ from private goods? Answer: A private good is characterized by the principle of rival consumption, which means that one person's consumption of a good reduces the amount available for someone else. A public good is not characterized by the principle of rival consumption. Public goods can be used by more people at no additional cost. Further, once the good is produced, it is usually impossible, or at the very least difficult, to exclude anyone from consuming it. Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 91) Explain why public goods can be classified as market failure. Explain what problem arises when public goods are produced. Answer: When the market fails to provide certain goods and services, there is a clear case for government intervention. If left to the free market mechanism, no public goods would be provided and, as a result, there would be a clear market failure. Public goods can be used by one person without reducing availability of the good for consumption by others (non-rival) at no additional cost and once the good is produced, it is usually impossible, or at the very least difficult, to exclude anyone from consuming it (non-excludable). Due to these results, consumers can take advantage of public goods without contributing sufficiently to their creation. This is called the free rider problem. Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 92) What is the purpose of antitrust legislation? Answer: Antitrust legislation makes illegal certain economic activities. These activities involve restraining trade and inhibiting free competition among rival firms in the marketplace. The aim is to reduce the economic power of monopolies. Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 93) What is the free-rider problem, and how is it related to public goods? Answer: The free-rider problem arises from the exclusion principle. Since no one can be excluded from the benefits of a public good, even if they don't contribute towards paying for the good, people have an incentive to let other people pay for the good and to not contribute themselves. If everyone free rides, the good will not get produced. Hence, public goods usually are provided by the government and paid for by taxes. Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 68 Copyright © 2021 Pearson Education, Inc.

94) Explain why ensuring economic stability is an economics function of government. Answer: Our economy sometimes faces the problems of high unemployment and rising prices. Perhaps most importantly, the federal government attempts to guide the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By adjusting spending and tax rates (fiscal policy) or managing the money supply and controlling the use of credit (monetary policy), it can slow down or speed up the economy's rate of growth— in the process, affecting the level of prices and employment. Diff: 3 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 95) Suppose a valley periodically floods. A dam can be built in the river that would prevent the flooding. Explain how flood control provided by building the dam arguably fits the characteristics of a public good. Answer: The dam would be indivisible since it must be a certain size in order to be effective. Once flood control is provided, new homes can be protected at no additional cost. Any one home's protection does not reduce the protection from flooding for any other home. It would be impossible to exclude someone from the benefits of the flood control, so flood control arguably is a public good. Diff: 2 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 96) What are the key characteristics of a public good? Answer: A public good is not subject to the principle of rival consumption in the sense that it can be provided to different individuals without additional costs. A public good is also subject to the free-rider problem in the sense that persons can benefit from the good without paying for it. Diff: 1 Topic: 5.2 The Other Economic Functions of Government Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 5.3 The Political Functions of Government 1) By definition, a government-sponsored good A) is a good that is deemed socially desirable by the political process. B) is a good that should be available only to upper-income groups. C) is always provided at a zero price. D) does not affect society's general welfare. Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 69 Copyright © 2021 Pearson Education, Inc.

2) In the United States, which of the following is an example of a government-inhibited good? A) museums B) education C) cocaine D) sports stadiums Answer: C Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 3) In the United States, which of the following is an example of a government-sponsored good? A) wireless networks B) community college education C) cigarettes D) cable TV service Answer: B Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 4) A friend of yours receives a government voucher for an apartment in a public housing project. This apartment represents A) a government-sponsored good. B) the free-rider problem. C) a public good. D) the drop-in-the-bucket problem. Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

5) Under present U.S. law, cocaine is an example of A) a government-sponsored good. B) a capital good. C) a public good. D) a government-inhibited good. Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) Under present U.S. federal law, which one of the following is a government-inhibited good? A) housing B) medical care C) cocaine D) education Answer: C Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 7) A government-inhibited good is a good which A) is not subject to the principle of mutual exclusivity. B) the political process has deemed socially undesirable. C) can be consumed by one individual without affecting the consumption of another individual. D) the political process has deemed socially desirable. Answer: B Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) A government-sponsored good is one that A) everybody is willing to support with funding contributions. B) is inherently valuable. C) the political process has determined socially desirable. D) everybody will receive concrete benefits from. Answer: C Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

9) A government-inhibited good is one that A) cannot be individually consumed. B) would be underproduced by the private market. C) should be subsidized to correct the market failure and productive inefficiency. D) has been deemed socially undesirable via the political process. Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 10) Which of the following is a government-inhibited good? A) soft drink B) whisky C) public education D) cocaine Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) A transfer payment is a payment A) made by the government to its current workers. B) associated with items exported to other nations. C) for in-kind services provided to the government. D) for which no services or goods are rendered. Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

12) Which of the following is a transfer payment? I. Social Security II. Unemployment benefits A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 13) An example of an in-kind transfer is A) income tax. B) Social Security. C) low-cost public housing. D) unemployment benefits. Answer: C Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) Money payments made by governments to individuals for which no services or goods are concurrently rendered are known as A) transfer payments. B) government-sponsored payments. C) government-inhibited payments. D) black market payments. Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

15) Examples of transfer payments are A) wages, profits, and rents. B) Social Security checks and unemployment insurance payments. C) salaries of educators, police, and firefighters. D) federal government spending for national defense. Answer: B Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 16) Which of the following does NOT involve transfers in kind? A) public housing B) food stamps C) Medicare D) income tax refund Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) A political function of government is to A) encourage the consumption of government-sponsored goods. B) provide public goods. C) correct for externalities. D) encourage the workings of the price system. Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

18) Which of the following is a political function of government but is NOT a central economic function? A) determining who has a right to vote B) determining government-sponsored and government-inhibited goods C) providing a legal system to adjudicate property rights D) redistributing income from some individuals to others Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 19) A government-sponsored good is one that A) is desirable to no one but ruled desirable by the court system nonetheless. B) everyone agrees is socially desirable. C) freely competitive markets have determined is socially desirable. D) the political process has determined is socially desirable. Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 20) If a nation's government determines that consumption of cigarettes should be discouraged, then this means that the government has judged cigarettes to be a(n) A) government-sponsored good. B) exclusive good. C) government-inhibited good. D) public good. Answer: C Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

21) A government-inhibited good is one that A) the political process has determined is socially undesirable. B) the political process has determined is socially desirable. C) freely competitive markets have determined is socially desirable. D) we want to encourage the consumption of. Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 22) A payment that is made by the government for which no goods or services are given in return is known as A) a public good. B) a transfer payment. C) a negative externality. D) a free rider. Answer: B Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 23) If a government determines that the provision of services by museums should be encouraged, then this means that the government has judged museum displays to be a(n) A) government-sponsored good. B) exclusive good. C) government-inhibited good. D) public good. Answer: A Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

24) Establishing rules for voter registration is an example of a(n) A) economic function of government. B) political function of government. C) public good. D) transfer payment. Answer: B Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 25) A government-inhibited good is often A) produced by the government. B) subsidized. C) taxed. D) advertised. Answer: C Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 26) A government-sponsored good is often A) inhibited by the government. B) subsidized. C) taxed. D) advertised. Answer: B Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27) Which of the following is NOT an example of a transfer payment? A) Social Security B) unemployment benefits C) welfare D) interest payments on government bonds Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 77 Copyright © 2021 Pearson Education, Inc.

28) Which of the following is NOT related to the government's political function of income redistribution? A) providing money transfer payments B) excise tax on cigarettes C) Social Security D) in-kind transfers Answer: B Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 29) Which of the following types of goods would least likely be classified as a governmentinhibited good? A) heroin B) marijuana C) tobacco D) soft drink Answer: D Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 30) Examples of transfers-in-kind include A) tax rebates on both the federal and state levels. B) taxes on alcohol and tobacco. C) food stamps. D) foreign aid. Answer: C Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

31) What type of policy does the government adopt in dealing with government-inhibited goods? A) It subsidizes their consumption. B) It subsidizes their production. C) It provides them as public goods. D) It taxes, regulates, or prohibits their use. Answer: D Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 32) A public museum is an example of a A) government-sponsored good. B) public good. C) good which generates a positive externality. D) good which generates a negative externality. Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33) Which of the following checks issued by the government represents a transfer payment? A) The federal government pays a defense contractor for development of a missile system. B) The federal government pays a retiree her Social Security benefits. C) The state of Oregon pays a construction firm for its work in repairing a state highway. D) The state of Illinois pays groundskeepers at the state capitol building their weekly wages. Answer: B Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 34) Government-sponsored goods are those goods A) that society views desirable through the political process. B) that companies give away as promotional prizes. C) that have lower than average negative externality. D) that only low-income individuals consume. Answer: A Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 79 Copyright © 2021 Pearson Education, Inc.

35) An example of a transfer payment is A) the President's salary. B) unemployment insurance benefits. C) a payment to a defense contractor. D) court costs paid by the defendants in a law suit. Answer: B Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 36) Which of the following is NOT an example of a transfer payment? A) unemployment compensation B) food stamps C) government salaries D) Social Security benefits Answer: C Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 37) Jason receives $20,000 per year from the federal government because he is disabled. This is a A) demerit good. B) transfer payment. C) non-rival good. D) free rider problem. Answer: B Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

38) How does the government carry out income redistribution? Answer: Income redistribution can be carried out by a combination of progressive taxation and transfer payments. Transfer payments are money payments made by the government to people for which no goods or services are rendered. Transfers can also be "in-kind," that is, in the form of a good or service. Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 39) According to the textbook, what are the two key political functions of government in a market economy? Answer: The two functions of government that are political rather than economic include (1) the regulation and provision of government-sponsored and government-inhibited goods, and (2) income redistribution. Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 40) How does a government-sponsored good differ from a public good? Answer: A public good is characterized by the fact that consumption is not rival and by the presence of the free-rider problem. Government-sponsored goods are private goods that the political process has deemed desirable. Diff: 2 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) Is there any common characteristic shared by government-inhibited goods and governmentsponsored goods? Explain briefly. Answer: Government-inhibited and government-sponsored goods do not have any inherent characteristics that qualify them as such; instead, through the political process, people collectively make judgments about which goods and services are "good" for society and which are "bad." Diff: 1 Topic: 5.3 The Political Functions of Government Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

5.4 Public Spending and Transfer Programs 1) As a share of total national income, government spending generally has A) been constant over the last 50 years. B) increased over the last 50 years. C) decreased over the last 50 years. D) increased until 25 years ago, and then decreased steadily. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 2) Social Security and Medicare are examples of A) capitalism. B) free market functions. C) market failures. D) governmental interventions. Answer: D Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 3) According to your text, which of the following represents the largest source of tax receipts for the Federal government? A) sales taxes B) individual income taxes C) corporate income taxes D) property taxes Answer: B Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

4) Government payment of a per-unit subsidy for health care services causes A) the health care market supply curve to shift upward. B) the health care market demand curve to shift downward. C) a reduction in the price that health care service providers receive for each unit of care provided. D) an increase in the quantity of health care services demanded above the quantity demanded in the absence of the subsidy. Answer: D Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 5) Recipients of Medicare tend to demand a greater quantity of low-value, high-cost services because A) the services are readily available. B) recipients are coerced into demanding such services. C) the government mandates that they demand such services. D) the services are heavily subsidized. Answer: D Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) The current Medicare system is designed so that it actually encourages A) cost reductions. B) higher costs of medical services. C) higher costs only for preventive medical checkups. D) lower drug costs for recipients. Answer: B Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

7) Government payment of a per-unit subsidy for health care services causes the out-of-pocket price that consumers pay for care to be A) less than the price that health care providers receive for providing care. B) greater than the price that health care providers receive for providing care. C) greater than the market clearing price without the subsidy. D) equal to zero. Answer: A Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 8) Compared with the market clearing price of a health care service covered by Medicare, the Medicare program pays a ________ price to health care providers and charges a ________ price to consumers. A) lower, lower B) lower, higher C) higher, lower D) higher, higher Answer: C Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) The goal of Medicare is to A) help the poor and indigent pay their hospital bills. B) prevent poverty in urban cities. C) subsidize medical expenses for the elderly. D) subsidize costs incurred by doctors. Answer: C Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

10) Subsidies paid to the health care industry for Medicare patients are paid by A) Congress. B) the Teamsters union. C) current taxes. D) the Federal Reserve. Answer: C Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) Public education is priced below market price largely as a result of A) government subsidy programs. B) under-funded public education. C) rising test scores by students. D) taxpayers who contribute little to the funding of public education. Answer: A Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) All of the following are major sources for financing public education EXCEPT A) income taxes. B) sales taxes. C) property taxes. D) government fees. Answer: D Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

13) When state and local governments provide public schools with a per-unit subsidy to provide educational services, the price that the schools providing these services receive is A) less than the price that consumers pay to receive educational services. B) less than the amount of the per-unit subsidy that the schools receive. C) greater than the market clearing price without the subsidy. D) equal to zero. Answer: C Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) According to your text, one reason for flat or falling achievement scores even in the face of substantially higher education subsidies may be that A) the additional funds are being siphoned off by dishonest school board members. B) some of the funds are going to social services rather than to enhance learning activities. C) students are so unmotivated that no amount of spending will ever improve scores. D) most parents do not support the schools or their children's educational activities. Answer: B Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) One reason the Medicare system costs so much is A) the amount of medical services is determined by the equilibrium of supply and demand. B) the supply of medical services does not respond to price changes. C) supply and demand analysis does not apply. D) beneficiaries are entitled to receive services for which the per-unit cost exceeds their own personal out-of-pocket payment. Answer: D Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

16) Which of the following is a major reason why the Medicare program is in such financial trouble? A) Workers are not paying enough into the program. B) The government set reimbursement rates too high. C) Because medical services are subsidized by the government, both consumption by the elderly and the cost of services have increased. D) There is a shortage of medical school applicants. Answer: C Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) The major economic effect of Medicare subsidies is A) that the number of physicians has decreased since compensation is low. B) to increase the price of medical services and reduce the quantity demanded. C) to increase the price of medical services and increase the quantity demanded. D) to lower the price of medical services and reduce the quantity demanded. Answer: C Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 18) Medicare subsidies will cause people to A) perceive the price they pay per unit of medical services to be lower than the price received by the provider. B) perceive the price they pay per unit of medical services to be higher than the price received by the provider. C) perceive the price they pay per unit of medical services to be exactly equal to the price received by the provider. D) demand fewer services. Answer: A Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

19) Medicare subsides will cause people to A) consume less medical services than in the absence of the subsidies. B) consume more medical services than in the absence of the subsidies. C) consume the same amount medical services as they would if there were no subsidies. D) be sicker because of inferior care. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

20) Refer to the above figure. Medicare subsidies have increased the price of medical services to Ps. The perceived price on the part of consumers is A) Ps. B) P0. C) Pd. D) undetermined without more information. Answer: C Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

21) Refer to the above figure. Medicare subsidies have increased the price of medical services to Ps. The quantity demanded of medical services is A) QM. B) Q0. C) Qd. D) undetermined without more information. Answer: A Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 22) In the above figure, the total dollar amount of the Medicare subsidies provided by the government is equal to A) the difference between Ps and P0 multiplied by QM. B) the difference between Ps and Pd multiplied by QM. C) the difference between P0 and Pd multiplied by Qd. D) the difference between Ps and Pd multiplied by Q0. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 23) Refer to the above figure. Medicare subsidies have increased the price of medical services to Ps. Which of the following statements is TRUE about the effect the Medicare subsidy has had on the consumption of medical services? A) The amount of medical services provided has decreased from Q0 to Qd as a result of the subsidy. B) The amount of medical services provided has increased from Q0 to QM as a result of the subsidy. C) The amount of medical services provided has increased from Qd to QM as a result of the subsidy. D) The amount of medical services provided has remained unchanged as a result of the subsidy. Answer: B Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

24) In the above figure, if a Medicare subsidy that had previously been paid by the government has now been eliminated, the result will be A) an increase in the price received by producers, from P0 to Ps. B) a decrease in the price received by producers, from Ps to P0. C) an increase in the price paid by consumers, from P0 to Ps. D) a decrease in the price paid by consumers, from Ps to P0. Answer: B Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 25) Refer to the above figure. In the absence of a subsidy, A) Qd would be demanded and QM would be supplied. B) the price Pd would be charged and quantity QM demanded. C) the quantity Qo and price Po would prevail in the market. D) None of these is correct. Answer: C Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 26) The funding of public education is A) a private program. B) a subsidy program. C) done by voluntary contributions. D) provided by Social Security. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

27) Which of the following statements about public education is TRUE? A) Over the last 40 years, there has been an increase in spending for public education, while there has not been a significant increase in performance. B) Over the last 40 years, there has been a decrease in public spending for public education, while there has not been a significant increase in performance. C) Most of the increases in public spending on public education have gone into programs that have increased student learning. D) Over the last 40 years there has been no decline in any of the measures of student performance in public education. Answer: A Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 28) If the government pays a per-unit subsidy to the producer of a service, we would expect to see a(n) I. increase in the quantity demanded. II. decrease in the out-of-pocket price paid by consumers. III. increase in the quantity supplied by producers. A) I only B) both I and II only C) both II and III only D) I, II, and III Answer: D Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 29) Over the past 50 years, there has been an increase in spending on public education without a noticeable improvement in student performance. One explanation given by economists on why student performance has not improved is that A) not enough funds have been spent on public education. B) schools are providing high-priced services that are not valued by parents. C) the quantity of educational services has not increased beyond the pre-subsidy equilibrium. D) there is too much competition for educational services. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

30) In public education, the value of the services provided is A) greater than the value that parents and students place on the services. B) equal to the value that parents and students place on the services. C) less than the value that parents and students place on the services. D) zero since they are a public good. Answer: A Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 31) Measures of student performance have not increased even though per-pupil government subsidies have increased because A) there is a need for more funds to be spent. B) we have declining enrollment in public schools. C) parents and children value the last unit of educational services received more than the cost. D) parents and children value the last unit of educational services received less than the cost. Answer: D Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 32) By subsidizing the provision of public education, the government A) generates an increase in the quantity of educational services demanded. B) pushes the per-unit price that consumers pay for educational services below the market clearing price. C) pushes the per-unit price that producers of educational services receive above the market clearing price. D) All of these. Answer: D Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

33) Government outlays include all of the following EXCEPT A) dividend payments. B) spending on the military. C) electricity for the Capital Building. D) letterhead stationery. Answer: A Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 34) Government spending as a percent of national income A) peaked during the Nixon administration. B) peaked during World War II. C) has been steadily climbing since 1900. D) has been almost constant this century. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 35) The largest spending category for state governments is A) welfare. B) border patrol. C) education. D) highway construction. Answer: C Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

36) What effect have Medicare subsidies had on the consumption of medical services? A) The consumption of medical services has been unaffected, because people don't consider the financial cost when seeking services related to their health. B) The consumption of medical services has been unaffected, because government restrictions have prevented patients from seeking a level of care above and beyond what they would choose if they had to pay for medical treatment out of pocket. C) The consumption of medical services has increased because Medicare subsidies give people the incentive to seek more care than they would otherwise. D) The effect cannot be measured because it is difficult to quantify the amount of resources devoted to our health care system. Answer: C Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 37) How have some patients been harmed by Medicare reimbursement caps? A) They have been discharged from the hospital too soon, so that the hospital can cut costs. B) They have been kept in the hospital too long, so that the hospital can get a higher reimbursement amount. C) They have had to undergo unnecessary procedures, so that the hospital can get a higher reimbursement amount. D) They have had to wait too long for essential procedures. Answer: A Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 38) Public schools A) allow students to get an education without incurring any opportunity cost. B) provide education at a price below the market price. C) provide education at a price above the market price. D) have done a better job of educating their students in science, math, reading, and writing as the subsidies they receive have increased over the years. Answer: B Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

39) Economically speaking, the design of Medicare A) encourages the consumption of medical services. B) discourages the consumption of medical services. C) helps to decrease the cost of care to non-Medicare patients. D) discourages the provision of medical services. Answer: A Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 40) Medicare is an example of a third-party payment for medical services that A) causes providers to supply less of medical services than they would without the payment. B) causes buyers to consume more of medical services than they would without the payment. C) does not cause any change in the equilibrium position for medical services which existed without the subsidy. D) causes the price of medical services to rise for the consumer once the payment is provided. Answer: B Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) The economic problem with Medicare financing is that A) there is a built-in incentive to provide fewer services by doctors. B) there is a built-in incentive to travel to Canada to receive medical services. C) the cost of providing services is falling annually. D) there is a built-in incentive to consume more services. Answer: D Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

42) Which of the following is NOT a consequence of the introduction of the Medicare program? A) an increased quantity of medical services demanded B) an increased ability for the elderly to obtain medical services C) an increased ability for the poor to obtain medical services D) a reduced demand for medical services Answer: D Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 43) The government's policy of reducing payments for physicians' services has generated a relative A) increase in the number of physicians in the program. B) reduction in the number of physicians in the program. C) reduction in the demand for medical services. D) increase in the income of the physicians remaining in the program. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 44) The total amount that the U.S. government spends to support a covered type of health care service under the Medicare system equals A) the per-unit subsidy provided to producers of that service times the quantity of the service demanded by consumers at a below-equilibrium out-of-pocket price of the service. B) the per-unit subsidy provided to producers of that service times the equilibrium quantity of the service demanded at the market clearing price that would arise in the absence of Medicare. C) the below-equilibrium, out-of-pocket price that consumers pay for the service times the quantity of the service provided by producers at that out-of-pocket price. D) the below-equilibrium, out-of-pocket price that consumers pay for the service times the quantity of the service demanded by consumers at that out-of-pocket price. Answer: A Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

45) The amount of government spending on education per public school student has ________ since 1960, and the achievement level of students has generally ________ since that time. A) increased; increased B) decreased; decreased C) increased; decreased D) decreased; increased Answer: C Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 46) Medicare A) subsidizes the care of older people, which gives them NO incentive to consume more medical services. B) subsidizes the care of older people, which gives them an incentive to consume more medical services. C) subsidizes the care of young people, which gives them an incentive to consume less medical services. D) subsidizes the care of middle aged people, which gives them an incentive to consume more medical services. Answer: B Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 47) Which of the following is NOT a transfer payment? A) Medicare B) Social Security retirement payments C) Social Security disability payments D) spending on national defense Answer: D Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

48) Which of the following is heavily subsidized by state and local governments? A) Medicare B) Social Security C) public education D) food stamps Answer: C Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 49) What happens in public schools when government funds subsidize education? A) There is a shortage of schools. B) The quality of education rises. C) The cost of providing the education is less than what the student pays. D) The cost of providing the education is more than what the students pays. Answer: D Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 50) If public subsidies for education were eliminated, what would you expect as an outcome in the market for educational services? A) More students would enroll in school. B) The price students pay to attend school would equal the value of an additional unit of education consumed. C) There would be no correlation between the price students pay and the cost of providing the educational services. D) The quality of education would deteriorate. Answer: B Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

51) Medicare and Social Security are examples of A) transfer payments. B) public goods. C) programs that do not respond to rational economic incentives. D) a free market system. Answer: A Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 52) What is one result of the Medicare subsidy? A) The health care industry is more efficient than it otherwise would be. B) Patients may elect to have some treatments that are of low value to them but that are costly to provide. C) The elderly population in the United States receives a lower quality of medical care than what is provided for the elderly population in other countries. D) The number of physicians in the United States has declined. Answer: B Diff: 3 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 53) Public elementary and high school education in the United States is provided A) as a free good. B) as a subsidized good. C) at the market clearing price. D) in an amount less than the equilibrium quantity. Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

54) Public education in the United States is A) subsidized mainly by state and local governments. B) funded by the federal government only. C) paid for mostly by the parents of students. D) paid for through the Social Security program. Answer: A Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 55) Which of the following is the largest component of federal spending today? A) income security B) Social Security C) Medicare D) national defense Answer: B Diff: 1 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 56) Use the concept of supply and demand to explain why an increase in Medicare subsidies can lead to an increase in health care spending by the government. Answer: Medicare reduces the price that the elderly people have to pay for health services, so that an increase in the subsidy will lead to an increase in the quantity demanded of health services. As a result, the government ends up paying more in total health care spending. Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 57) Briefly explain why government subsidies are a reason for the declining student performance in public education. Answer: This is due to the incentive problems of government subsidies in public education. Many public schools may face little or no competition from unsubsidized education providers, and they may provide subsidized services but contribute little to student learning. Diff: 2 Topic: 5.4 Public Spending and Transfer Programs Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

5.5 Collective Decision Making: The Theory of Public Choice 1) One major characteristic of the price system is that A) consumers together are the ones who ultimately decide what is produced. B) individual sellers ultimately decide what is produced in the market. C) competition among sellers is reduced. D) all exchanges are regulated by the government. Answer: A Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 2) The theory of public choice deals primarily with A) collective decision making. B) individual decisions in a free market. C) government actions that do not reflect the preferences of consumers. D) how government regulations affect the decisions of individual consumers. Answer: A Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 3) One key assumption of the theory of public choice is that individuals A) are always in favor of the collective well-being of the public instead their own well-being. B) are always concerned about the well-being of other individuals in society. C) act differently between the public sector and the market sector. D) act within the political process to maximize their individual well-being. Answer: D Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

4) When comparing market and public sector decision making, which statement is NOT true? A) Self-interest is the motivating force in each decision making arena. B) In both decision making sectors, majority rule is how things are done. C) In both decision making sectors, there are scarcity constraints. D) Collective (political) outcomes and economic outcomes may differ. Answer: B Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 5) All of the following are assumptions of both market and public-sector decision making EXCEPT: A) Decisions are based on majority rule. B) Decisions are motivated by individuals' self-interest. C) Opportunity costs exist in decisions. D) Choices reflect incentives faced by decision makers. Answer: A Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) Which of the following is FALSE about public-sector decision making? A) Decisions are based on majority rule. B) The price charged to consumers is often less than its full opportunity cost. C) Decisions involve no opportunity cost. D) Incentives play a role in decision making. Answer: C Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

7) An important assumption in the theory of public choice is that A) individuals will act within the political process to maximize their individual well-being. B) individuals will act within the political process to maximize their collective well-being. C) individuals will only operate outside the political process when their well-being is involved. D) scarcity does not exist in the government sector. Answer: A Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) In which of the following ways is the private market sector similar to the public sector in terms of decision making? A) Prices determine the demand for goods and services in each sector. B) There is competition for scarce resource in both sectors. C) Both sectors may use a type of "force" if necessary. D) Votes by individual voters are basically equal in importance with dollars spent by individuals on goods. Answer: B Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) Which of the following characterizes the largest difference between the way decisions are made in the private sector versus the public sector? A) The incentive system for individuals to perform efficiently are vastly different. B) The workers themselves are really quite different types of people. C) In both sectors individuals will try to maximize their own individual gains over the gains of others. D) Costs and resources are vastly different in each sector. Answer: A Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

10) Government goods are provided to the consumer at a zero price. This means that A) the cost to society is zero. B) the political system is run by proportional rule. C) people are getting something for nothing. D) the cost of the goods is the value of the resources used to produce the good. Answer: D Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) Which of the following is TRUE about the political and market systems of voting? A) The political voting system functions according to proportional rule, while the market voting system functions according to majority rule. B) The political voting system functions according to majority rule, while the market voting system functions according to proportional rule. C) The political voting system functions according to minority rule, while the market voting system functions according to majority rule. D) The political system and the market system are identical. Answer: B Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) What is the assumption underlying public-choice theory? A) Elected officials believe in cooperating with one another and they seek to avoid competition among themselves. B) The costs and benefits of being efficient are the same whether one is in the private sector or in the public sector. C) Individuals act within the political process to improve their own individual well-being. D) Resources in the public sector are not scarce. Answer: C Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

13) The theory of public choice suggests that A) government agencies tend to be inefficient because the people running them do not understand the concept of opportunity cost. B) government agencies tend to be inefficient because they are subject to institutional arrangements in which managers do not have an incentive to be efficient. C) the goods provided by government, whether public or private goods, are not scarce. D) you can lower your tax bill if you are careful not to consume too many government resources, regardless of what your neighbors do. Answer: B Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) A difference between the market and the public sector is that A) scarcity exists only in the market sector. B) government can use force, while the market does not. C) we can only vote in the public sector. D) the cost of private goods to society is zero. Answer: B Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) The theory of public choice A) is the theory of how government decides on what military hardware to purchase. B) considers government decision-making efficient. C) is the study of collective decision making. D) is the study of how negative externalities can be reduced. Answer: C Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

16) Scarcity of resources A) affects both market and public sector decision making. B) affects market, but not public sector decision making. C) affects public sector, but not market decision making. D) is really not an issue in such a wealthy nation as the United States. Answer: A Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) The market and public sector are similar in that A) there is competition among the participants in both sectors. B) the resources used in both sectors are scarce. C) the participants in both sectors react to incentives. D) All of these are true. Answer: D Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 18) A difference between the market and the public sector is that A) competition exists only in the market sector. B) resources are only scarce for the market sector. C) decision making is by majority rule in the public sector but not in the market sector. D) only the public sector produces private goods. Answer: C Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 19) The incentive structure is a A) system of rewards and punishments that individuals consider when making decisions. B) system determined by the federal government that gives certain states more federal funds. C) system of infrastructure in the United States that improves commerce. D) system of checks and balances in the government. Answer: A Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 106 Copyright © 2021 Pearson Education, Inc.

20) If U.S. consumers increase their spending on electric cars by 10 percent, and 10 percent more electric cars are produced, this is known as the A) majority rule. B) proportional rule. C) government rule. D) profit rule. Answer: B Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 21) Briefly explain the similarities and differences of decision making by the market sector and the public sector. Answer: The similarities of the two sectors include the presence of opportunity costs, competition by serving individual interests, and an incentive structure. The main differences between decisions by the two sectors are that the public sector often makes decisions on goods at zero price, by use of force, and by a majority voting system instead of "dollar votes." Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 22) List and explain the four key assumptions in the theory of public choice. Answer: The key assumptions in the theory of public choice are (1) individuals are motivated by self-interest, which implies individuals will act within the political process to maximize their individual (not collective) well-being, (2) opportunity costs exist, which means every government action has an opportunity cost, (3) competition is present, which implies elected representatives will always be in competition for available government funds and (4) individuals in government face an incentive structure, which means if a bureaucrat provides poor representation, the organization's owners—the taxpayers—have no immediate mechanism for expressing their dissatisfaction. Diff: 1 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

23) What are the voting rules followed by the political system as opposed to the market system? Answer: In the political system, one person gets one vote, while in the market system, each dollar that a consumer spends counts separately. The political system is run by majority rule, while the market system is run by proportional rule. In the market system, the spending of dollars indicate intensity of want, while this is not the case in the political system due to its all-ornothing nature. Diff: 2 Topic: 5.5 Collective Decision Making: The Theory of Public Choice Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 6 Funding the Public Sector 6.1 Paying for the Public Sector: Systems of Taxation 1) The fact that every dollar that the government spends or transfers must ultimately be provided by the taxes and user charges it collects plus government borrowing is known as the A) government balance sheet constraint. B) government budget constraint. C) tax collection constraint D) user charge constraint. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 2) The government budget constraint implies that A) government borrowings = government spending + transfers - taxes and user charges. B) government borrowings = taxes and user charges + government spending - transfers C) government spending = transfers - taxes and user charges - government borrowing. D) government spending = government borrowing - transfers - taxes and user charges Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 3) How do taxation and user charges compare as government revenue sources? A) Each generates about the same amount of government revenue. B) Revenues from taxation are much greater than revenues from user charges. C) User charges generate much more revenue than do taxes. D) We don't know because the government does not publish revenue figures broken down. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

4) Over the long run, a government's fundamental source of revenues is A) printing money. B) user fees and taxes. C) exports. D) issuing bonds. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 5) The main source of government funding is A) interest earned from holding bonds. B) taxes. C) borrowing. D) transfer payments. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 6) The sum of public spending on goods and services and transfer payments during a given period cannot exceed tax revenues plus borrowed funds. This is the statement for A) ad valorem taxation. B) an excise tax. C) a sales tax. D) the government budget constraint. Answer: D Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 7) All of the following are possible funding sources for the government EXCEPT A) user charges. B) taxes. C) earnings from investing in company stock shares. D) borrowing. Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

8) Over the long run, the fundamental funding sources for the government include A) borrowing. B) transfers between government agencies. C) taxes. D) lending. Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 9) According to the government budget constraint, any excess of public expenditures and transfers over taxes and user fees must be funded by A) private borrowing. B) government borrowing. C) U.S. Treasury money creation. D) Federal Reserve money creation. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 10) Of the following, which is the largest source of government funds in the long run? A) government borrowing B) money creation C) user fees D) taxation Answer: D Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 11) The marginal tax rate shows A) the percentage of income which a typical family pays in tax. B) the average rate of taxation in the economy. C) the deductions which are permitted for child care and medical expenses. D) the extra tax due on an extra dollar of income. Answer: D Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

12) The marginal income tax rate is equal to A) the total tax payment divided by total income. B) the change in the tax payment divided by the change in income. C) the average tax payment divided by the total tax payment. D) the percent of total income that goes to taxes. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 13) The marginal income tax rate applies to A) all income earned by a family. B) the income in the highest tax bracket reached. C) the income of the highest income U.S. taxpayers. D) the income received by people above the national average. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 14) Suppose the income tax rate is 0 percent on the first $10,000; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on all income above $70,000. Family X has income of $100,000 while Family Y has income of $40,000. The marginal tax rates faced by the two families are A) 40 percent on X and 10 percent on Y. B) 40 percent on X and 20 percent on Y. C) 30 percent on X and 20 percent on Y. D) 30 percent on X and 30 percent on Y. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

15) Suppose the tax rate on the first $10,000 of income is 0 percent; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on income over $60,000. Family X has an income of $55,000. What is the tax liability of Family X? A) $16,500 B) $6,600 C) $7,500 D) $3,400 Answer: C Diff: 3 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 16) Suppose the income tax rate schedule is 0 percent on the first $10,000; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on any income over $70,000. Family A earns $28,000 a year and Family B earns $65,000 a year. Both receive a ten percent raise. What is the marginal tax rate of each and what is the extra tax paid by each after the raise? A) Family A: 10 percent marginal tax rate and $280 in extra taxes; Family B—30 percent marginal tax rate and $1950 in extra taxes. B) Family A: 10 percent marginal tax rate and $420 in extra taxes; Family B—30 percent marginal tax rate and $2275 in extra taxes. C) Family A: 20 percent marginal tax rate and $360 in extra taxes; Family B—40 percent marginal tax rate and $2100 in extra taxes. D) Family A: 20 percent marginal tax rate and $560 in extra taxes; Family B—40 percent marginal tax rate and $2600 in extra taxes. Answer: C Diff: 3 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 17) Suppose the tax rate on the first $10,000 income is 0 percent; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $30,000; and 40 percent on any income over $80,000. Family X has income of $50,000. What is the marginal and average tax rate for Family X? A) marginal—10 percent; average—12 percent B) marginal—20 percent; average—12 percent C) marginal—25 percent; average—15 percent D) marginal—15 percent; average—25 percent Answer: B Diff: 3 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

18) Suppose the tax amount on the first $10,000 income is $0; $2000 on the next $20,000; $4000 on the next $20,000; $6000 on the next $30,000; and 40 percent on any income over $80,000. Family A has income of $30,000 and Family B has income of $80,000. What is the marginal and average tax rate for each family? A) Family A: marginal—10 percent; average—6.7 percent; Family B: marginal—20 percent; average—15 percent. B) Family A: marginal—10 percent; average—20 percent; Family B: marginal—30 percent; average—23 percent. C) Family A: marginal—10 percent; average—10 percent; Family B: marginal—40 percent; average—40 percent. D) Family A: marginal—10 percent; average—15 percent; Family B: marginal—40 percent; average—20 percent. Answer: A Diff: 3 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 19) The marginal tax rate and the average tax rate are the same under a A) progressive income tax system. B) regressive income tax system. C) proportional income tax system. D) None of these Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 20) A tax rate system characterized by higher marginal tax rates as income increases is known as A) a progressive tax system. B) a regressive tax system. C) a proportional tax system. D) a flat-rate tax system. Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

21) Assume a family that earns $20,000 pays $1,000 in income taxes, while a family that earns $40,000 pays $3,750 in income taxes. In this situation, the income tax system is A) progressive. B) regressive. C) proportional. D) one of these, but we cannot tell which one without more information. Answer: A Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 22) Assume a family that earns $20,000 pays $2,000 in income taxes, while a family that earns $40,000 pays $3,000 in income taxes. In this situation, the income tax system is A) progressive. B) regressive. C) proportional. D) one of these, but we cannot tell which one without more information. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 23) An example of a regressive tax is the A) corporate income tax. B) personal income tax. C) Social Security tax. D) state inheritance tax. Answer: C Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 24) If the marginal tax rate is less than the average tax rate, the tax system is A) progressive. B) proportional. C) regressive. D) flat. Answer: C Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

25) In a proportional income tax system, A) marginal tax rates are the same regardless of the level of taxable income. B) marginal tax rates increase as the level of taxable income increases. C) marginal tax rates decline as the level of taxable income declines. D) everyone pays the same dollar amount in taxes. Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 26) A tax system that applies a lower marginal tax rate at higher levels of income is A) progressive. B) regressive. C) proportional. D) flat. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 27) A "flat tax" on personal income, in which the same tax rate is applied to every dollar of income earned by each taxpayer, is an example of A) a regressive tax. B) a proportional tax. C) a progressive tax. D) a value-added tax. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 28) The average tax rate can be calculated by which of the following formulas? A) the change in taxes due divided by the change in taxable income B) the change in taxable income divided by the change in taxes due C) total taxes due divided by total taxable income D) total taxable income divided by total taxes due Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

29) The marginal tax rate can be calculated by which of the following formulas? A) the change in taxes due divided by the change in taxable income B) the change in taxable income divided by the change in taxes due C) total taxes due divided by total taxable income D) total taxable income divided by total taxes due Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 30) Suppose that in the economy of Idaho, Amy earns an income of $50,000 a year and pays $10,000 in income taxes; Bailey earns an income of $25,000 a year and pays $8,000 in income taxes. Based on this information, we could say that Idaho's tax system is A) proportional. B) progressive. C) regressive. D) flat. Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 31) The federal income tax code of the United States is A) progressive. B) proportional. C) regressive. D) progressive for individuals but proportional for married couples. Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 32) Advocates of a progressive income tax use arguments EXCEPT for which of the following? A) A progressive tax system taxes according to ability to pay. B) A progressive tax system taxes according to benefits received. C) A progressive tax system helps redistribute income away from the rich and towards the poor. D) A progressive tax system maximizes government revenues. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

33) Under a progressive income tax system, the marginal income tax rate paid by taxpayers A) declines as their incomes increase. B) rises as their incomes increase. C) is unchanged as their incomes increase. D) is unrelated to their incomes. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 34) The average tax rate is defined as A) total tax due/change in taxable income. B) total tax due/total taxable income. C) change in taxes due/change in taxable income. D) change in taxes due/total taxable income. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 35) The marginal tax rate is A) total tax due/change in taxable income. B) total tax due/total taxable income. C) change in taxes due/change in taxable income. D) change in taxes due/total taxable income. Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 36) A tax system in which the average and marginal tax rates are the same for every level of taxable income and every change in income is an example of A) regressive taxation. B) proportional taxation. C) progressive taxation. D) premium taxation. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

37) In a progressive tax system, A) the marginal tax rate and the average tax rate are the same for every income level and the same as income increases. B) the marginal tax rate increase as income increases but the average tax rate does not change as income increases. C) the marginal tax rate and the average tax rate increase as income levels increase and the marginal tax rate exceeds the average tax rate. D) the marginal tax rate and the average tax rate decrease as income levels increase and the marginal tax rate is less than the average tax rate. Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 38) The tax base is A) the minimum amount of tax revenue that government must collect each year. B) the maximum amount of tax revenue that government must collect each year. C) the sum of all incomes earned in the United States. D) the value of all goods, services, incomes, or wealth subject to taxation. Answer: D Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 39) The U.S. Social Security tax is an example of a A) progressive tax. B) proportional tax. C) premium tax. D) regressive tax. Answer: D Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

40) Homer earns $10,000 per year. Each year he spends $5,000 and saves $5,000. He pays a 5 percent sales tax on all of his spending. Assuming the sales tax is the only tax he pays, his average tax rate out of his income is A) 0 percent. B) 2.5 percent. C) 3.5 percent. D) 5.0 percent. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 41) In a progressive income tax system, A) the marginal tax rate exceeds the average tax rate. B) the average tax rate exceeds the marginal tax rate. C) high income earners pay a lower percentage of their income in taxes than do low income earners. D) the tax rate depends solely on how long an individual has been in the labor force. Answer: A Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 42) Jose earns $160,000 per year and Jackie earns $80,000 per year. They both pay the same price to buy an identical SUV and each pays $1,500 in sales tax. In relation to their relative incomes, this is an example of a A) regressive tax. B) progressive tax. C) proportional tax. D) marginal tax. Answer: A Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge

43) Jamal earns $150,000 per year and Josephina earns $80,000 per year. If Jamal pays $15,000 in income taxes and Josephina pays $8,000 in income taxes, the income tax system would be A) regressive. B) progressive. C) proportional. D) marginal. Answer: C Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge

44) Using the above figure, which of the lines in the above diagram represents a proportional tax? A) A B) B C) C D) none of them Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

45) Using the above figure, which of the lines in the above diagram represents a progressive tax? A) A B) B C) C D) none of them Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 46) Using the above figure, which of the lines in the above diagram represents a regressive tax? A) A B) B C) C D) none of them Answer: C Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 47) Jose earns $150,000 per year and Josephina earns $80,000 per year. If Jose pays $15,000 in income taxes and Josephina pays $5,000 in income taxes, the income tax system would be A) regressive. B) progressive. C) proportional. D) marginal. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 48) The Social Security tax is considered to be a A) regressive tax. B) progressive tax. C) proportional tax. D) marginal tax. Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

49) Another name for a "flat-rate tax" in which the same tax rate applies to all income earners is a A) proportional tax. B) progressive tax. C) regressive tax. D) passive tax. Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 50) Assume that Mrs. Doe's income increased from $50,000 last year to $55,000 this year and that she paid an additional $2,000 in taxes. This would indicate that her marginal tax rate is A) 2 percent. B) 3.6 percent. C) 36 percent. D) 40 percent. Answer: D Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 51) If a tax system is progressive, then A) the average and the marginal tax rates are equal. B) the marginal tax rate is greater than the average tax rate as income rises. C) the marginal tax rate is lower than the average tax rate as income rises. D) the average tax rate is constant, but the dollar amount paid in taxes increases as income increases. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 52) The marginal tax rate is A) the sum of all individual tax rates. B) the total taxes paid as a percentage of total income. C) the average tax rate paid by both individuals and corporations. D) the increase in taxes as a percentage of the increase in income. Answer: D Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 15 Copyright © 2021 Pearson Education, Inc.

53) When income is $15,000, the amount of income taxes owed is $1,500; when income increases to $20,000, the amount owed increases to $3,000. The average income tax rate when a person earns $15,000 is A) 75 percent. B) 10 percent. C) 13.3 percent. D) 20 percent. Answer: B Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 54) When income is $15,000, the amount of income income taxes owed is $2,000; when income increases to $20,000, the amount owed increases to $3,000. The marginal tax rate in this case is A) 20 percent. B) 13.3 percent. C) 15 percent. D) 25 percent. Answer: A Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 55) If you were to face a marginal tax rate of 20 percent, how much would your tax bill increase when your income increased from $100,000 to $104,000? A) $1,000 B) $800 C) $400 D) $10,400 Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge

56) Suppose you are making $100,000 per year and paying $10,000 per year in income taxes. You get a $10,000 per year raise and your income taxes are now $15,000 per year. Based on this information, the income tax system is A) proportional. B) progressive. C) regressive. D) bracketed. Answer: B Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 57) Suppose you are making $100,000 per year and paying $10,000 per year in income taxes. You get a $10,000 per year raise and your income taxes are now $11,000 per year. Based on this information, the income tax system is A) proportional. B) progressive. C) regressive. D) bracketed. Answer: A Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 58) What are the three sources of funding for the public sector? Can the government rely on all of these sources in the long run? Explain. Answer: The three sources are (1) explicit user fees for government goods and services, (2) taxes, and (3) borrowing. Because the government cannot borrow forever; in the long run, its major sources of revenue are only user fees and taxes. Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 59) What is a government's budget constraint in the long run as opposed to a given time period? Answer: In a given time period, the government budget constraint is the limitation on public expenditures, which is the total amount of tax revenues plus borrowed funds. However, a government cannot borrow forever, so that its constraint in the long run is simply tax revenues. Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

60) Why is the government budget constraint different between the short run and the long run? Answer: In the short run, the government budget constraint consists of tax revenues and borrowing. However, a government cannot borrow indefinitely so that, in the long run, its budget constant consists of only tax revenues. Diff: 1 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 61) Suppose the income tax rate is 0 percent on the first $10,000; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on all income above $70,000. Family A has income of $82,000 while Family B has income of $37,000. What are the marginal tax rates faced by the two families? Answer: Since Family A's income ($82,000) is in the last bracket, their marginal tax rate is 40 percent. Since Family B's income ($37,000) is in the third bracket, their marginal tax rate is 20 percent. Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 62) Suppose the income tax rate schedule is 0 percent on the first $10,000; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on any income over $70,000. Family A earns $32,000 a year and Family B earns $70,000 a year. Both families each receive a ten percent raise. What is the marginal tax rate of each and what is the extra tax paid by each after the raise? Answer: Family A's new income is $35,200 which falls into the third tax bracket. Thus, their new marginal rate is 20 percent rate and so they will pay $640 in extra taxes ($3200*0.20); Family B's new income is $77,000 which falls into the last tax bracket. Thus, their new marginal tax rate is 40 percent and so they will pay $2800 in extra taxes ($7000 ∗ 0.40). Diff: 3 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

63) Briefly compare the three tax systems based on the relationship between the marginal tax rate and the average tax rate as income rises. Answer: The three tax systems are proportional, progressive, and regressive taxes. A proportional tax system is one in which the amount of taxes is proportional to income so that the marginal tax rate equals the average tax rate at all income levels. A progressive tax system is one in which a higher percentage of income is paid as taxes when income rises, so that the marginal tax rate is higher than the average tax rate when income rises. A regressive tax system is one in which a lower percentage of income is paid as taxes when income rises, so that the marginal tax rate is lower than the average tax rate when income rises. Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 64) "Only in a progressive tax system does the amount of taxes increase as income increases." Do you agree or disagree? Explain. Answer: Disagree. In all of the three tax systems (progressive, regressive and proportional), the amount of taxes can increase as income increases. In a progressive system, however, not only the amount of taxes increases but also the percentage income paid in taxes increases as income increases. Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 65) Suppose Jill has earned more income this year as compared to what she did last year. Her income tax has also increased. Does it necessarily mean that the income tax system is progressive? Explain. Answer: No, the amount of income tax can increase as income increases in any of the three tax systems (regressive, progressive, and proportional). However, in a progressive tax system, the tax rate (not the tax amount) increases as income increases. Diff: 2 Topic: 6.1 Paying for the Public Sector: Systems of Taxation Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

6.2 The Most Important Federal Taxes 1) A typical capital gain is experienced by A) selling stock or a mutual fund. B) holding government bonds. C) only investment bankers. D) holding stock of large corporations. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 2) A person experiences a capital gain if she A) sells an asset for more than what she paid for it. B) settles a debt. C) invests in a physical capital project. D) contributes to a country's production of capital goods. Answer: A Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 3) Reduction or elimination of dividend taxes is designed, in part, to A) reduce the double taxation burden on individuals. B) make rich people richer. C) reduce inefficiencies in the production process. D) increase corporate tax levels. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 4) A capital gain is defined as A) the tax paid when one sells an asset. B) the positive difference between the sale price and the purchase price of an asset. C) the tax rate one pays when one moves into a higher tax bracket. D) an unanticipated increase in income. Answer: B Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

5) Suppose you purchased 100 shares of stock in 2016 for $25 a share and you sell them today for $30 a share. If the capital gains tax is 30 percent, your tax liability is A) $70. B) $150. C) $500. D) indeterminate without knowing the inflation rate. Answer: B Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 6) Corporate profits are A) taxed at too low a rate. B) taxed only when a stockholder sells his or her shares of stock. C) taxed twice—once by the corporate tax system, and again by personal tax system when they are paid to stockholders as dividends. D) taxed three times—once by the corporate tax system, again by the personal tax system, and again as capital gains. Answer: C Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 7) Some economists argue that corporate income taxes are typically not paid by firms, but by A) stockholders, employees, and consumers. B) the government. C) bond holders. D) the board of directors of the firm. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 8) The corporate income tax in the United States A) excludes dividends paid out. B) only taxes retained earnings. C) results in individuals' being doubly taxed on corporate earnings. D) does not apply to profits earned on exports. Answer: C Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 21 Copyright © 2021 Pearson Education, Inc.

9) Social Security taxes are A) progressive because all workers pay the tax. B) regressive because higher income workers pay taxes on a smaller percentage of their income. C) proportional because everyone is charged the same percentage tax rate. D) regressive because higher income workers don't pay the tax. Answer: B Diff: 3 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 10) Social Security taxes are regressive because A) they apply only to rich people. B) they are not applied to income beyond a certain amount. C) they are applied to welfare recipients. D) they are applied to retired people only. Answer: B Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 11) The responsibility of paying for the Social Security benefits for currently retired individuals falls on A) current and future workers. B) the retired people themselves. C) no one, since the government prints the money. D) only working people over 50 years of age. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 12) The distribution of tax burdens among various groups in society is referred to as A) sectioning. B) regressive placement. C) zero-base budgeting. D) tax incidence. Answer: D Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

13) Which of the following is an argument that the incidence of corporate taxation falls entirely on consumers? A) Corporations pass their tax burdens on to consumers by charging higher prices equal to the amount of the tax. B) Corporations pass their tax burdens on to consumers because consumers ultimately work for the corporations. C) Corporations always evade taxes so that consumers ultimately bear the tax burdens as taxpayers. D) Most taxes on consumers are collected by corporations through sales taxes. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 14) The largest share of federal government tax receipts is derived from A) corporate income taxes. B) excise taxes. C) social insurance contributions. D) individual income taxes. Answer: D Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 15) Which of the following forms of taxation accounts for the largest share of taxes received by state and local governments? A) sales, excise, and gross receipts taxes B) personal and corporate income taxes C) license and permit fees D) property taxes Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

16) Local government expenditures depend on which taxes? A) revenues from licenses and permits B) local property, sales, and excise taxes C) capital gains taxes D) Social Security taxes Answer: B Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 17) When an asset is sold for less than it is bought, then there is a A) budget deficit. B) corporate income tax. C) capital gain. D) capital loss. Answer: D Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 18) Suppose you purchased 500 shares of stock in 2020 for $15 a share, and the price now is $20 a share. If you sell the stock, then your capital gain is A) $2500. B) $1000. C) $10000. D) indeterminate without knowing the inflation rate. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 19) Eight years ago you purchased an asset for $100,000 that has yielded a nominal capital gain of $30,000. If you sold the asset today, your inflation-adjusted capital gains would be zero due to inflation over the last eight years. The capital gains tax is 28 percent. If you sold the asset today, your tax liability would be A) zero. B) $28,000. C) $8,400. D) indeterminate without more information. Answer: C Diff: 3 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 24 Copyright © 2021 Pearson Education, Inc.

20) Suppose the capital gains tax is 28 percent and you purchased a house ten years ago for $80,000. If you sold the house today you would get $140,000. Your tax liability would be A) $39,200. B) $16,800. C) indeterminate without knowing the inflation rate. D) indeterminate without knowing the personal income tax rate. Answer: B Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Application of knowledge 21) The reason a corporation has retained earnings is to A) pay unemployment taxes. B) make investments that will increase the value of the stock. C) avoid the double taxation of corporate profits. D) be able to make unemployment payments. Answer: B Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 22) Corporate profits are taxed twice because A) taxes are collected on profits before profits are distributed to shareholders. B) the government wants to minimize the amount of tax paid on capital gains. C) it is economically efficient to reduce the amount of retained earnings. D) capital gains are not indexed to the rate of inflation. Answer: A Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 23) The earnings that a corporation saves for investment in other productive activities are A) capital gains. B) tax incidence. C) transfers in kind. D) retained earnings. Answer: D Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

24) Retained earnings are A) the funds held back to pay out dividends. B) the funds used to pay corporate taxes. C) profits not given out to stockholders. D) the reason there is double taxation. Answer: C Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 25) Tax incidence refers to A) determining who sends the taxes into the government. B) the tendency of some people to avoid paying taxes at all. C) the distribution of tax burdens among groups, or who really pays a tax. D) determining the marginal tax rate applied to any increase in income. Answer: C Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 26) The distributions of tax burdens among various groups in society is known as A) a proportional tax. B) a progressive tax. C) a regressive tax. D) tax incidence. Answer: D Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 27) The largest source of receipts for the federal government is A) corporate income taxes. B) personal income taxes. C) capital gains taxes. D) Social Security taxes. Answer: B Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

28) Social Security taxes are paid by A) employers only. B) employees only. C) both employers and employees. D) neither employers nor employees. Answer: C Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 29) When the profits of a corporation are taxed and the dividends paid to stockholders are also taxed, A) the government is engaging in double taxation. B) the government is engaging in capital gains taxation. C) the government is engaging in regressive taxation. D) the government is engaging in progressive taxation. Answer: A Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 30) One criticism of the corporate income tax is that A) it is too regressive. B) it is too flat. C) it is so complex to administer that corporate income taxes are rarely collected by the Internal Revenue Service. D) a portion of the corporations' tax burden is passed on to consumers via higher prices for goods and services and to workers via lower wages. Answer: D Diff: 3 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 31) The tax that brings in the most revenue in the United States is the A) capital gains tax. B) corporate income tax. C) Social Security tax. D) personal income tax. Answer: D Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

32) State and local governments receive most of their revenue from A) sales and excise taxes, revenue from the federal government, and property taxes. B) individual income taxes, social insurance contributions, and property taxes. C) corporate income taxes, property taxes, and personal income taxes. D) property taxes, sales and excise taxes, and Social Security contribution. Answer: A Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 33) Which one of the following statements is TRUE? A) In a proportional tax system, the marginal tax rate always exceeds the average tax rate. B) In a proportional tax system, the average tax rate always exceeds the marginal tax rate. C) The U.S. Social Security tax is proportional. D) The U.S. Social Security tax is regressive. Answer: D Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 34) Which of the following is subject to double taxation? A) income earned by people in the lowest tax bracket B) Social Security income C) dividends and retained earnings D) income earned by government employees Answer: C Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 35) A friend tells you he is studying the incidence of the corporate income tax. What is the subject of his study? A) how frequently corporations should be taxed B) how inflation affects the amount of tax revenue collected from firms C) how corporations can aid the government in collecting delinquent taxes D) how the burden of corporate taxation is distributed among stockholders, employees, and consumers Answer: D Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

36) The three possible sources of government funding include A) explicit fees, taxes, and borrowing. B) international income, personal income taxes, and export taxes. C) foreign aid, revenues, and implicit fees. D) None of these are correct. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 37) Which of the following is NOT an important source of revenue for the federal government? A) individual income taxes B) property taxes C) social insurance taxes and contributions D) corporate income taxes Answer: B Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 38) Using the fiscal year 2020 estimates, the largest component of federal revenue is the A) individual income tax. B) corporate income tax. C) excise tax. D) social insurance and contributions. Answer: A Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 39) Using the fiscal year 2020 estimates, the largest component of state and local revenue is the A) individual income tax. B) corporate income tax. C) revenue from the federal government. D) sales, excise, and gross receipts taxes. Answer: D Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

40) For all employee earnings subject to Social Security taxes, what is the current Social Security tax rate for employees? A) 0.8% B) 2.9% C) 4.2% D) 6.2% Answer: D Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 41) For all employee earnings subject to Social Security taxes, what is the current Social Security tax rate for employers? A) 0.8% B) 2.9% C) 4.2% D) 6.2% Answer: D Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 42) The Social Security program is financed directly from A) voluntary contributions by the elderly. B) sales taxes on goods with inelastic demand. C) payroll taxes. D) poll taxes. Answer: C Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 43) Social Security contributions are A) a voluntary dollar amount that people contribute towards Social Security. B) entirely paid by your employer. C) mandatory taxes partially paid out of workers' wages and salaries. D) collected only from people earning more than $120,000 a year. Answer: C Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

44) A current concern about Social Security is that A) funds set aside by past generations to pay benefits for future generations are growing too rapidly and may trigger inflation. B) promised benefit payouts are growing more rapidly than likely sources of revenues, indicating a future inability to keep the system operating. C) continued political bickering between the president and Congress could lead to an end to any funding of the program. D) the payroll taxes used to fund the program are being eliminated as part of an effort to generate employment increases, thus leaving the program bankrupt. Answer: B Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 45) Current concern about Social Security is that A) the fund is growing too rapidly and would trigger inflation. B) the fund might be depleted before long and might not be there for workers who retire later. C) the government is planning to phase out the program. D) None of these Answer: B Diff: 1 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 46) Ultimately, the real burden of paying for Social Security benefits will be paid for by A) taxes levied on workers. B) Social Security trust fund bonds. C) new federally issued Treasury bills. D) a new tax levied on businesses. Answer: A Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

47) The Social Security system was founded A) during the Civil War, to pay pensions for veterans. B) during the last years of the nineteenth century, as people who had once depended on having a family farm found themselves without a means of support. C) as the United States began to recover from the Great Depression. D) in response to concerns that arose during the high inflation of the 1970s. Answer: C Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 48) What is meant by the term "tax incidence"? What is the tax incidence of the personal income tax? What is the tax incidence of the corporate income tax? Answer: Tax incidence refers to the distribution of tax burdens among various groups in society. The tax incidence of the personal income tax is on those who pay the taxes. On the other hand, economists are uncertain as to the tax incidence of the corporate income tax. It may be borne by stockholders, consumers, workers, or bondholders. Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 49) In what way is corporate income subject to double taxation? Answer: The double taxation of corporate income is that corporations pay taxes on its income and then their stockholders also pay taxes on dividend earnings. Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 50) Explain how corporate profits are taxed twice. Answer: Corporate profits are taxed by the corporate income tax first. Second, dividends paid out of profits are taxed as personal income of the stockholders. If the company does not pay dividends but the value of the stock goes up, the stockholder will pay capital gains tax when he or she sells the stock. Diff: 2 Topic: 6.2 The Most Important Federal Taxes Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

6.3 Tax Rates and Tax Revenues 1) Sales taxes are A) assessed on the prices paid on a large set of goods and services. B) levied on purchases of a particular good or service. C) based on each individual taxpayer's income level. D) collected only by the U.S. government. Answer: A Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 2) Ad valorem taxes A) are not used in the United States. B) are paid as a fixed percentage of a good's unit price. C) are based on income levels. D) are accessed based on the costs of producing the goods or services. Answer: B Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 3) An ad valorem sales tax can be thought of as A) a proportional tax. B) not part of the tax base. C) a progressive tax. D) none of these. Answer: A Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 4) Governments have to rely on taxes for financing because A) they cannot borrow unlimited amounts. B) they usually spend all of the gold reserves. C) it is easier to collect taxes than to print money. D) they are not allowed to sell bonds. Answer: A Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

5) Which of the following statements is TRUE of static tax analysis? A) A government receives lower tax revenues by raising the tax rate. B) A government receives higher tax revenues by raising the tax rate. C) A government cannot change tax revenues by changing the tax rate. D) A change in the tax rate can raise or lower tax revenues, depending on other factors. Answer: B Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 6) Dynamic tax analysis is based on the recognition that as tax rates are increased, A) tax revenue collections will eventually decline. B) tax revenue collections will continually increase. C) tax revenue collections will change at the same rate as the tax rates. D) tax revenue collections will increase at a faster rate than the tax rate change. Answer: A Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 7) A government wishing to maximize its tax revenues should A) always assess the highest possible tax rate. B) always assess the lowest possible tax rate. C) determine the highest possible tax rate and then back it down by exactly 4 percentage points. D) push tax rates up to the point where revenues peak, but raise the tax rate no farther. Answer: D Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 8) Which of the following statements is FALSE about the issues faced by the government when contemplating a tax? A) Consideration must be given to how tax rates relate to the amount actually received. B) Consideration must be given to how taxes influence market prices. C) Consideration must be given to how taxes influence equilibrium quantity. D) Consideration must be given to the amount of funds the government will be receiving from the transfer payments paid by the public to the government. Answer: D Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

9) The value of goods, services, incomes or wealth subject to taxation is A) the tax base. B) a sales tax. C) the collected tax revenue. D) a unit tax. Answer: A Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 10) A sales tax is A) a tax assessed on personal income. B) a tax assessed on the prices paid for numerous goods and services. C) a tax assessed on a public good. D) the total tax base. Answer: B Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 11) Ad valorem taxation A) refers to the personal income tax. B) is used to tax goods but not services. C) is assessed by charging a tax rate as a fraction of the market price of a good. D) is a tax that is applied only to imported goods. Answer: C Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 12) An example of ad valorem taxation is A) a tax on luxury items. B) the corporate income tax. C) the personal income tax. D) the Social Security tax. Answer: A Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

13) Static tax analysis assumes that A) an increase in a tax rate may lead to a decrease in the tax base. B) an increase in a tax rate will lead to an increase in the tax base. C) an increase in a tax rate will leave the tax base unchanged. D) the tax base will always remain unchanged. Answer: C Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 14) Dynamic tax analysis assumes that A) an increase in a tax rate may lead to a decrease in the tax base. B) an increase in a tax rate will lead to an increase in the tax base. C) an increase in a tax rate will leave the tax base unchanged. D) the tax base will always remain unchanged. Answer: A Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 15) A 10 percent tax is going to be applied to a $100,000 tax base. What can be said about the revenue collected assuming static tax analysis? A) The total revenue will be zero. B) The total revenue will be between $0 and $10,000. C) The total revenue will be $10,000. D) There is not enough information to determine what revenues will equal. Answer: C Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 16) A 10 percent tax is going to be applied to a $100,000 tax base. What can be said about the revenue collected assuming dynamic tax analysis? A) The total revenue will be zero. B) The total revenue will be between $0 and $10,000. C) The total revenue will be $10,000. D) There is not enough information to determine what revenues will equal. Answer: B Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

17) In what type of analysis will an increase in the tax rate always lead to an increase in tax revenues? A) ad valorem taxation B) excise taxation C) dynamic tax analysis D) static tax analysis Answer: D Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 18) In what type of analysis could an increase in the tax rate lead to a decrease in tax revenues? A) ad valorem taxation B) excise taxation C) dynamic tax analysis D) static tax analysis Answer: C Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 19) The Mayor of Stuckeyville is considering increasing the tax on bowling. He is confident that tax revenues will increase but recognizes the possibility that they may decrease. The mayor is engaging in A) dynamic tax analysis. B) static tax analysis. C) a policy that will cause the tax base to increase. D) a policy that will cause the tax base to remain unchanged. Answer: A Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 20) A major criticism of static tax analysis is that it A) uses only ad valorem taxes. B) does not use ad valorem taxes. C) ignores the incentive effects created by higher tax rates. D) assumes that the tax base will not increase. Answer: C Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 37 Copyright © 2021 Pearson Education, Inc.

21) Which of the following statements about taxation is TRUE? A) Increasing taxes will always increase tax revenues. B) Static tax analysis recognizes that an increase in taxation could lead to a decrease in tax revenues. C) Dynamic tax analysis assumes that an increase in taxation will leave the tax base unchanged. D) There is a tax rate at which tax revenues are maximized. Answer: D Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 22) If the government wishes to maximize its tax revenue, it should A) recognize that too high of a tax rate can decrease the tax base. B) engage in static tax analysis. C) recognize that an increase in the tax rate will lead to an increase in tax revenues. D) use only flat taxes. Answer: A Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 23) A local government currently has a tax base of $4 million and a tax rate of 5 percent. If the tax rate is increased to 6 percent, the tax base will decrease to $3.5 million. If the goal is to maximize tax revenues the tax rate should be A) lowered below 5 percent. B) kept at 6 percent. C) reduced to 5 percent. D) abolished. Answer: B Diff: 3 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

24) A local government currently has a tax base of $10 million and a tax rate of 10 percent. If the tax rate is increased to 12 percent, the tax base becomes $6 million. If the goal is to maximize tax revenues the tax rate should be A) raised above 12 percent. B) kept at 10 percent. C) raised to 12 percent. D) abolished. Answer: B Diff: 3 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

25) Refer to the above figures. Which panel represents the expected relationship between tax revenue and the sales tax rate if static tax analysis is used? A) Panel 1 B) Panel 2 C) Panel 3 D) Panel 4 Answer: A Diff: 3 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

26) Refer to the above figures. Which panel represents the expected relationship between tax revenue and the sales tax rate if dynamic tax analysis is used? A) Panel 1 B) Panel 2 C) Panel 3 D) Panel 4 Answer: C Diff: 3 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 27) Which of the following are considered ad valorem taxes? A) taxes assessed by charging a rate equal to a percentage of an item's price B) taxes assessed by charging a flat amount per unit purchased C) taxes based on the amount of debt that the government must repay D) taxes based on the amount of spending the government will undertake Answer: A Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 28) Assume that the government one day decides to tax greens fees at all state golf courses. To the government's dismay, not only was the amount of tax collected small, but there was a 90 percent decline in golfing. What type of tax analysis did the government apparently rely upon when it imposed this tax? A) static tax analysis B) dynamic tax analysis C) transaction cost analysis D) ad hoc tax analysis Answer: A Diff: 3 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 29) Ad valorem taxation means A) that only the value added by a service provider is taxed. B) that the tax rate is a percentage of the price paid for a product. C) a negative income tax. D) a progressive property tax imposed in some states. Answer: B Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

30) According to dynamic tax analysis, continually increasing the tax rate will eventually A) cause an increase in the tax base. B) have no impact on the tax base. C) cause a decrease in the tax base. D) result in an initial decrease in the tax base followed ultimately by a rise in the tax base. Answer: C Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 31) Dynamic tax analysis is an economic evaluation of tax rate changes A) by the National Tax Institute in Burlington, Massachusetts. B) by various state governments. C) by the tax institutes established by a consortium of business schools. D) based on the assumption that tax base declines if tax rates continuously increase. Answer: D Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 32) Dynamic tax analysis generally predicts A) that the higher the tax rate is, the higher the tax revenue will continue to be into the future. B) that the higher tax rates lead to higher revenues only to a point at which revenues will begin to decrease due to a diminishing tax base. C) that lower tax rates will always and continuously lead to increased tax revenues. D) that lower tax rates are always going to lead to decreased tax revenues. Answer: B Diff: 3 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 33) In order for the government to collect taxes, the government must first establish a(n) A) ad valorem taxation. B) tax base. C) philosophy of taxation. D) justice system. Answer: B Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

34) State sales taxes are operated as a system of A) ad valorem taxation. B) unit taxation. C) income taxation. D) revenue minimizing taxation. Answer: A Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 35) To set a tax rate at the appropriate level to maximize its tax revenues, a government must engage in A) static tax analysis. B) dynamic tax analysis. C) debt-free tax analysis. D) ad valorem tax analysis. Answer: B Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 36) Static tax analysis assumes A) all of the present tax rates will be in place for a minimum of twenty years. B) changes in the tax rates have no effect on the tax base. C) changes in the tax rates have no effect on tax revenue. D) changes in the tax rates will change the tax base. Answer: B Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 37) Dynamic tax analysis assumes A) all of the present tax rates will be in place for a minimum of twenty years. B) changes in the tax rates have no effect on the tax base. C) changes in the tax rates have no effect on tax revenue. D) changes in the tax rates will change the tax base. Answer: D Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking

38) Explain why an increase in the tax rate can result in lower tax revenues. Answer: According to dynamic tax analysis, consumers may react to a higher tax rate by cutting back on purchases of goods and services included in the tax base. The reduction in the tax base may eventually be sufficiently large so that tax revenues decline. Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 39) A government is thinking about increasing the sales tax rate. Should it use static or dynamic tax analysis? Explain why one approach is better than the other. Answer: The government should use dynamic tax analysis. When estimating the expected revenue generated by the sales tax, it is important to remember that the tax base could be influenced. If the tax base decreases sufficiently in response to a tax-rate increase, total revenues may be reduced even though there has been an increase in the sales tax rate. Diff: 2 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 40) According to dynamic tax analysis, will continuing to push up the tax lead to steady increases in tax revenues? Why? Answer: In dynamic tax analysis, the tax base will eventually decline for ever-higher tax rates. This means that tax revenues will eventually fall at sufficiently high tax rates. Diff: 1 Topic: 6.3 Tax Rates and Tax Revenues Learning Outcome: Micro-24: Explain the basic principles of tax policies and the tax system AACSB: Analytical thinking 6.4 Taxation from the Point of View of Producers and Consumers 1) Imposing a tax on sales of a product A) shifts the market demand curve for the product. B) shifts the market supply curve for the product. C) shifts both the market supply and demand curve for the product. D) has no effect on either the market demand or the market supply curve for the product. Answer: B Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

2) What happens when the government imposes a unit excise tax on a good? A) The amount of the tax is added to the current equilibrium price. B) The demand for the newly taxed good decreases. C) That good's supply curve shifts down by the amount of the tax. D) The newly taxed good's supply curve shifts vertically upward by the amount of the per-unit tax being levied. Answer: D Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 3) The imposition of a unit excise tax on red wine will A) lower equilibrium price and quantity in the market. B) increase equilibrium quantity and price in the market. C) lower equilibrium quantity and raise equilibrium price in the market. D) raise equilibrium quantity and lower equilibrium price in the market. Answer: C Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 4) The government imposes a unit excise tax on bubble gum. What happens as a result? A) The equilibrium quantity of bubble gum increases. B) At the original market price, there will be a bubble gum surplus so price decreases. C) At the original market price, there is a bubble gum shortage and so price rises. D) There will be no change in either the market price or equilibrium quantity as long as the excise tax rate is 5 percent or less. Answer: C Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

5) Unit excise taxes imposed on gasoline are A) largely paid by the producers because gasoline is a necessity. B) largely paid by consumers because they are not very responsive to price changes. C) shared equally between the producer and the consumer. D) paid by the wholesalers of these products. Answer: B Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) How can we anticipate the proportion of a newly imposed unit excise tax that consumers will pay? A) Consumers will pay most of the tax whenever their demand for a product is relatively unresponsive to price changes. B) Consumers will always pay 100 percent of an excise tax. C) Consumers will pay most of the tax whenever their demand for the product is very price sensitive. D) Since producers always pay 100 percent of an excise tax, we know consumers will not pay any of the tax. Answer: A Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 7) Imposing a unit excise tax on the final sale of a good or service can be displayed graphically as A) a vertical shift upward of the demand curve. B) a vertical shift upward of the supply curve. C) a vertical shift downward of the demand curve. D) a vertical shift downward of the supply curve. Answer: B Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

8) Which of the following is TRUE about the effects of an excise tax if consumers are totally unresponsive to price changes? A) Consumers pay all of the excise tax. B) Producers pay all of the excise tax. C) Consumers and producers share the excise tax equally. D) Neither consumers nor producers pay the excise tax. Answer: A Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) A tax levied on purchases of a particular good or service A) is illegal because it is discriminatory. B) always leads to a reduction in total tax revenues. C) always leads to an increase in total tax revenues. D) is an excise tax. Answer: D Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 10) A unit tax A) is based on the value of the good being sold. B) is a constant tax assessed on each unit of a good sold. C) is the primary tax studied in dynamic tax analysis. D) does not influence equilibrium price and quantity. Answer: B Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

11) Which of the following is TRUE of an excise tax? A) An excise tax is always a unit tax. B) An excise tax is levied on purchases of particular good or service. C) An excise tax is based on an individual's income. D) Imposing an excise tax shifts the market demand curve. Answer: B Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) If we wanted to analyze the effects of a $2 unit tax graphically, we would shift the A) supply curve upward by $2. B) supply curve downward by $2. C) demand curve upward by $2. D) demand curve downward by $2. Answer: A Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 13) The imposition of a new excise tax will A) increase equilibrium price and increase equilibrium quantity. B) increase equilibrium price and decrease equilibrium quantity. C) decrease equilibrium price and increase equilibrium quantity. D) decrease equilibrium price and decrease equilibrium quantity. Answer: B Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

14) A unit tax of $10 has been levied on a good. The equilibrium price of the good will most likely A) increase by $10. B) remain unchanged. C) decrease by $10. D) increase by an amount less than $10. Answer: D Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 15) A unit tax of $1 will always A) shift the supply curve upward by more than $1. B) shift the supply curve upward by less than $1. C) shift the supply curve up by exactly $1. D) leave the supply curve unchanged. Answer: C Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

16) Refer to the above figure. A unit tax of $2 has been placed on the good. Which of the following statements is TRUE about the vertical distance between S1 and S2? A) The distance is less than $2. B) The distance is $2. C) The distance is more than $2. D) The distance cannot be determined with the information given. Answer: B Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

17) Refer to the above figures. A unit tax of $2 has been levied on a good. Which of the panels depict the effect of the taxes? A) Panel 1 B) Panel 2 C) Panel 3 D) None of the diagrams reflect the effect of the tax. Answer: A Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

18) Refer to the above figure. A unit tax has been placed on the good. The consumer pays what amount of the tax? A) none of the tax B) P2 - P0 C) P2 - P1 D) P1 - P0 Answer: C Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 19) Refer to the above figure. A unit tax has been placed on the good. The producer pays what amount of the tax? A) none of the tax B) P2 - P0 C) P2 - P1 D) P1 - P0 Answer: D Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

20) Refer to the above figure. A unit tax has been placed on the good. What is the total amount of the tax? A) 0 B) P2 - P0 C) P2 - P1 D) P1 - P0 Answer: B Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 21) When a unit tax of $1 is levied on a product, A) the entire $1 is paid by the consumer. B) the entire $1 is paid by the producer. C) both the consumer and producer pay $1 each. D) the consumer pays part of the $1 and the producer pays the rest. Answer: D Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 22) Which of the following statements about excise taxes is TRUE? A) The producer will increase the price of the good by the amount of the excise tax. B) The equilibrium price will increase and the equilibrium quantity will remain unchanged. C) Both the consumer and producer pay part of the excise tax. D) Consumers will refuse to pay excise taxes, forcing the producers to pay it. Answer: C Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

23) Refer to the above figure. An excise tax of $1 was imposed on this good. From the figure we can see that the A) producer will bear most of the tax. B) consumer will bear most of the tax. C) consumer and producer will share the tax. D) amount of the tax collected is less than $1. Answer: B Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 24) How would the market for coffee be affected if the government charged an excise tax of $2.00 on each unit of coffee sold? A) There would be a shortage of coffee. B) The demand for coffee would increase. C) The demand for coffee would decrease. D) The supply curve would shift up vertically by $2.00. Answer: D Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

25) How would the market for smartphones be affected if the government charged an excise tax of $1.00 on each smartphone sold? A) The supply of smartphones would decrease. B) The demand for smartphones would increase. C) The demand for smartphones would decrease. D) The price of smartphones would rise by $1.00. Answer: A Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 26) How does the imposition of an excise tax on a good affect its market equilibrium? A) Equilibrium quantity decreases, and equilibrium price decreases. B) Equilibrium quantity decreases, and equilibrium price increases. C) Equilibrium quantity increases, and equilibrium price decreases. D) Equilibrium quantity increases, and equilibrium price increases. Answer: B Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27) What determines the proportion of a unit excise tax that will be passed on to consumers in the form of higher prices? A) the nature of the projects funded by the tax B) the number of additional taxes that consumers have to pay C) the popularity of the tax D) the degree to which quantity demanded and supplied of the good respond to price changes Answer: D Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

28) The imposition of a tax on a product A) shifts the supply curve to the right. B) shifts the demand curve to the right. C) shifts both the supply and the demand curve to the right. D) shifts the supply curve to the left. Answer: D Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

29) The demand and supply of a product is given in the above table. A unit tax of $2 is imposed on the product. The equilibrium quantity for this product after the tax is imposed is equal to A) 30 units. B) 25 units. C) 20 units. D) 15 units. Answer: C Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 30) Using the above table, a unit tax of $2 is imposed on the product. The equilibrium price of this product after the tax is imposed is A) $5. B) $4. C) $3. D) $2. Answer: C Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

31) Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by the consumer? A) $1 B) $2 C) $3 D) unable to determine Answer: A Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 32) Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by the producer? A) $2 B) $1 C) $3 D) unable to determine Answer: B Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33) An excise tax on gasoline causes A) supply of gasoline to shift to the left. B) a reduction in the quantity of gasoline demanded. C) the market clearing price of gasoline to rise. D) All of these are correct. Answer: D Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

34) An excise tax is a tax that is levied on A) the value of a piece of property. B) the purchase of a given good or service. C) the value of an estate. D) that part of a person's income coming from interest payments. Answer: B Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 35) A tax levied on the purchase of a specific good or service is A) an excise tax. B) a consumption tax. C) a purchase tax. D) a value tax. Answer: A Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 36) A state tax assessed specifically on cigarettes is an example of A) an excise tax. B) a consumption tax. C) a social tax. D) a tariff. Answer: A Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 37) An excise tax A) acts as a negative incentive to consume that good or service. B) is illegal in most cities in the United States. C) is often used to encourage the use of a good. D) is a value added tax (VAT). Answer: A Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 57 Copyright © 2021 Pearson Education, Inc.

38) Using the above figure, if the government levies a new unit tax in this market, S represents the original supply curve, and St represents the after-tax supply curve, then the revenues that the government collects from imposing this tax is represented on this graph by A) OAEG. B) OBCG. C) BAEC. D) CEF. Answer: C Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 39) Using the above figure, if the government levies a new unit tax in this market, S represents the original supply curve, and St represents the after-tax supply curve, then the after-tax price paid by consumers is the vertical distance from the origin to A) point A. B) point B. C) somewhere between point B and point A. D) point F. Answer: B Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

40) If a unit excise tax is placed on a good for which the demand is very unresponsive to a price change, then A) the government generally pays the majority of the tax. B) the consumers generally pay the majority of the tax. C) the producers generally pay the majority of the tax. D) producers and consumers pay equal portions of the tax. Answer: B Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) Sales taxes are routinely collected by A) the merchants selling the good or services. B) the Internal Revenue Service. C) the Department of Commerce. D) the Federal Trade Commission. Answer: A Diff: 1 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 42) Should the government wish to lower the price of gasoline to the consumer, one approach might be A) to raise the gasoline excise tax. B) to reduce the gasoline excise tax. C) to take action to shift the supply curve of gasoline to the left. D) to lower taxes on automobiles. Answer: B Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

43) How is the market for gasoline affected if the excise tax on gasoline is reduced? A) The supply of gasoline decreases. B) The supply of gasoline increases. C) The equilibrium quantity of gasoline decreases. D) The equilibrium price of gasoline increases. Answer: B Diff: 3 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 44) If a state government wants to collect the maximum tax revenue from a unit excise tax, which of the following would they tax? A) cigarettes B) beef hamburgers C) luxury cars D) one particular smartphone model Answer: A Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 45) If a new unit excise tax is levied on soft drinks, the A) demand for soft drinks shifts to the left. B) demand for soft drinks shifts to the right. C) supply of soft drinks shifts to the right. D) supply of soft drinks shifts to the left. Answer: D Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

46) Explain why it is that how much consumers pay for an excise tax depends on how responsive they are to a given change in market price. Answer: If consumers are very responsive to a change in the market price for a good, then a small increase in price will result in a large decrease in quantity demanded. In this case, most of the burden of the tax will be placed on producers. If consumers are not very responsive to a change in the market price for a good, then a small increase in price will result in a small decrease in quantity demanded. In this case, most of the burden of the tax will be placed on consumers. The tax burden is effectively the difference between the market prices before and after the imposition of the tax. Diff: 2 Topic: 6.4 Taxation from the Point of View of Producers and Consumers Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 7 The Macroeconomy: Unemployment, Inflation, and Deflation 7.1 Unemployment 1) Which of the following is TRUE of unemployment? A) It is defined as the number of people actively looking for work who do not have jobs. B) The result is that the economy operates inside its production possibilities curve. C) There are psychological consequences associated with unemployment. D) All of these. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 2) Which of the following is TRUE about the labor force? A) It includes those over 16 ages old and are employed. B) It includes those over 16 ages old and are unemployed. C) Both A and B are correct. D) None of these is correct. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 3) A country's labor force is equal to A) the population between the ages of 16 and 65. B) the number of employed people. C) the total number of employed and unemployed people. D) the total number of employed people, unemployed people, and discouraged workers. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

4) Which of the following people would be considered unemployed? A) Homer, who lost his job at the power plant and is not looking for work B) Lenny, who is working part time at a fast food restaurant C) Abe, who is retired D) Edna, who lost her job as a teacher and is currently searching for a new job Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 5) The term "unemployment" is best described as the total number of A) people not working. B) people who have been laid off and have stopped looking for work. C) adults who work fewer hours than they wish to work. D) adults who are looking for work but have not found a job. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 6) According to the text, during which time period did the United States have the highest unemployment rates? A) 1930s B) 1950s C) 1980s D) 2010s Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

7) Individuals who have stopped looking for work because they are convinced that they will not find a job are considered A) structurally unemployed. B) discouraged workers. C) part of the labor force. D) underemployed. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 8) Which federal agency publishes the United States' unemployment figures? A) Health and Human Services B) The Bureau of Labor Statistics C) the Federal Reserve D) the Senate Committee on Labor Relations Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 9) In the history of the United States, unemployment reached its highest rate A) in the Panic of 1893. B) in the 1930s. C) in the period between World War II and the Korean War. D) in the Great Recession of the late 2000s. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

10) When did the United States register its lowest unemployment rate? A) in the 1920s B) the decade following 2007 C) 2020 D) at the end of World War II Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 11) The population of individuals at least 16 years of age can be broken into 3 groups. They are A) the unemployed, discouraged workers, and retirees. B) those employed full-time, those employed only part-time, and the unemployed. C) those working in the for-profit sector, those working in the nonprofit sector, and individuals who are unemployed. D) none of these. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 12) The rate of unemployment is calculated as the number of A) unemployed workers divided by the number of employed workers. B) people in the civilian labor force divided by the number of unemployed. C) unemployed divided by the number of people in the civilian labor force. D) employed workers divided by the number of unemployed workers. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

13) According to the Bureau of Labor Statistics, if you voluntarily leave your job to search for another job, then you A) are classified as unemployed. B) are eligible for unemployment compensation. C) may not re-enter the labor force for six months. D) are classified as a job loser. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 14) Official unemployment rates may underestimate the true rate of unemployment because the official rate A) includes those workers who only work part time. B) may include some individuals who are not actually in the labor force. C) does not include individuals receiving any type of unemployment compensation. D) fails to include discouraged workers. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 15) The official unemployment rate may understate the true rate of unemployment because of A) workers who hold two jobs. B) increases in worker productivity. C) changes in wage rates. D) discouraged workers who no longer are actively seeking work and are excluded from the statistics. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

16) Historically, the United States has experienced A) continuous decreases in the unemployment rate since World War II. B) periods of both increases and decreases in the unemployment rate since World War II. C) continuous increases in the unemployment rate since World War II. D) no changes in the unemployment rate since World War II. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 17) If the U.S. economy enters a recession, the A) economy experiences full employment. B) unemployment rate tends to increase. C) labor force tends to increase. D) entire population will be partially unemployed. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 18) The total civilian labor force is comprised of A) the unemployed and the employed. B) only the employed. C) all individuals over 16 years of age, whether or not they work or are seeking work. D) only full-time employed individuals between the ages of 18 and 55. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

19) The labor force includes individuals who are: I. Employed II. Unemployed III. Discouraged workers A) I only B) Both I and II C) Both I and III D) All I, II and III Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 20) Which of the following best fits the definition of unemployed? A) retired and not working B) working less than a full work week C) not working but looking for a job D) not working at a gainful pursuit, either in or out of the home Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 21) By definition, the labor force participation rate is A) the percentage of institutionalized working-age individuals who are employed or seeking employment. B) the percentage of noninstitutionalized working-age individuals who are employed or seeking employment. C) the annual rate of growth in the number of people who are either employed or searching for available jobs. D) the annual rate of growth in the number of people who are unemployed and searching for available government-provided unemployment benefits. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

22) The rate of unemployment is found by A) dividing the number unemployed by the number of people in the labor force. B) dividing the number unemployed by the number employed. C) dividing the number employed by the number of people in the labor force. D) dividing the number employed by the number unemployed. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 23) Including discouraged workers in the calculation of the unemployment rate would A) increase the reported rate. B) lower the reported rate. C) not change the reported rate. D) change the reported rate, but in an unpredictable manner. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 24) Unemployment is measured as A) all teens and adults in the civilian labor force who are not working. B) all adults in the civilian labor force who are willing and able to work and who are actively looking for work, but have not found a job. C) all adults in the civilian labor force, regardless of whether or not they have been engaged in actively seeking employment, who do not have the job they want. D) all adults in the civilian labor force who are not working. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

25) The labor force is defined as the number of A) employed plus the number of unemployed. B) people who are working. C) people who are working in labor-type jobs. D) union members who are working. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 26) The U.S. Department of Labor classifies all individuals in the United States as A) labor force participants. B) either employed, unemployed, or not in the labor force. C) either overemployed or underemployed. D) potential employees. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 27) A person who previously had a full-time job has been paroled from prison and has applied for a job is considered A) a reentrant. B) a job loser. C) a new entrant. D) not in the labor force. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

28) Increases in the duration of unemployment may A) reflect a general downturn in economic activity that depresses job openings. B) increase the number of discouraged workers. C) increase the unemployment rate. D) all of these. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 29) Which category of unemployed individuals makes up the greatest share of those who are unemployed? A) new entrants B) reentrants C) job losers D) job leavers Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 30) Which of the following is a stock variable? The number of A) unemployed people. B) reentrants. C) job losers. D) job leavers. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

31) The number of people that are laid off in a month is A) a stock. B) a flow. C) both a stock and a flow. D) neither a stock nor a flow. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 32) When there is an increase in the duration of unemployment, the U.S. Congress typically responds by A) lowering income taxes. B) extending unemployment benefits. C) encouraging unemployed U.S. workers to seek employment overseas. D) redefining "unemployed" so the unemployment rate does not look so bad. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 33) The labor-force participation rate shows the percentage of A) people not working, but who want to work. B) people who are not actively participating in meaningful economic activity. C) new entrants into the labor force. D) non-institutionalized working-age people who are actually working or seeking employment. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

34) The largest major change in the U.S. labor force participation rate during the last few decades has been A) the number of prisoners dropping out of the labor force. B) the increase in the number of working women. C) the decrease in the number of working women. D) the increase in the number of illegal immigrants in the United States. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 35) In the United States, the labor-force participation rate since 1960 has been A) increasing for females. B) declining for females. C) declining for both males and females. D) unchanged for both males and females. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 36) If a person is laid off from a job, he is considered by the Bureau of Labor Statistics to be a A) job loser. B) reentrant. C) job leaver. D) new entrant. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

37) If I voluntarily end my employment, the Bureau of Labor Statistics would consider me to be A) a job loser. B) a job leaver. C) a discouraged worker. D) a reentrant. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 38) Which of the following would NOT be considered unemployed? A) a new entrant to the labor force B) a job leaver who is looking for a better job C) an individual fired by her employer D) a newly retired worker Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 39) The largest category of the unemployed are A) job losers. B) reentrants. C) job leavers. D) new entrants. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

40) Which of the following can cause official unemployment figures to underestimate the true unemployment rate? A) Some people get discouraged and quit looking for a job. B) Some people engage in illegal activities. C) Some people work "off the books." D) Some people work overtime. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 41) The unemployment rate will rise when A) people get discouraged and quit looking for a job. B) the average work week falls from 40 hours to 39 hours. C) the duration of unemployment increases. D) the size of the labor force increases without an increase in employment. Answer: D Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 42) In recent years the labor force participation rate has been fairly stable A) as has the labor force participation rate for males, females, minorities, and nonminorities. B) although the female labor force participation rate has fallen while the male labor force participation rate has increased. C) although the male labor force participation rate has fallen while the female labor force participation rate has increased. D) although the labor force participation rate of young adults has increased while the labor force participation rate of those in the 40-55 age classification has fallen. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

43) If the duration of unemployment in a country increases from 16 weeks to 18 weeks, then A) the unemployment rate will decrease. B) the unemployment rate will increase. C) the size of the labor force will increase. D) the size of the labor force will decrease. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 44) The duration of unemployment tends to A) increase when business activity decreases. B) increase when employment increases. C) increase when the labor force shrinks. D) stay consistently the same over long periods of time. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 45) People who have dropped out of the labor force and who are no longer looking for a job because they believe the job market has little to offer them are classified by the Labor Department as A) unemployed. B) non-participants. C) discouraged workers. D) underemployed. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

46) Which of the following people would be considered unemployed by the Bureau of Labor Statistics? I. Mrs. Smith works 20 hours a week but wishes to work 40 hours a week. II. Mr. Smith is laid off from his job as a welder, but expects to be rehired in 8 months. A) I only B) II only C) Both I and II D) Neither I nor II Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 47) To be officially counted as unemployed, a person must be A) at least 16 years old. B) at least 25 years old. C) at least 21 years old. D) any age, so long as you are looking for work. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 48) Who is considered officially unemployed? A) Six months after failing to get a job, Antony quits looking. B) Shauna graduated from college last summer but is still unemployed despite her spirited search. C) Teresa is working part time but she wishes to work full time. D) Chen is going to school full time. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

49) Costs of unemployment include A) structural unemployment. B) the output lost due to the fact that the economy is not running at full employment. C) reduction in the labor force. D) higher wages. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 50) Sharon voluntarily quit her job and is now searching for a new position. Sharon is classified as a A) job loser. B) job reentrant. C) job leaver. D) new entrant. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 51) If there is unemployment and all businesses are operating at less than full capacity, then A) there are too many workers, and some people ought to leave the labor force. B) we are not experiencing a net social cost to unemployment because it is offset by the capacity levels of the factories. C) society is producing inside its production possibilities curve. D) society is at the wrong point on the production possibilities curve. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

52) The labor force participation rate includes A) only those who are employed. B) only those employed but looking for a job. C) both employed workers and discouraged workers not seeking jobs. D) both employed workers and those unemployed but seeking employment. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 53) One major reason that economists are concerned about unemployment is that A) unemployment always leads to frictional unemployment. B) unemployment reduces the size of the labor force. C) unemployment shifts the production possibilities curve outward. D) the economy is producing less output than if there were full employment. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 54) Which of the following individuals is NOT counted as unemployed? A) Jamil, who recently quit his job and is looking for a new position B) Jackie, who was recently fired and is now applying for another job C) Jack, who has become discouraged about ever finding a job and has stopped looking D) Jennifer, who just graduated from college and is now seeking employment with the company of her dreams. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

55) To be considered officially unemployed, a person must be at least 16 years old A) and not working. B) and not in school and not working. C) and be a discouraged worker. D) and not working but is actively seeking employment. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 56) Over the last 100 years in the United States, unemployment reached its highest rate A) in the 1920s. B) in the 1930s. C) in the 1970s. D) in late 2010s. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 57) The population is 100 million, the labor force is 70 million, and the number of unemployed is 3.5 million. What is the unemployment rate? A) 7 percent B) 5 percent C) 10 percent D) 3.5 percent Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

58) To be officially classified as unemployed, a person must be A) collecting unemployment benefits. B) at least 21 and not working. C) at least 16, not working and actively seeking employment. D) laid off or fired. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 59) The labor force is defined as A) all individuals who are currently employed. B) all individuals who are at least 16 years old and are currently employed. C) all individuals who are at least 16 years old and are currently employed or unemployed. D) all individuals who are at least 16 years old and are employed, looking for work or not looking for work. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 60) The labor force includes all of the following individuals who are 16 years or older EXCEPT A) people who have never been in the labor force but have just found a job. B) the employed. C) the unemployed. D) people who are retired and not actively seeking work. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

61) The definition of the adult population is those who are 16 years and older and who are A) employed or unemployed. B) in the labor force. C) in the labor force or not in the labor force. D) not in the labor force. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 62) A person who has taken medical leave is A) in the labor force. B) not in the labor force. C) unemployed. D) a job leaver. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 63) By the legal definition of unemployment, a person who has quit his job to take care of his children full time is A) unemployed. B) employed. C) in the labor force. D) not in the labor force. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

64) The labor force is defined as A) the number of people over 16 years of age. B) the number of people who are working. C) the sum of the employed and the unemployed. D) the number of people in blue-collar jobs. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 65) Unemployment is a ________ concept, measuring the ________. A) flow; number of people who are first entering the labor force B) flow; number of people who lost their jobs within the last week C) stock; number of people who are not working D) stock; number of people at a point in time who are not working but who are looking for work Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 66) Unemployment is a A) flow concept. B) stock concept. C) both a flow and a stock concept. D) neither a stock nor a flow concept. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

67) Suppose that last week 100,000 people lost their jobs or quit. We can say that A) the number of unemployed increased by 100,000 people. B) the number of unemployed increased by less than 100,000 people because we should not count those who quit their jobs. C) the 100,000 people represent a flow known as job departures. D) the 100,000 people represent a stock known as the new unemployed. Answer: C Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 68) Distinguishing between stock measures and flow measures of the labor force, the stock measures are A) the labor force only. B) the number of people who lost their jobs and the number of people who found jobs only. C) the total number of people who are unemployed only. D) the total number in the labor force and the total number of people who are unemployed only. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 69) Distinguishing between stock measures and flow measures, the flow measures are A) the labor force only. B) the number of people who lost their jobs and the number of people who found jobs only. C) the total number of people who are unemployed only. D) the total number in the labor force and the total number of people who are unemployed only. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

70) Suppose there are 100 million in the labor force, and 6 million unemployed people. During the next month, 200,000 people lose their jobs and 300,000 find jobs. The new total of employed is ________ and the new unemployment rate is ________. A) 100.1 million; 5.8 percent B) 100 million; 6.1 percent C) 94.1 million; 5.9 percent D) 93.9 million; 6.1 percent Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 71) Suppose the population of Robstown is 120,000. Of the population 16 years and older, 50,000 are employed, 10,000 have never worked and are not looking for work, 5,000 are not working and are looking for work, and 15,000 are retired and not looking for work. The labor force equals A) 50,000. B) 55,000. C) 65,000. D) 80,000. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 72) Suppose the population of Robstown is 120,000. Of the population 16 years and older, 50,000 are employed, 10,000 have never worked and are not looking for work, 5,000 are not working and are looking for work, and 15,000 are retired and not looking for work. The number unemployed equals A) 5,000. B) 10,000. C) 15,000. D) 20,000. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

73) The population of a small town is 5,000. There are 4,000 people in the labor force, and 3,500 people are employed. The unemployment rate equals A) 5 percent. B) 10 percent. C) 12.5 percent. D) 35 percent. Answer: C Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 74) In a small country, the adult population is 10,000. In that country, 7,000 people are in the labor force and 6,300 people are employed. The unemployment rate equals A) 0.63 percent. B) 7 percent. C) 10 percent. D) an undetermined amount given the lack of information. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 75) In a small country, the adult population equals 10,000. In that country, 8,000 people are in the labor force and 200 people are unemployed. The unemployment rate equals A) 2.5 percent. B) 2 percent. C) 4 percent. D) an undetermined amount given the lack of information. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

76) A job loser is an individual A) in the labor force whose employment was involuntarily terminated. B) who used to work full time but left the labor force and has now reentered it looking for a job. C) in the labor force who quits voluntarily. D) who has never held a full-time job lasting two weeks or longer but is now seeking employment. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 77) A reentrant is an individual A) in the labor force whose employment was involuntarily terminated. B) who used to work full time but left the labor force and has now reentered it looking for a job. C) in the labor force who quits voluntarily. D) who has never held a full-time job lasting two weeks or longer but is now seeking employment. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 78) A job leaver is an individual A) in the labor force whose employment was involuntarily terminated. B) who used to work full time but left the labor force and has now reentered it looking for a job. C) in the labor force who quits voluntarily. D) who has never held a full-time job lasting two weeks or longer but is now seeking employment. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

79) An individual in the labor force whose employment was involuntarily terminated is A) a job leaver. B) a job loser. C) a job reentrant. D) part of the PPI. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 80) All of the following are considered to be unemployed EXCEPT A) job leavers. B) discouraged workers. C) job reentrants. D) new job entrants. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 81) New entrants to the labor force usually account for around ________ percent of the unemployed. A) 10 B) 20 C) 25 D) 5 Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

82) A new entrant is an individual A) in the labor force whose employment was involuntarily terminated. B) who used to work full time but left the labor force and has now reentered it looking for a job. C) in the labor force who quits voluntarily. D) who has never held a full-time job lasting two weeks or longer but is now seeking employment. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 83) The unemployment rate can increase when A) the number of job finders increases. B) the size of the military increases. C) the proportion of 18-22 year olds that go to college increases. D) the number of unemployed workers increases. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 84) The duration of unemployment tends to rise when A) people leave their jobs rather than lose their jobs. B) the number of entrants exceeds the number of reentrants. C) business activity starts back up after a long period of decline. D) business activity goes into a downturn. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

85) Discouraged workers A) are considered part of the unemployed because they are not working. B) are considered part of the unemployed because they are still in the labor force. C) are not considered part of the unemployed because they quit their jobs voluntarily. D) are not considered part of the unemployed because they are not actively seeking work. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 86) A discouraged worker is someone who A) has been fired. B) is unemployed. C) is not in the labor force. D) is employed. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 87) One criticism of the unemployment rate is that it A) does not include the number of discouraged workers as unemployed. B) does not include people who are not working and are not looking for work. C) counts a new entrant that is actively seeking work as unemployed. D) is a stock measure. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 88) The unemployment rate will decrease when A) the duration of unemployment increases. B) the average workweek falls from 40 to 39 hours. C) the age of the labor force increases. D) people get discouraged and quit looking for work. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

89) The percentage of the noninstitutionalized working-age individuals who are employed or seeking work is known as A) the labor force. B) the labor force participation rate. C) discouraged worker. D) the stock of employed and unemployed workers. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 90) An increase in the labor force participation rate A) implies that the unemployment rate must fall. B) implies that the unemployment rate must rise. C) means there are more discouraged workers. D) is consistent with either a rise or a fall in the unemployment rate. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 91) The labor force participation rate is the A) proportion of the noninstitutionalized adult population in the labor force. B) proportion of the labor force that is employed. C) proportion of the labor force that is unemployed. D) proportion of the noninstitutionalized adult population that is employed. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

92) The major change in American labor markets this century is A) the steady rise of the unemployment rate. B) the steady rise of the employment rate. C) the increase in the female labor-force participation rate. D) the increase in the labor-force participation rate. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 93) Which of the following would NOT be a factor that has contributed to the rising female labor force participation rate? A) greater access to education B) greater access to training C) increasing family size D) reduction of barriers to competing with men for jobs Answer: C Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 94) In a small country, the adult population equals 500. There are 400 people in the labor force and 300 people are employed. The labor force participation rate equals A) 75 percent. B) 80 percent. C) 60 percent. D) an undetermined amount given the lack of information. Answer: B Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

95) In a country, the adult population equals 100,000. There are 50,000 people unemployed and 40,000 people are employed. The labor force participation rate equals A) 90 percent. B) 50 percent. C) 40 percent. D) an undetermined amount given the lack of information. Answer: A Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 96) In a small country, there are 5,000 people in the labor force and 4,000 people are employed. The labor force participation rate equals A) 40 percent. B) 90 percent. C) 80 percent. D) an undetermined amount given the lack of information. Answer: D Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 97) To be counted in the labor force A) a person has to be working at least 10 hours per week. B) a person has to be at least 16 or older, have a job, or if unemployed has to be actively seeking employment. C) a person, irrespective of his or her age, has to be working or, if out of work, actively seeking employment. D) a person has to be over 16 years of age, irrespective of whether she or he is actively seeking work. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

98) To be counted as unemployed in the United States a person has to be A) at least 21 and out of work. B) at least 16, out of work, and actively seeking employment. C) at least 16 and less than 65 and actively seeking employment. D) out of work and actively seeking employment. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 99) All of the following are examples of a flow EXCEPT A) a new entrant into the labor force. B) an individual who voluntarily leaves the labor force. C) a person who is fired from a job. D) the current unemployment rate. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 100) A person who is currently not working and has stopped looking for a job because he or she is convinced there is no job available is classified as a A) discouraged worker. B) disgruntled worker. C) depressed worker. D) dissatisfied worker. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

101) The labor force participation rate is A) the percentage of the population who are in the labor force. B) the percentage of the non-institutionalized working age population who is in the labor force. C) the percentage of the non-institutionalized population who is in the labor force. D) the percentage of the entire population who is in the labor force. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 102) Since 1950, the labor force participation rate in the United States A) of men and women both increased. B) of men increased and women decreased. C) of men and women both decreased. D) of men decreased and for women increased. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 103) Which one of the following statements is TRUE? A) The existence of unemployment places the economy at a point inside its production possibilities curve. B) The unemployment rate is the percentage of the population not working. C) To be counted as part of the labor force, an individual must be working more than 40 hours a week. D) The sum of wages lost by all unemployed workers gives an accurate, comprehensive estimate of the total cost of unemployment. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

104) During the Great Depression A) the unemployment rate was not unusually high, but wage levels were low. B) unemployment statistics were not collected. C) the U.S. unemployment rate reached its historical highest. D) most people who couldn't find work left the labor force, so the official unemployment rate remained low. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 105) Which one of the following individuals is NOT counted as unemployed? A) a recent college graduate currently without any employment and looking for her first full-time job B) a 35-year-old woman fired from her prior work because of poor performance and looking for another job C) a 50-year-old woman laid off from her former job because of a downturn in the company's sales and looking for another job D) a 22-year-old aspiring actress currently without any show business employment, but working temporarily as a waitress while she auditions for acting jobs Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 106) The average duration of unemployment across the labor force is about A) 25 weeks. B) 15 weeks. C) 8 weeks. D) 4 weeks. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

107) What is the definition of a discouraged worker? A) a member of the labor force who is working but is discouraged about his prospects for advancement within the company B) a member of the labor force who is working but is discouraged about the performance of his company within the industry C) a person who has dropped out of the labor force because he is discouraged about his prospects for employment D) an employed member of the labor force who is discouraged about his pay Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 108) Which one of the following accurately describes the trends in U.S. labor force participation over the past 50 years? A) The labor force participation rate of men has climbed from about 75 percent to 90 percent. B) The labor force participation rate of women has climbed from below 40 percent to about 60 percent. C) The labor force participation rates for both men and women have declined. D) The overall labor force participation rate has held steady at about 85 percent. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 109) Is it possible for the unemployment rate to rise at the same time that the number of people working increases? A) no B) yes, if the new workers are employed less than full time C) yes, if labor force growth outpaces growth in the number of people working D) yes, if established workers keep their jobs but no longer have the option of working overtime Answer: C Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

110) The labor force in the United States includes A) discouraged workers. B) those over the age of 16 who are employed or are seeking employment. C) those between ages 12 and 16 who are actually working. D) all of these. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

111) Using the above table, the employment rate is A) 65.6 percent. B) 48.5 percent. C) 95.0 percent. D) 69.1 percent. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 112) Using the above table, the unemployment rate X is A) 2.6 percent. B) 5.0 percent. C) 3.5 percent. D) 2.1 percent. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

113) Using the above table, the labor force is A) 380,000. B) 911,000. C) 930,000. D) 569,000. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 114) Using the above table, the labor force participation rate is A) 65.6 percent. B) 73.8 percent. C) 81.8 percent. D) 69.1 percent. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 115) Unemployment statistics are often criticized for A) understating the number of people out of work, because discouraged workers are excluded in the statistics. B) overstating the number of people out of work, because retirees are included in the statistics. C) understating the number people out of work, because full-time college students are excluded. D) overstating the number of people out of work, because the unemployment statistics include all low-income workers. Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

116) If Tim works at home taking care of the household, A) he is part of the labor force. B) he is not part of the labor force. C) he is considered to be employed. D) he is considered to be unemployed. Answer: B Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 117) Which of the following would be considered a member of the labor force? A) an engineer who has been laid off a year ago and since then has not looked for work B) an inmate in a state prison making license plates C) a person in a mental institution D) a computer programmer looking for work Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 118) Which of the following people would be considered unemployed assuming that they are actively seeking employment? A) those who were fired from their job B) those who resigned from their job C) new entrants into the job market D) All of these are correct. Answer: D Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

119) The highest measured rate of unemployment in the United States occurred during A) the post-WWII years. B) the Panic of 1893. C) the Carter administration. D) the Great Depression. Answer: D Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 120) Which of the following groups would NOT be considered as part of the civilian labor force? A) full-time students who are not working or looking for work B) those already employed C) those who are unemployed D) all individuals only working part-time Answer: A Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 121) Assuming there are 190 million people employed in the United States and 10 million people unemployed, the unemployment rate would therefore equal A) 1.9 percent. B) 5 percent. C) 10 percent. D) an undetermined amount given the lack of information. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

122) "Discouraged workers" A) would be considered as unemployed. B) would not be considered as unemployed. C) would be considered as part of the labor force. D) would only be considered as underemployed. Answer: B Diff: 3 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 123) The definition of a job loser is an individual A) who quits his job voluntarily. B) whose employment was terminated involuntarily due to a downturn in the economy. C) who competed for a promotion at his company and did not get it. D) who is underemployed. Answer: B Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 124) The definition of a job leaver is an individual A) who terminates his job voluntarily in order to work for a family business. B) whose employment was terminated involuntarily. C) who competed for a promotion at his company and did not get it. D) who is underemployed. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 125) Since 1950, it can be observed that the female participation rate in our labor force has A) increased. B) decreased. C) stayed constant. D) moved erratically up and down. Answer: A Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 41 Copyright © 2021 Pearson Education, Inc.

126) An individual who has stopped looking for a job because he is convinced that he cannot find a job is referred to as A) a contingent worker. B) a productive worker. C) a discouraged worker. D) an unemployed worker. Answer: C Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 127) Annie had a job as a human resource manager of a restaurant chain that went out of business due to a downturn in the economy. She looked for work for six months and gave up because she was convinced that she could not find a suitable job to fit her skill set. In this instance she would be counted as a A) job leaver. B) reentrant. C) discouraged worker. D) labor force participant. Answer: C Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 128) With regard to employment status, the adult population is divided into what three groups? How is it determined whether someone is in the labor force or not? Answer: The adult population is in one of three groups—the employed, the unemployed, and those not in the labor force. To be in the labor force, one must be 16 years old or older, and either be working or actively looking for work. Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

129) What are the four categories of unemployed individuals determined by the Bureau of Labor Statistics? Answer: First are job losers, who became unemployed involuntarily through termination or layoff. Second are reentrants, which are people who worked at a full-time job before but have been out of the labor force for a while. Third are job leavers who voluntarily leave their jobs, and the last are new entrants, who are people who never worked a full-time job for two weeks or longer. Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 130) Who are discouraged workers, and how do they affect labor force participation and unemployment rates? Answer: Discouraged workers are people who have dropped out of the labor force because they don't believe they can find a job that they would want. To be considered in the labor force, one must be actively looking for work, so a discouraged worker is not considered in the labor force and is not considered unemployed. Hence, the existence of discouraged workers implies that the published unemployment rates understate the true level of unemployment. Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 131) Distinguish between a stock and a flow. How do these concepts relate to unemployment? Answer: A stock is a quantity of something measured at a given point in time, while a flow is a quantity measured per unit of time. Unemployment is a stock concept—there are so many people out of work at a given point in time. Over time, it increases or decreases depending on what happens to flows such as job finders and job losers. Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 132) If the duration of unemployment increases, what happens to the unemployment rate, other things being equal? Why? Answer: An increase in the duration of unemployment increases the unemployment rate. If workers stay unemployed longer, other things constant, there will be more workers unemployed at any given point in time. Diff: 2 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 43 Copyright © 2021 Pearson Education, Inc.

133) What is unemployment and what is the unemployment rate? What are the costs of unemployment? Answer: Unemployment refers to someone who is without a job but who is actively looking for work. The unemployment rate is the proportion of the labor force, which is the people 16 and older who either are working or are looking for work, that is unemployed. The cost of unemployment is the reduced output that could have been made with full employment, as well as the psychological costs to the unemployed. Diff: 1 Topic: 7.1 Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 7.2 The Major Types of Unemployment 1) Frictional unemployment will always exist since A) some workers will always want to make a job transition. B) the capitalist system promotes unemployment. C) mismatches in skills will always exist. D) the U.S. economy will continue to shrink. Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 2) Suppose that Jason quits a job with Corporation A in order to look for more rewarding employment. Jason would be A) counted as still being employed. B) included in the economy's "hidden employment." C) counted as frictionally unemployed. D) counted as cyclically unemployed. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

3) If a person loses her job because her abilities and skills are a poor match with current requirements of employers, this person is considered A) structurally unemployed. B) frictionally unemployed. C) a discouraged worker. D) seasonally unemployed. Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 4) If a person is fired for poor performance but possesses skills required to obtain another job after some searching, this person is considered A) seasonally unemployed. B) frictionally unemployed. C) structurally unemployed. D) a discouraged worker. Answer: B Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 5) Bee's assembly line job has been replaced by robots, and Bee lacks abilities and skills required to attain other jobs. She is considered A) structurally unemployed. B) frictionally unemployed. C) seasonally unemployed. D) a discouraged worker. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

6) Collin has lost his job with a telemarketing company, which has moved its operation to India. Collin is considered A) structurally unemployed. B) frictionally unemployed. C) seasonally unemployed. D) a discouraged worker. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 7) Many economists would argue that some frictional unemployment A) creates massive economic disruptions and should be eliminated as quickly as feasible. B) should be eliminated whatever the cost. C) no longer exists because increased unemployment benefits have generally solved this problem. D) cannot and probably should not be eliminated. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 8) Frictional unemployment would increase when A) migrant workers are unemployed after harvest season. B) the number of individuals who quit one job to find another increases. C) discouraged workers drop out of the work force. D) workers are replaced by machines in production. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

9) A recent accounting graduate from a major business school is searching for a place to begin his career as an accountant. This individual is A) structurally unemployed. B) seasonally unemployed. C) cyclically unemployed. D) frictionally unemployed. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 10) When an individual is frictionally unemployed, the unemployment arises from A) a short-term elimination of jobs because of a slowdown in business activity. B) imperfect labor market information which requires individuals to search for appropriate employment. C) the permanent elimination of jobs because of a change in the structure of the economy. D) a reduction in the overall demand for labor's skills. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 11) Which one of the following individuals would be classified as structurally unemployed? A) Joe was laid off by his construction company because there was a reduction in the number of houses built in the winter. B) Gail lost her job with the state because there was a reduction in the state budget. C) Johnny lost his job at a Sears department store, which had lost considerable business to online shopping services. D) Fay lost her job in early January when the Christmas store where she worked was closed. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

12) The fact that a number of lifeguards lose their jobs at the end of each summer would be counted as A) cyclical unemployment. B) frictional unemployment. C) seasonal unemployment. D) structural unemployment. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 13) A lifeguard who is out of work in the winter is A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 14) An example of a frictionally unemployed individual is A) Charles, who has lost his job as an auto worker because of increased imports. B) Mary, who quit her job to find work closer to her home. C) Sam, who lost his job as a real estate salesperson when the housing market went soft. D) Cynthia, who has few skills and is no longer looking for work. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

15) Cyclical unemployment occurs when A) individuals enter the labor market and make the rounds of potential employers. B) individuals with skills no longer valued in the domestic labor market cannot find employment. C) individuals give up the search for employment. D) a downturn in economic activity decreases employment. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 16) An example of a cyclically unemployed individual is A) Bonnie, who lost her job as a real estate salesperson when the housing market declined. B) Alice, who quit her job to enter college. C) Mary, who lost her job in the textile industry following a decrease in the tariff on textiles. D) Bobby, who lost his job in an oil production company after a surge in global oil supply led to falling oil prices. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 17) If an outdoor vendor loses her job when winter weather comes, this individual is A) seasonally unemployed. B) cyclically unemployed. C) structurally unemployed. D) chronically unemployed. Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

18) Structural unemployment results when A) a reduction in consumer income reduces demand for products. B) individuals enter the labor market in June following graduation. C) workers face layoffs following a decrease in economic activity. D) the introduction of a product substitute leads to a large decline in the market demand for a product so that workers specializing in the production of that product find themselves out of work. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 19) Which of the following explains why frictional unemployment exists? A) Some workers have skills that have become obsolete. B) There are individuals who work part-time but prefer to work full-time. C) There are costs associated with searching for jobs. D) Policy makers have been unable to prevent recessions. Answer: C Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 20) Unemployment that is caused by business recessions is called A) frictional unemployment. B) cyclical unemployment. C) seasonal unemployment. D) structural unemployment. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

21) A person quits her job in order to spend time looking for a better paying job. This is an example of A) frictional unemployment. B) cyclical unemployment. C) seasonal unemployment. D) structural unemployment. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 22) Environmental regulation reduces the demand for Pennsylvania coal and the unemployment rate in Pennsylvania increases. This is an example of A) frictional unemployment. B) cyclical unemployment. C) structural unemployment. D) regulatory unemployment. Answer: C Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 23) Unemployment due to the fact that workers have difficulty in the search for appropriate job offers is A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

24) Unemployment that results from a mismatch of workers' abilities and skills with current requirements of employers is A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 25) Unemployment that results from business recessions that occur when aggregate demand is insufficient to create full employment is A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 26) Unemployment that results from the seasonal pattern of work in specific industries is A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

27) Frictional unemployment always exists because A) some workers quit their jobs without having another job already lined up. B) the government has never instituted full employment policies. C) workers are lazy and refuse to accept certain jobs. D) recessions are necessary sometimes to keep the economy healthy. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 28) Frictional unemployment is A) related to job search difficulties for potential workers. B) a result of a poor match of worker's abilities and skills with current requirements of employers. C) a result of business recessions that occur when aggregate demand is insufficient to create full employment. D) a result of the seasonal pattern of work in specific industries. Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 29) A worker who has quit her job to obtain a higher paying job would be included in which unemployment category? A) frictional unemployment B) cyclical unemployment C) structural unemployment D) seasonal unemployment Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

30) To prevent frictional unemployment, we would have to A) make sure that market demand for goods is stable over time. B) eliminate the business cycle. C) prevent people from leaving their jobs before finding another job. D) make sure everyone went to college. Answer: C Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 31) Structural unemployment is A) due to the fact that workers must search for appropriate job offers. B) a result of a poor match of worker's abilities and skills with current requirements of employers. C) a result of business recessions that occur when aggregate demand is insufficient to create full employment. D) a result of the seasonal pattern of work in specific industries. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 32) Cyclical unemployment is A) related to job search difficulties for potential workers. B) a result of a poor match of worker's abilities and skills with current requirements of employers. C) a result of business recessions that occur when aggregate demand is insufficient to create full employment. D) a result of the seasonal pattern of work in specific industries. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

33) Cyclical unemployment is caused by A) technological change. B) changes in an economy's overall condition. C) a dynamic economy in which people want to switch jobs sometimes. D) predictable shifts in production associated with different seasons. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 34) Seasonal unemployment is A) due to the fact that workers must search for appropriate job offers. B) a result of a poor match of worker's abilities and skills with current requirements of employers. C) a result of business recessions that occur when aggregate demand is insufficient to create full employment. D) a result of the seasonal pattern of work in specific industries. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 35) The seasonally adjusted unemployment rate A) reports only seasonal unemployment. B) removes the seasonal variation from the unemployment rate. C) is impossible to compute since no one knows what the seasonal component equals. D) is another name for structural unemployment. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

36) Which of the following statements is TRUE about the seasonally adjusted unemployment rate? A) The seasonally adjusted unemployment rate is the sum of the frictional unemployment rate, structural unemployment rate, and cyclical unemployment rate. B) The seasonally adjusted unemployment rate shows how the unemployment rate fluctuates with the various seasons. C) The seasonally adjusted unemployment rate is the same as the natural rate of unemployment. D) The seasonally adjusted unemployment rate is the rate computed for fall, spring, summer and winter. Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 37) A person graduates from college, then starts to look for a job. This is an example of A) cyclical unemployment. B) frictional unemployment. C) seasonal unemployment. D) structural unemployment. Answer: B Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 38) When the automobile replaced the horse as the primary means of transportation, the unemployment rate of blacksmiths increased. This was an example of A) cyclical unemployment. B) frictional unemployment. C) seasonal unemployment. D) structural unemployment. Answer: D Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

39) A cutback in the space program due to a slow economy causes an increase in unemployment among aeronautical engineers. This is an example of A) cyclical unemployment. B) frictional unemployment. C) seasonal unemployment. D) structural unemployment. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 40) A recession causes a decrease in the demand for housing, resulting in substantial layoffs in the construction industry. This is an example of A) cyclical unemployment. B) frictional unemployment. C) seasonal unemployment. D) structural unemployment. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 41) The United States experienced a deep recession between 2007 and 2009. Which type of unemployment would most likely increase during that period of recession? A) cyclical unemployment B) frictional unemployment C) seasonal unemployment D) structural unemployment Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

42) Reductions in employment in the U.S. auto industry caused by the increased adoption of new technologies to produce cars more efficiently is an example of A) cyclical unemployment. B) frictional unemployment. C) seasonal unemployment. D) structural unemployment. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 43) A person who is employed in the construction industry may frequently experience A) frictional unemployment. B) structural unemployment. C) seasonal unemployment. D) technological unemployment. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 44) Teresa just graduated from college, is unemployed, and looking for her first real job. This is an example of A) frictional unemployment. B) structural unemployment. C) seasonal unemployment. D) cyclical unemployment. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

45) Hailey worked for Autonation and was laid off when car sales fell during a recession with falling incomes. This is an example of A) frictional unemployment. B) structural unemployment. C) seasonal unemployment. D) cyclical unemployment. Answer: D Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 46) Suppose that unemployment increases because the government requires employers to provide more funds for their employees' retirement programs. The increase in unemployment is most likely a result of an increase in A) frictional unemployment. B) structural unemployment. C) the natural rate of unemployment. D) cyclical unemployment. Answer: B Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 47) Mr. Ramirez lost his job at a steel mill due to competition from cheaper imported steel. He would be classified as A) frictionally unemployed. B) not in the labor force. C) cyclically unemployed. D) structurally unemployed. Answer: D Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

48) After completing college, Mohamed spent three months looking for a job. During this period, Mohamed would be classified as A) frictionally unemployed. B) not in the labor force. C) cyclically unemployed. D) structurally unemployed. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 49) Unemployed U.S. residents who are, in effect, merely searching for work between jobs, are defined as A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 50) Monica recently lost her job as a teller at the bank. The bank explained that they were replacing Monica and others with ATM machines. Monica falls into a category of unemployment known as A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: B Diff: 3 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

51) In 2014, some European countries were dealing with a recession. Workers who were laid off in those countries due to the economic downturn would be A) frictionally unemployed. B) structurally unemployed. C) cyclically unemployed. D) seasonally unemployed. Answer: C Diff: 3 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 52) Liza had a job as a human resource manager of a restaurant chain that went out of business due to a downturn in the economy. This is an example of A) cyclical unemployment. B) structural unemployment. C) seasonal unemployment. D) technological unemployment. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 53) The unemployment rate reported by the Bureau of Labor Statistics includes all of the following types of unemployment with the exception of A) frictional unemployment. B) structural unemployment. C) hidden unemployment. D) cyclical unemployment. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

54) A person who is unemployed because of a mismatch between the person's skills and current employment requirements is experiencing A) frictional unemployment. B) structural unemployment. C) cyclical unemployment. D) seasonal unemployment. Answer: B Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 55) The natural rate of unemployment includes A) cyclical unemployment. B) hidden unemployment. C) part-time employment. D) structural unemployment. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 56) Which of the following best describes an economy with full employment? A) "Everyone who is looking for a job will have one." B) "No person is unemployed for whatever reason." C) "Full employment occurs only when the economy has a zero percent unemployment rate." D) "The level of unemployment that corresponds to the normal friction in the labor market." Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

57) Full employment does NOT necessarily mean that every adult has a job because A) students and homemakers are always looking for work. B) there are always some discouraged workers. C) policy makers never want to achieve full employment. D) there are transaction costs in finding a job in the labor market. Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 58) The natural rate of unemployment does NOT include which of the following? A) cyclical unemployment B) frictional unemployment C) seasonal unemployment D) all of these Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 59) An unemployment rate of zero cannot be expected since A) there are some people who do not want to work. B) there will always be discouraged workers. C) some portion of the labor force will always be between jobs. D) aggregate demand can never create enough job vacancies. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

60) Which of the following statements about full employment is correct? I. Full employment means that the unemployment rate is less than 1/2 of 1 percent. II. Full employment means that the transaction costs associated with getting a job are zero. A) I only B) II only C) Both I and II D) Neither I nor II Answer: D Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 61) Full employment means that A) everyone who wants a job has a job, although it may not be the job they really want. B) everyone who wants a job has a job, and they have the job they most prefer. C) taking seasonal fluctuations into account, only frictional and structural unemployment exist. D) the sum of structural and cyclical unemployment is greater than frictional unemployment. Answer: C Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 62) Full employment is defined by the Council of Economic Advisers as A) a zero percent unemployment rate. B) every adult who wants to work has a job. C) the unemployment rate associated with zero inflation. D) the unemployment rate associated with the normal frictions in the labor market. Answer: D Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

63) The natural rate of unemployment when seasonally adjusted includes A) frictional and structural unemployment but not cyclical. B) frictional and cyclical unemployment but not structural. C) frictional unemployment only. D) cyclical and structural unemployment but not frictional. Answer: A Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 64) In conditions of full employment, A) no one in or out of the labor force is unemployed. B) the only unemployment results from a normal frictions and structural mismatches in the labor market. C) the only unemployment results from cyclical swings in economic activity. D) no one in the labor force is unemployed. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 65) Full employment is NOT zero unemployment because A) there are statistical errors when determining the unemployment rate that cannot be overcome. B) there is "normal" friction in the economy made up of those workers who are between jobs and those new entrants to the labor force. C) there are undocumented workers in the economy who are not counted by the Bureau of Labor Statistics. D) government workers are not counted in the labor force. Answer: B Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

66) The natural rate of unemployment is best described as A) the unemployment rate when the economy is at its peak. B) the sum of cyclical, frictional and structural unemployment. C) the unemployment rate that prevails in the long run. D) 0 percent. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 67) Full employment is A) zero unemployment. B) when the unemployment level is reduced to the goal set by Congress. C) the unemployment level when the normal friction in the economy is taken in account. D) when all adults looking for work can find full time occupation. Answer: C Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 68) The natural rate of unemployment is the rate of unemployment that A) all workers and employers have fully adjusted to any changes in the economy. B) occurs when all workers find work in the economy. C) is an unrealistic goal set by policymakers. D) occurs when employers find more than one job applicant for each job available. Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 69) Full employment in the United States A) means a 100% employment rate. B) means 0% unemployment for 6 months. C) means the economy has no cyclical unemployment. D) means that the cyclical unemployment rate is about 2%. Answer: C Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

70) The level of unemployment that is equal to the frictional and structural rate in the long run is sometimes referred to as A) cyclical employment. B) the natural rate of unemployment. C) the total rate of unemployment. D) the zero unemployment rate. Answer: B Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 71) When Joe, who is among the highest-paid workers in a field in which there are numerous job openings across the nation, recently became unemployed, his opportunity cost of job search is A) average, so the length of his period of unemployment is likely to be long. B) relatively high, so the length of his period of unemployment is likely to be short. C) relatively low, so the length of his period of unemployment is likely to be long. D) relatively high, so the length of his period of unemployment is likely to be long. Answer: B Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 72) Which one of these factors plays a role in determining the extent and duration of frictional unemployment? A) the ease with which job seekers can obtain information about job openings B) the degree to which the overall level of business activity fluctuates up and down C) the extent to which government legislation requires firms to provide health insurance for employees D) the education and skill levels of labor force participants Answer: A Diff: 2 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

73) Describe the major types of unemployment. Answer: Frictional unemployment is the continuous flow of people from job to job. Seasonal unemployment refers to changes in employment related to seasonal-type of work, such as work at summer resorts or winter ski lodges. Structural unemployment refers to unemployment of workers over lengthy intervals resulting from skill mismatches of prospective employees' abilities and requirements of employers, and from fewer jobs being offered by employers constrained by government regulations and labor market policies. Cyclical unemployment has to do with those unemployed due to a downturn in business activity. Diff: 1 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 74) What is meant by full employment? Why isn't the full employment rate zero? What causes frictional unemployment? Answer: Full employment is the level of unemployment that corresponds to normal friction in the labor market. Since a dynamic economy will always experience changes in demand for goods and services, there will always be some frictional unemployment. Frictional unemployment refers to the unemployment resulting from the time people spend between jobs, looking for other work. Diff: 3 Topic: 7.2 The Major Types of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 7.3 Inflation and Deflation 1) A major element of the concepts of inflation and deflation is A) the idea that price changes are measured daily. B) their dependence on average rather than individual prices. C) the requirement that ALL prices must be moving in the same direction. D) each household's willingness to report what they pay for goods and services each month. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

2) A sustained decrease in the average of all prices of goods and services in the economy is known as A) inflation. B) disinflation. C) deflation. D) hyperinflation. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 3) The statistical measure of a weighted average of prices of goods and services that firms produce and sell is known as A) the inflation rate. B) the consumer price index (CPI). C) the producer price index (PPI). D) the Gross Domestic Product (GDP) deflator. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 4) Inflation is best described as a situation in which A) relative prices are changing. B) some prices are rising faster than others. C) relative prices are changing, but the purchasing power of the dollar is unchanged. D) the average of all prices are on a sustained rise over a period of time. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

5) Deflation is defined as a situation in which A) the rate of inflation is below 2 percent. B) the average of all prices of goods and services in an economy is falling. C) the value of the dollar is rising relative to other currencies. D) the Gross Domestic Product's growth rate is less for a given quarter than it was for the prior quarter. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 6) Inflation is best defined as A) a sustained increase in the price of ALL goods and services in an economy. B) a relative price increase. C) a sustained increase in the average of all prices of goods and services in an economy. D) a sustained increase in the price of a single good or service. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 7) Deflation refers to a situation in which A) the inflation rate decreases. B) the average of all prices is falling. C) there is a recession and inflation. D) prices are not changing. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

8) The rate of inflation and the purchasing power of money are A) positively related. B) totally unrelated. C) inversely related. D) randomly related. Answer: C Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 9) The faster the drop in the purchasing power of money, the faster the A) drop in the inflation rate. B) drop in the deflation rate. C) increase in the deflation rate. D) increase in the inflation rate. Answer: D Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 10) The value of your money income, in terms of buying goods and services, is referred to as your money's A) staying power. B) rigidity factor. C) purchasing power. D) transaction cost. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

11) By definition, the purchasing power of money always drops when A) inflation occurs. B) deflation occurs. C) the economy is experiencing full employment. D) there is a presidential election year. Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 12) The nominal value of a good is A) the good's value expressed in purchasing power terms. B) the good's anticipated value one year from now. C) the price of the good in today's dollars, minus an anticipated inflation premium. D) the price of the good in today's dollars. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 13) The formula for computing a basic price index is A) (cost of market basket today/cost of market basket in base year) × 100. B) (cost of market basket in base year/100) × cost of market basket today. C) (cost of market basket in base year/cost of market basket today) × 100. D) (100/cost of market basket in base year) + cost of market basket today. Answer: A Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

14) If the current price of a market basket of goods is $600 and the base year price for the same market basket is $500, what is the value of the price index? A) 140 B) 120 C) 150 D) 100 Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 15) Assume that the current price of a market basket of goods is $5,000 and the base year price of the same market basket is $4,000. The current price index is A) 2500. B) 400. C) 200. D) 125. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

16) According to the above table, in Year 3, the price index for widgets is A) 100. B) 200. C) 75. D) 150. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

17) According to the above table, in the base period (Year 1), the price index is A) 100. B) 200. C) 75. D) 150. Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 18) The Consumer Price Index measures A) the average of raw material prices paid by producing firms. B) the level of prices with respect to goods and services purchased by a typical consumer in urban areas. C) the average of the prices of all goods produced in a country and goods imported from other countries. D) hourly wage rates of manufacturing workers. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 19) Which of the following price indexes is designed to measure changes in the prices of goods and services purchased by a typical individual? A) Producer Price Index B) Gross Domestic Product (GDP) Deflator C) Index of Leading Economic Indicators D) Consumer Price Index Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

20) A price index shows A) the current cost of a basket of goods. B) the relative price of necessities. C) the price of goods in the future. D) the cost of today's goods expressed in terms of the cost of goods in a base year. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 21) Assume that there was a 5 percent increase in the price of all goods in 2015; if the base year is 2014, then the price index in 2015 will be A) 95. B) 105. C) 110. D) 1100. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 22) The statistical measure of the weighted average of prices of goods purchased by a typical individual is called the A) Producer Price Index. B) Gross Domestic Product (GDP) deflator. C) Consumer Price Index. D) Personal Consumption Expenditure Index. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

23) The broadest indication of economy-wide inflation is captured by the A) Consumer Price Index. B) Gross Domestic Product (GDP) deflator. C) Producer Price Index. D) Personal Consumption Expenditure Index. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 24) Which of the following measures gives the earliest warning of increasing inflation? A) the Consumer Price Index B) the Producer Price Index C) the Personal Consumption Expenditure Index D) All of these should signal the same short-run inflation. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 25) Last year the price of a dozen eggs was $2, and this year the price is $2.60. Which of the following does NOT express this price change accurately? A) The price increased 30 percent. B) The price increased by 60 cents. C) If last year was the base year, the index number for this year would be 130. D) If this year is the base year, the index number for last year would be 130. Answer: D Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

26) Last year you purchased 20 USBs at $12 apiece, 10 shirts at $15 each, and 5 sweaters at $30 each (total spending equals $540). This year you buy 18 USBs at $15 each, 10 shirts at $16 each, and 6 sweaters at $36 each (total spending equals $640). If last year's index was 100, this year's index A) is 119.6. B) is 118.5. C) is 83.6. D) is 30. Answer: B Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 27) In computing a price index, A) the most recent year is always set equal to 1. B) both the quantities in the market basket and the prices change from year to year. C) the quantities in the market basket stay the same while the prices differ. D) the base year must be one for which the inflation rate was zero. Answer: C Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 28) The price index that measures the changes in prices of ALL goods and services produced by the economy is the A) CPI. B) PPI. C) Gross Domestic Product (GDP) deflator. D) Personal Consumption Expenditure Index. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

29) The consumer price index (CPI) is a measure of inflation for A) farmers. B) an elderly couple recently retired to Yuma, Arizona. C) Apple Computer. D) a typical consumer of the market basket used to calculate the index. Answer: D Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

30) If 2017 is the base year, what is the price index for a market basket of goods for 2018 in the above table? A) 97.3 B) 102.8 C) 128.0 D) Zero, since the price of CDs fell and the price of gasoline increased Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 31) Which of the following is a measure of general inflation that is NOT based on a fixed market basket of goods and services? A) consumer price index B) producer price index C) personal consumption expenditure index D) consumer price index excluding prices of food and energy Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

32) The relationship between the producer price index (PPI) and the consumer price index (CPI) is such that, in the short run A) the CPI usually increases before the PPI. B) the CPI and the PPI usually move simultaneously. C) the PPI usually increases before the CPI. D) the CPI and the PPI usually move in opposite directions. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 33) If the Bureau of Labor Statistics changed the way it calculates the consumer price index (CPI) so as to take into account product quality changes and the changing mix of products and services purchased by the average family, the result would most likely A) show a higher rate of inflation. B) show a lower rate of inflation. C) cause an increase in Social Security payments. D) cause higher wage increases for union employees with contracts that specify automatic wage boosts when the CPI rises. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 34) Inflation refers to the situation when A) the prices of necessities increase. B) the average of all prices is increasing. C) all prices rise by the same rate. D) the rate at which prices are rising is rising. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

35) Deflation is the situation when A) the rate at which prices increase falls. B) the average of all prices is declining. C) the real rate of interest is negative. D) some prices are increasing and some are declining. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 36) Which of the following statements is NOT true about inflation? A) Inflation is a sustained increase in the average prices of goods in the economy. B) During an inflationary period, the prices of some goods will increase while the price of some goods will decrease. C) When there is inflation, the purchasing power of a dollar decreases. D) During an inflationary period, the prices of all goods will increase. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 37) The purchasing power of money increases when A) the inflation rate increases. B) there is inflation. C) there is deflation. D) there are more dollars in the economy. Answer: C Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

38) The value of money for buying goods and services is known as A) inflation. B) nomination. C) nominal income. D) purchasing power. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 39) Which of the following statements is TRUE if your money income stays the same but the price of one good that you are buying goes up? A) Your effective purchasing power falls. B) Your nominal income has been decreased. C) You will have to reduce the quantities you purchase of all goods. D) Your real income has increased. Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 40) The greater the inflation rate, the A) faster the decrease in the purchasing power of money. B) slower the decrease in the purchasing power of money. C) better it is to hold money as cash. D) better it is to put money into savings accounts. Answer: A Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

41) An increase in the price of electricity, ceteris paribus, indicates that A) the purchasing power of money is decreasing. B) the purchasing power of money is increasing. C) electricity is relatively more scarce than it was before. D) inflation is increasing. Answer: C Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 42) The value of an item expressed in purchasing power that varies with the overall price level is known as A) inflation. B) deflation. C) the nominal value. D) the real value. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 43) The value of an item expressed in today's dollars is known as A) inflation. B) deflation. C) the nominal value. D) the real value. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

44) Nathan received a $50 gift certificate to a bookstore a year ago. The economy has been in an inflationary period for the last year. This gift certificate is A) expressed in real terms and is worth more. B) expressed in nominal terms and is worth less. C) not expressed in either real or nominal terms since it is not money. D) adjusted in terms of the CPI. Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 45) A price index is the A) cost of a market basket of goods today. B) cost of a market basket of goods and services a year ago expressed as a percentage of the cost of the same market basket today. C) cost of a market basket of goods and services today expressed as a percentage of the cost of the same market basket during a base year. D) year that is chosen as the point of reference for comparison of prices in other years. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 46) In the base year, the price index A) will be between 1 and 100. B) will always equal 100. C) equals 100 times the cost of the market basket in the base year. D) will equal the year. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

47) The year that is chosen as the point of reference for comparison of prices in other years is known as the A) base year. B) price index. C) purchasing power. D) consumer price index. Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 48) Last year a pair of pants had a price of $20 and this year the price is $25. Which of the following expresses this price change accurately? A) If this year is the base year, the index number for last year would be 120. B) If last year is the base year, the index number for this year would be 120. C) If this year is the base year, the index number for last year would be 80. D) If last year is the base year, the index number for this year would be 80. Answer: C Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 49) Last year you purchased 20 shirts at $15 apiece, 30 USBs at $12 each, and 5 sweaters at $25 apiece. This year you buy 20 shirts at $20 apiece, 30 USBs at $12 apiece, and 5 sweaters at $20 apiece. If last year's index was 100, this year's index is A) 91.3. B) 102.0. C) 109.5. D) 9.5. Answer: C Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

50) Refer to the above table. You are given information on Collin's consumption for 2010 and 2020. Using 2010 as the base year, compute the price index for 2020. The index equals A) 1.5. B) 70.588. C) 141.667. D) 107.143. Answer: C Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

51) Refer to the above table. You are given information on Collin's consumption for 2010 and 2020. Using 2010 as the base year compute the price index for 2020. The index equals A) 0.75. B) 73.007. C) 87.50. D) 136.842. Answer: D Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

52) Refer to the above table. You are given information on Celine's consumption for 2010 and 2018. Using 2010 as the base year compute the price index for 2018. The index equals A) 170. B) 58.823. C) 0.5823. D) 0.17. Answer: A Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

53) Refer to the above table. You are given information on Celine's consumption for 2005 and 2015. Using 2005 as the base year compute the price index for 2015. The index equals A) 40.35. B) 247.826. C) 0.4035. D) 0.2478. Answer: B Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

54) If all prices in the economy go up from one year to the next, the CPI index, using the previous year as the base would A) be less than 100. B) be greater than 100. C) not be influenced since quantities have remained unchanged. D) not be determined since not enough information is given. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 55) When computing a price index, the base year is A) the earliest year for which data are available. B) the year that is chosen as the point of reference for comparison of prices with other years. C) the most recent year for which data are available. D) the most recent year in which the inflation rate was close to zero. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 56) The GDP deflator is A) an index that utilizes a consumer's market basket of goods in calculating the inflation rate. B) the most general indicator of inflation since it measures changes in the prices of all goods and services in the economy. C) an index used to calculate inflation at the wholesale level. D) the least used index because it is so costly to calculate. Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

57) The Consumer Price Index (CPI) is a A) statistical measure of a weighted average of prices of a specific set of goods and services purchased by consumers in urban areas. B) statistical measure of a weighted average of prices of commodities that firms produce and sell. C) price index measuring the changes in prices of all new goods and services produced in the economy. D) statistical measure of average prices using annually updated weights based on surveys of consumer spending. Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 58) The Producer Price Index (PPI) is a A) statistical measure of a weighted average of prices of a specific set of goods and services purchased by wage earners in urban areas. B) statistical measure of a weighted average of prices of commodities that firms produce and sell. C) price index measuring the changes in prices of all new goods and services produced in the economy. D) price index that tracks the price levee of commodities that firms purchase from other firms. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 59) The Personal Consumption Expenditure Index (PCE) is a A) statistical measure of a weighted average of prices of a specific set of goods and services purchased by wage earners in urban areas. B) statistical measure of a weighted average of prices of commodities that firms produce and sell. C) price index measuring the changes in prices of all new goods and services produced in the economy. D) statistical measure of average prices using annually updated weights based on surveys of consumer spending. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 88 Copyright © 2021 Pearson Education, Inc.

60) The GDP deflator is a A) statistical measure of a weighted average of prices of a specific set of goods and services purchased by wage earners in urban areas. B) statistical measure of a weighted average of prices of commodities that firms produce and sell. C) price index measuring the changes in prices of all new goods and services produced in the economy. D) price index that tracks the price level of commodities that firms purchase from other firms. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 61) Suppose medical care makes up 10 percent of the CPI index, and that prices rise in the medical care area faster than in the rest of the economy. An elderly couple spends 30 percent of their income on medical care. For this couple, the CPI A) understates the inflation rate because of the importance of medical care for this family. B) overstates the inflation rate because this family is not typical of the country as a whole. C) understates the inflation rate because the CPI always understates inflation. D) is a good measure of inflation since the bias inherent in the CPI is offset by the increased emphasis on health care for this family. Answer: A Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 62) For the CPI, the value of the index in the base year A) always equals 100. B) depends upon price and quantity that are constantly changing. C) is always greater than 100. D) depends upon what prices did the year before. Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

63) The index that is NOT based on a fixed market basket of goods and services is the A) CPI. B) PPI. C) Wholesale Price Index. D) GDP Price Deflator. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 64) The indices that are based on a fixed market basket of goods and services are A) CPI and GDP deflator. B) PPI and GDP deflator. C) CPI and PPI. D) CPI, PPI and GDP deflator. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 65) The CPI tends to overstate the true inflation rate because A) we cannot know what the true inflation rate is. B) it fails to consider the effects of new products in the marketplace. C) the market basket actually selected is inappropriate. D) the market basket fails to weigh housing costs sufficiently. Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

66) Which of the following is NOT a criticism of the CPI? A) The CPI does not account for the way consumer substitute less expensive items for higher priced items. B) The CPI ignores changes in consumption patterns that occur between years in which it revises the index. C) The CPI ignores successful new products until long after they have been introduced. D) The CPI ignores the changes of prices of goods that firms produce and sell to each other. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 67) Throughout U.S. history, inflation has been highest A) right after a recession. B) right before a recession. C) during periods of war. D) during Republican administrations. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

68) Using the above table, the following is the output of a two-product economy. The price index in this economy in Year 2, assuming Year 1 is the base year, is A) 113.0. B) 88.5. C) 107.1. D) 106.7. Answer: A Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

69) Inflation can be defined as A) an increase in the purchasing power of money. B) a decrease in the purchasing power of money. C) no change in the purchasing power of money. D) an increase in real income. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 70) Which of the following is NOT a measure of the general level of prices? A) Consumer Price Index B) Producer Price Index C) GDP Deflator D) Personal Sales Deflator Index Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 71) An increase in inflation will cause a reduction in which of the following? A) the nominal value of money B) the Producer Price Index C) the GDP deflator D) the real value of money Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

72) Which one of the following is TRUE? A) Inflation increases the real value of money. B) In the base year, the value of a price index is 100. C) The consumer price index measures changes in the average income of consumers. D) The market basket defined for the consumer price index contains more items than does the market basket defined for the GDP deflator. Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 73) Economists agree that the structure of the Consumer Price Index has some problems that limit its usefulness as a reliable measure of inflation. What is one of these drawbacks? A) It is based on the faulty assumption that each consumer buys only one unit of each item. B) It is based on the faulty assumption that consumption choices are not influenced by income levels. C) It ignores changes in consumption patterns brought about by changes in the relative prices of consumer goods. D) It is based on a market basket of mail-order items and does not include the goods that consumers typically purchase. Answer: C Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 74) Which government agency compiles the consumer price index? A) the Congressional Budget Office B) the Government Accounting Office C) the Bureau of Labor Statistics D) It is not compiled by a government agency, but rather by an independent research institution called the Conference Board. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

75) Which is the broadest price index reported in the United States? A) the CPI-U B) the GDP deflator C) the consumer price index D) the producer price index Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 76) The GDP deflator is NOT a fixed-quantity price index, but the CPI is. What is the significance of this fact? A) The GDP deflator does not include enough items in its market basket. B) A base year cannot be defined for the GDP deflator. C) The GDP deflator reflects not only changes in prices, but also changes in consumption patterns as consumers substitute between goods. D) The GDP deflator overstates the true rate of inflation, whereas the CPI understates it. Answer: C Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 77) How has the pattern of movements in the U.S. price level changed since World War II? A) Periods of inflation have largely been eliminated. B) Periods of deflation have largely been eliminated. C) The annual rate of inflation has never risen above 3 percent. D) The price level has become more volatile. Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

78) The price index for any designated base year must always equal A) the CPI for that year. B) 0. C) 100. D) one divided by the nominal price change for the year. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 79) The government agency which has been given the task of calculating the Consumer Price Index (CPI) is A) the Bureau of Economic Research. B) the Department of State. C) the Council of Economic Advisors. D) the Bureau of Labor Statistics. Answer: D Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 80) The purchasing power of the dollar A) increases as the price of basic goods and services increases. B) is the amount of goods and services that can be purchased with the dollar. C) has been rising in the United States since 1945. D) has remained unchanged in the last 20 years. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

81) In the table shown above, the total cost of the market basket in 2010 was A) $6.00. B) $8.50. C) $60.00. D) $85.00. Answer: C Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 82) In the table shown above, the total cost of the market basket in 2020 was A) $6.00. B) $8.50. C) $60.00. D) $85.00. Answer: D Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 83) If 2010 is the base year in the table shown above, what is the price index for the year 2010? A) 100.0 B) 121.3 C) 147.1 D) 141.7 Answer: A Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

84) If 2010 is the base year in the table shown above, what is the price index for the year 2020? A) 100.0 B) 114.7 C) 147.1 D) 141.7 Answer: D Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 85) Considering the data in the table shown above and 2010 as the base year, what is the inflation rate between years 2010 and 2020? A) 0.0 percent B) 41.7 percent C) 17.1 percent D) 3.4 percent Answer: B Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

A Two-Good Market

86) In the table shown above, assuming that the market basket cost of light bulbs and volleyballs in the base year was $4500, what would the price index for this two-good market equal in the year 2019? A) 104.86 B) 100.00 C) 112.52 D) 122.22 Answer: D Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

87) Considering the data from the table shown above, assuming that the market basket cost of light bulbs and volleyballs in the base year was $4500, what would be the price index for the year 2020? A) 177.78 B) 156.30 C) 100.00 D) 92.70 Answer: A Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 88) In the United States, most often the ________ changes first, and the ________ follows. A) CPI; PPI B) GDP deflator; CPI C) PPI; CPI D) PCE; CPI Answer: C Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 89) The term "market basket" means a A) collection of goods that can fit into an average shopping cart. B) collection of goods that changes every year and is defined by Congress. C) collection of goods that is used by a typical family. D) collection of goods that is purchased during a holiday season. Answer: C Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

90) The market basket cost $300 in 2020, while it cost $250 in the base year. Therefore, the price index for 2020 A) is 83. B) is 120. C) is 80. D) cannot be calculated because the inflation rate is not given. Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 91) You receive a five percent raise in your hourly wage. The inflation rate is four percent. Your purchasing power A) has increased. B) has decreased. C) has stayed the same. D) is indeterminate. Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 92) You receive a 3 percent raise in your salary. The inflation rate is 4 percent. The purchasing power of your salary has A) increased by 1 percent. B) decreased by 1 percent. C) increased by 11 percent. D) decreased by 11 percent. Answer: B Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

93) In 2020, the price for a market basket of consumer goods is $1,300. In the base year, the cost of the identical market basket was $1,000. The price index in this case is A) 13.0. B) 130.0. C) 200.0. D) 160.0. Answer: B Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 94) In 2020, the price for a market basket of consumer goods is $800. In the base year, the cost of the identical market basket was $1,000. The price index in this case is A) 80.0. B) 130.0. C) 800.0. D) 180.0. Answer: A Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 95) According to your text, during the 2010s, the inflation rate was in which range of percentages? A) 0-5% B) 5-10% C) 10-15% D) 15-20% Answer: A Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

96) How are inflation and the purchasing power of money related? Answer: Inflation is the situation in which the average price of all goods and services is rising. The purchasing power of money is the value of money for buying goods and services. The faster the inflation rate the greater the drop in the purchasing power of money. Diff: 1 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 97) In what ways is the consumer price index flawed? Answer: There are at least three problems with the CPI. First, it is a fixed-quantity index, which means that it doesn't take into consideration the way people change their purchases of goods and services when there are relative price changes. Second, it fails to account for quality changes in goods. Third, it ignores the introduction of new goods. Diff: 3 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 98) What is a price index? How do the CPI, the PPI, the PCE Index and the GDP deflator differ? Answer: A price index is the cost of today's market basket of goods and services expressed as a percentage of the cost of the same market basket during a base year. The CPI, PPI, and GDP deflator differ in the goods and services they cover. The CPI measures price changes for goods and services purchased by consumers. The PPI measures price changes for goods and services charged by firms. The PCE Index measures a weighted average of prices of consumer goods and services based on continuously updated surveys of consumers' purchases. The GDP deflator measures changes in prices of everything produced in the economy. Diff: 2 Topic: 7.3 Inflation and Deflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

7.4 Anticipated Versus Unanticipated Inflation 1) Typically, nominal interest rates and anticipated inflation rates A) move in opposite directions. B) are not related. C) move in the same direction. D) are such that the nominal rate is one-half the anticipated rate. Answer: C Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 2) Unanticipated positive inflation will create A) losses for creditors and gains for debtors. B) losses for both creditors and debtors. C) gains for both creditors and debtors. D) gains for creditors and losses for debtors. Answer: A Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 3) Most of the problems caused by inflation are caused by the fact that A) there are no ways available for people to protect themselves against inflation. B) anticipated inflation induces people to protect themselves against inflation. C) inflation causes the purchasing power of the dollar to increase. D) the inflation is often unanticipated and therefore comes as a surprise to individuals in the economy. Answer: D Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

4) Fully anticipated inflation occurs when A) the actual inflation rate equals the anticipated inflation rate. B) the actual inflation rate is less than the anticipated inflation rate. C) the inflation rate is zero. D) the anticipated inflation rate and the unanticipated inflation rate are equal. Answer: A Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 5) The real rate of interest is the A) nominal rate of interest minus the anticipated rate of inflation. B) current rate actually paid by the borrower. C) difference between the bank's lending and savings rates. D) current rate which the government pays on its debt. Answer: A Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 6) If the rate of inflation is 5 percent and the real interest rate is 3 percent, the nominal interest rate should be A) 2 percent. B) 4 percent. C) 8 percent. D) -2 percent. Answer: C Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge

7) Under which one of the following situations would you be better off? A) You have $10,000 in your savings account paying 5 percent per year and unanticipated inflation is 8 percent per year. B) You have paid $500 for a $1,000 U.S. savings bond that matures in 10 years and unanticipated inflation is 10 percent per year. C) You lend a friend $10,000 at 3 percent to be repaid in one year and unanticipated inflation is 6 percent during the year. D) You borrowed $10,00 at 3 percent to pay for this year's college expenses and unanticipated inflation is 6 percent during the year. Answer: D Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 8) Suppose that you borrow $100,000 from the bank to purchase some land and you agree to pay 2 percent interest on the loan. If the loan must be repaid in 12 months and the inflation rate is 4 percent during the year, then A) you will repay the bank with dollars with more purchasing power than you initially borrowed. B) you will repay the bank with fewer dollars than the bank initially loaned you. C) you will repay the bank with dollars with less purchasing power than it initially loaned you. D) the bank will receive fewer dollars, because of inflation, than it had initially expected to receive. Answer: C Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 9) The real rate of interest is defined as A) zero. B) the nominal rate of interest. C) the nominal rate of interest minus the anticipated inflation rate. D) the nominal rate of interest plus the anticipated inflation rate. Answer: C Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

10) The annual rate of inflation averaged 2 percent during the past decade, but borrowers and lenders anticipate that the price level will rise at a rate of 3 percent next year. The current nominal interest rate is 7 percent. The real rate of interest is A) 10 percent. B) 9 percent. C) 5 percent. D) 4 percent. Answer: D Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 11) Assume you borrow funds to buy a new car at 5 percent interest and you think that the economy-wide rate of inflation over the life of the loan will be 4 percent. If you are correct in your assumption, your real rate of interest on the car loan will be A) 1 percent. B) 2 percent. C) 4 percent. D) 5 percent. Answer: A Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 12) Who stands to gain as a result of unanticipated inflation? A) creditors B) debtors C) persons living on a fixed income D) retired individuals Answer: B Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

13) During a period of unanticipated inflation, the group that is most likely to benefit is A) debtors. B) savers. C) creditors. D) retired individuals. Answer: A Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 14) When the unanticipated inflation rate is zero, A) creditors gain at the expense of debtors. B) debtors gain at the expense of creditors. C) neither creditors not debtors gain or lose. D) both creditors and debtors lose at the expense of the government. Answer: C Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 15) The cost of inflation to society includes I. The opportunity costs of resources used by people to protect themselves against inflation II. The costs associated with recalculating prices A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 3 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

16) Inflation can cause a misallocation of resources because A) inflation doesn't proceed evenly which means that people have a difficult time determining when a price change signals a change in relative prices. B) firms have to change their price labels at unusual times. C) the nominal rate of inflation doesn't equal the real rate of inflation. D) people are encouraged to borrow too much. Answer: A Diff: 3 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 17) An unexpected reduction in inflation would tend to benefit which of the following? A) creditors B) debtors C) creditors and debtors D) neither creditors nor debtors Answer: A Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 18) For most people, the problems of inflation are caused by the fact that A) the inflation is unanticipated. B) the inflation is anticipated. C) the inflation rate causes the purchasing power of money to increase. D) all prices change so there is no way to protect themselves against the decline in their wealth. Answer: A Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

19) Unanticipated inflation occurs when A) everyone knows perfectly the true rate of inflation. B) the actual inflation rate differs from the anticipated inflation rate. C) the inflation rate is zero. D) there is no change in the purchasing power of money. Answer: B Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 20) Suppose the actual inflation rate is less than the anticipated inflation rate. Given this information, we know with certainty that the real rate of interest A) is negative. B) is more than the nominal rate of interest. C) equals the nominal rate of interest. D) none of these (i.e., more information is needed to answer this question). Answer: D Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 21) The nominal rate of interest is A) CPI minus an inflationary premium. B) PPI minus an inflationary premium. C) the market rate of interest expressed in today's dollars. D) the real rate of interest minus the anticipated rate of inflation. Answer: C Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

22) The real rate of interest is A) the nominal rate of interest divided by the anticipated rate of inflation. B) negative if the anticipated rate of inflation is zero. C) the market rate of interest expressed in today's dollars. D) the nominal rate of interest minus the anticipated rate of inflation. Answer: D Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 23) With respect to the interest rate, the inflationary premium A) is added to the nominal rate of interest to obtain the real rate of interest. B) is the interest rate expressed in today's dollars. C) covers anticipated depreciation in purchasing power. D) is derived from the COLA. Answer: C Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 24) The price level has been rising 5 percent a year for 10 years and is expected to continue to do so. The nominal rate of interest is 4 percent. The real rate of interest is A) 5 percent. B) 1 percent. C) 9 percent. D) -1 percent. Answer: D Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

25) The inflation rate has been 7 percent for 10 years, and the nominal interest rate has been 6 percent during this same time period. Suddenly, the public anticipates that the inflation rate will be 6 percent this coming year. The real rate of interest for the coming year is A) 0 percent. B) 2 percent. C) 4 percent. D) 13 percent. Answer: A Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 26) The nominal rate of interest is A) the interest rate observed in today's market. B) the interest rate observed in the market minus the inflation premium. C) not influenced by inflation. D) a value that depends upon the stock market. Answer: A Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 27) The real rate of interest is A) the interest rate observed in the market. B) the interest rate observed in the market minus the anticipated inflation rate. C) not influenced by inflation. D) a value that depends upon the stock market. Answer: B Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

28) The real rate of interest equals 4% and the expected rate of inflation equals 2%. The nominal rate of interest equals A) 2%. B) 3%. C) -1%. D) 6%. Answer: D Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 29) The real rate of interest equals 3%, and the expected rate of inflation equals 2%. The nominal rate of interest is A) -1%. B) 1%. C) 5%. D) 0%. Answer: C Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 30) Debtors gain and creditors lose when A) the anticipated rate of inflation is greater than the actual rate of inflation. B) the anticipated rate of inflation is less than the actual rate of inflation. C) the anticipated rate of inflation is the same as the unanticipated rate of inflation. D) the unanticipated rate of inflation is zero. Answer: B Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

31) The menu cost of inflation involves A) the mistakes producers make in adjusting prices. B) the mistake people make when they do not know the actual rate of inflation. C) cost-of-living adjustments. D) the costs associated with changing price lists. Answer: D Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 32) Unanticipated positive inflation A) hurts everyone. B) hurts creditors. C) hurts debtors. D) benefits banks. Answer: B Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 33) A COLA is A) unanticipated positive inflation. B) unanticipated negative inflation. C) the cost associated with recalculating prices and printing new price lists when there is inflation. D) an automatic increase in wages that takes into account increases in the price level. Answer: D Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

34) A clause in a contract that automatically increases wages to account for increases in the price level is A) the GDP deflation. B) the PCE index. C) a COLA. D) the real rate of interest. Answer: C Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 35) The purpose of COLAs is to protect A) lenders. B) borrowers. C) workers. D) businesses. Answer: C Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 36) Which one of the following is TRUE? A) The nominal rate of interest is the real rate plus the anticipated rate of inflation. B) The real rate of interest is the nominal rate plus the anticipated rate of inflation. C) Increases in anticipated inflation increase the real interest rate. D) Increases in the CPI increase the real interest rate. Answer: A Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

37) The real rate of interest can be defined as the A) nominal interest rate less the anticipated rate of inflation. B) anticipated rate of inflation less the nominal interest rate. C) the market rate of interest expressed in today's dollars. D) nominal rate of interest less the unanticipated rate of inflation. Answer: A Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 38) Empirical evidence shows that the nominal interest rate typically rises at the same time the inflation rate increases. What does this suggest? A) The real rate of interest is zero. B) Increases in the current inflation rate lead borrowers and lenders to expect that inflation in the future will be higher than previously thought. C) Interest rate changes are the main component of the CPI. D) Interest rate changes are the main component of the GDP deflator. Answer: B Diff: 3 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 39) Which one of the following would benefit financially from unanticipated inflation? A) a borrower whose loan has a fixed nominal interest rate B) a borrower with an adjustable rate mortgage C) a bank that has made loans at a fixed nominal interest rate D) a firm whose workers are covered by a COLA agreement Answer: A Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

40) Suppose the rate of inflation unexpectedly decreases from 6% to 4%. Which one of the following would most likely benefit from this unexpected reduction in the rate of inflation? A) creditors B) a borrower whose loan has a fixed nominal interest rate C) debtors D) workers who are covered by a COLA agreement Answer: A Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 41) An unexpected increase in the rate of inflation A) benefits both creditors and debtors. B) hurts both creditors and debtors. C) benefits creditors but hurts debtors. D) hurts creditors but benefits debtors. Answer: D Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 42) Unanticipated inflation benefits A) people or businesses who owe funds. B) people or businesses who lend funds. C) people who live on a fixed income. D) people with CDs (certificates of deposits) in the bank. Answer: A Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

43) Who is likely to be helped by unanticipated inflation? A) lenders B) borrowers C) all consumers D) all producers Answer: B Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 44) Why is there a resource cost associated with inflation? A) because unemployment increases when there is inflation B) because most workers end up working fewer hours during periods of inflation C) because consumers, workers, and firms devote resources to protecting themselves from the financial costs of inflation D) because the existence of inflation discourages people from placing their savings in interestbearing accounts, where it is needed to fund capital investment Answer: C Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 45) If a bank advertises 3 percent interest for a checking account and the anticipated rate of inflation is 3.5 percent, A) the real rate of interest earned on the account is 0.5 percent. B) the real rate of interest earned on the account is -0.5 percent. C) the real rate of interest earned on the account is 6.5 percent. D) the real rate of interest earned on the account is 3.25 percent. Answer: B Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

46) How much should a bank charge for a loan, if the anticipated inflation rate is 2 percent, and the bank wants to earn 4 percent on this $1,000,000 loan? A) $20,000 B) $10,000 C) 6 percent D) 0 percent Answer: C Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 47) If your income rises at 5 percent and inflation has risen at 3 percent, then the purchasing power of your income has A) eroded. B) stayed the same. C) fallen, but will increase due to indexing. D) increased. Answer: D Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 48) If you anticipate that the inflation rate is going to rise from 2 percent to 3 percent next year, you should A) save your funds at a fixed rate of interest. B) borrow funds at a fixed rate of interest. C) keep your funds in your sock drawer. D) wait to buy a house until next year. Answer: B Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

49) The real interest rate is A) the nominal interest rate plus the anticipated inflation rate. B) the nominal interest rate minus the anticipated inflation rate. C) the nominal interest rate plus a COLA. D) the nominal interest rate plus the GDP deflator. Answer: B Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 50) If the nominal interest rate is 2 percent and the anticipated inflation rate is 6 percent, then A) the real interest rate is -8 percent. B) the real interest rate is 8 percent. C) the real interest rate is -4 percent. D) the real interest rate is 4 percent. Answer: C Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Application of knowledge 51) During an unanticipated inflation, A) creditors are helped and debtors are hurt. B) creditors are hurt and debtors are helped. C) both creditors and debtors are hurt. D) both creditors and debtors are helped. Answer: B Diff: 1 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 52) An automatic increase in a wage rate found in some contracts is known as a A) change of labor agreement. B) cost of labor arrangement. C) cost of living adjustment. D) charge for living amendment. Answer: C Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 118 Copyright © 2021 Pearson Education, Inc.

53) How is inflation related to interest rates? Answer: People base their decisions on borrowing, lending, and investing on the basis of the real interest rate. If there is anticipated inflation, the nominal rate of interest will equal the real rate of interest plus the anticipated inflation rate. So, interest rates vary directly with anticipated inflation. Unanticipated inflation leads to a real interest rate different from what people thought, and the decisions people made turn out to be mistaken. Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 54) What are the costs to society of inflation? Who is harmed by inflation and who benefits? Answer: The resources used by people to protect themselves against inflation is the major cost of inflation to society as a whole. There is resource misallocation due to people making decisions based on faulty information about the true rate of inflation. In general, creditors are harmed by unanticipated inflation and debtors benefit. Diff: 2 Topic: 7.4 Anticipated Versus Unanticipated Inflation Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 7.5 Changing Inflation and Unemployment: Business Fluctuations 1) The term "business fluctuations" refers to A) changes in overall business activity, as evidenced by changes in national income, employment, and the price level. B) changes in the general price level from inflation to deflation, or vice versa. C) changes in the full employment level of economic activity. D) changes in the value of the dollar. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

2) In sequential order, the four phases of the business cycle are A) trough, peak, expansion, contraction. B) peak, contraction, trough, expansion. C) expansion, contraction, peak, trough. D) contraction, trough, peak, expansion. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 3) The peak phase of the business cycle represents A) a temporary maximum output level of Gross Domestic Product (GDP). B) an increase in foreign investment. C) a labor surplus. D) falling prices. Answer: A Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 4) When economy-wide business activities are increasing, they are referred to as A) contractions. B) expansions. C) anti-cycles. D) corrections. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 5) A recession may be defined as A) a period during which the rate of growth of business activity is consistently less than its longterm trend. B) an increase in real economic output from one period to the next. C) no change in real economic output over a period of time. D) no change in the dollar (money) value of economic output over a period of time. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

6) All of the following are signals of a recession EXCEPT A) a cyclical reduction in employment of labor. B) a slight reduction in a currently high rate of growth in economic activity. C) increasing unemployment. D) a falling level of economic activity. Answer: B Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 7) An economy recovering from a recession moves A) up from its trough to a period of expansion. B) up from its peak to a period of expansion. C) down from its trough to a period of depression. D) down from its peak to a period of expansion. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 8) During a recession A) incomes rise and employment decreases. B) incomes fall and unemployment increases. C) incomes fall and unemployment falls. D) incomes rise and unemployment increases. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 9) When economy-wide business fluctuations are negative, they are referred to as A) contractions/recessions. B) booms. C) expansions. D) peaks. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

10) Contractions are characterized by A) increases in the rate of growth of economic activity. B) an upward movement toward a peak in economic activity. C) a downward movement toward a trough in economic activity. D) a long period in which no cycles are observed in economic activity. Answer: C Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 11) The business cycle phase that must come before the peak is a(n) A) trough. B) expansion. C) recession. D) contraction. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 12) When, over a sustained period of time, the growth of aggregate business activity falls below what is considered the normal growth rate, the economy necessarily experiences A) inflation. B) deflation. C) an expansion. D) a recession. Answer: D Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 13) A period of time in which the overall business activity is rising at a rapid rate is known as A) inflation. B) hyperinflation. C) an expansion. D) a contraction. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

14) The official dating of recessions is done by A) the President. B) the Congress. C) the National Bureau of Economic Research. D) the Council of Economic Advisors. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 15) An extremely severe recession is known as a A) trough. B) peak. C) contraction. D) depression. Answer: D Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 16) A period of time in which the overall pace of business activity is falling is known as A) inflation. B) deflation. C) an expansion. D) a contraction. Answer: D Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 17) A period in which the level of business is consistently less than its long-term trend is known as A) depression. B) recession. C) business cycle. D) growth trend. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

18) A period of time in which the overall pace of business activity is rising is known as A) inflation. B) deflation. C) an expansion. D) a contraction. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 19) The official dating of recessions is done by A) the Council of Economic Advisors. B) the National Bureau of Economic Research. C) the Government Accounting Office. D) the Secretary of the Treasury. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 20) The long-run trend in business activity is A) downward. B) constant. C) upward. D) such that it cannot be described as a trend. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 21) Business fluctuations A) influence unemployment but not inflation. B) influence inflation but not unemployment. C) can influence inflation and unemployment. D) have no influence on inflation and unemployment. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

22) Which of the following would be considered an external shock? A) a decline in tax revenues during a recession B) a recession C) a depression D) a war Answer: D Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 23) Which of the following is a TRUE statement? A) All recessions are due to external shocks. B) Ultimately, no recession has been due to an external shock. C) There have been recessions that cannot be explained by external shocks. D) All recessions and all expansions are due to external shocks. Answer: C Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

24) Refer to the above figure. Point B is known as A) a peak. B) a recession. C) an expansion. D) a contraction. Answer: B Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 25) Refer to the above figure. Point C is known as A) a peak. B) a trough. C) an expansion. D) a contraction. Answer: A Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

26) Refer to the above figure. The points between A and B are known as A) a peak. B) a trough. C) an expansion. D) a contraction. Answer: D Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 27) Refer to the above figure. The points between B and C are known as A) a peak. B) a trough. C) an expansion. D) a contraction. Answer: C Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 28) Refer to the above figure. A recession is best described as A) the upward linear line. B) the period between Point B and Point C. C) the period between Point A and Point B. D) none of these. Answer: C Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 29) Refer to the above figure. At Point B, the actual unemployment rate A) will decrease over time. B) is negative. C) tends to be higher than the natural unemployment rate. D) tends to be lower than the natural unemployment rate. Answer: C Diff: 3 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

30) Ups and downs in business activity are referred to as A) ebb and flow. B) contractions. C) variability. D) business fluctuations. Answer: D Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 31) Business fluctuations in the United States are A) smooth and steady. B) predictable. C) controllable. D) irregular and unpredictable. Answer: D Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 32) Examples of external shocks are all of the following EXCEPT A) war. B) drought. C) oil shock. D) U. S. federal tax policies. Answer: D Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 33) When the economy is experiencing a contraction, there is an increase in A) frictional unemployment. B) structural unemployment. C) seasonal unemployment. D) cyclical unemployment. Answer: D Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

34) The trough of a contraction is A) the point in time at which the level of national business activity reaches a minimum before expanding again. B) the point in time at which the level of national business activity reaches a maximum before contracting again. C) the rate at which the level of business activity is declining. D) an external shock that causes economic activity to decline. Answer: A Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 35) How has the pattern of fluctuations in overall U.S. business activity changed since World War II? A) It has become less volatile. B) Expansions have been eliminated. C) Contractions have been eliminated. D) Recessions have been eliminated. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 36) Changes in business activity are A) referred to as business fluctuations. B) referred to as the ebb and flow of business. C) always undesirable. D) caused by the changing seasons every year. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 37) A decline in business activity is called A) a recession. B) a trough. C) an expansion. D) a peak. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 129 Copyright © 2021 Pearson Education, Inc.

38) Which of the following would be a leading indicator? A) the number of unemployment claims B) the real interest rate C) personal income in the United States D) an increase in stock prices Answer: A Diff: 3 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 39) Which of the following statements is correct? A) The depth and the length of all business cycles are identical. B) The depth and the length of all business cycles are different. C) Business cycles are caused by seasonal unemployment changes. D) Business cycles are caused by unanticipated inflation. Answer: B Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 40) A severe and prolonged recession is called A) a slump. B) a stagnation. C) a trough. D) a depression. Answer: D Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 41) Historically speaking, business fluctuations in an economy were more commonly referred to as A) inflationary pressures. B) economic growth. C) bulls and bears. D) business cycles. Answer: D Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

42) According to business activity charts for the last 100 years, the point of the highest business activity in the United States occurred A) during the 1920s bull market boom. B) during World War II. C) during the Vietnam War. D) during the Trump administration. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 43) A business fluctuation when the pace of economic activity is slowing down is called A) a reduction. B) a contraction. C) a depression. D) a slowdown. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 44) Typically during a recession, A) incomes fall, and unemployment falls. B) incomes and unemployment rise. C) incomes fall, and unemployment rises. D) incomes increase, and unemployment falls. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 45) Changes in leading indicators signal A) the changes in the frictional and seasonal unemployment rate. B) the changes that will occur in the economy. C) the changes in the frictional unemployment rate and the changes in the inflation rate. D) the changes in the market basket. Answer: B Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

46) The National Bureau of Economic Research is A) funded by Congress and evaluates the budget appropriations. B) funded by the Federal Reserve Banks and analyzes the banking system. C) a nonprofit organization and evaluates the business cycles. D) a nonprofit organization and evaluates the U.S. monetary policy. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 47) The period between the trough and the peak of a business fluctuation is called A) the growth phase. B) the spreading out. C) the development. D) the expansion. Answer: D Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

48) Refer the above figure. Stage "1" of the economy is called A) the top. B) the peak. C) the trend. D) the climax. Answer: B Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

49) Refer the above figure. Stage "2" of the economy is called A) a contraction. B) a peak. C) a trough. D) an expansion. Answer: A Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 50) Refer to the above figure. Stage "3" of the economy is called A) a development. B) a pit. C) a trough. D) a hole. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 51) Refer the above figure. Stage "4" of the economy is called A) a maturity. B) a spreading out. C) an expansion. D) a development. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 52) A business fluctuation when the pace of business activity is speeding up is known as A) a contraction. B) a trough. C) an expansion. D) a recession. Answer: C Diff: 1 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

53) A huge snow storm that disrupted U.S. economic activity is known as A) an external shock. B) an expansion. C) a demand shock. D) an internal shock. Answer: A Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 54) What is the business cycle? How "cyclical" is it? What causes the business cycle? Answer: The business cycle refers to the ups and downs in overall business activity over time. It is cyclical in the sense that expansions eventually give way to contractions, which are followed again by an expansion. But, the pattern of the expansions and contractions are neither symmetrical nor repeating. External shocks are important in explaining the business cycle, although they are insufficient alone to explain the cycle. Diff: 2 Topic: 7.5 Changing Inflation and Unemployment: Business Fluctuations Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 8 Measuring the Economy's Performance 8.1 The Simple Circular Flow 1) The simple circular flow of income shows that the total income in an economy equals A) total profits earned by firms. B) all taxes paid by households. C) the total amount of money supplied by the government. D) total expenditures. Answer: D Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 2) The observation that goods and services flow in one direction and money payments flow in another direction is the principle behind A) the double coincidence of wants. B) a barter economy. C) a pure command economy. D) the circular flow of income. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 3) Which of the following is TRUE about product markets? A) Goods and services flow from households to firms. B) Goods and services flow from firms to households. C) Factors (land, labor, capital, and entrepreneurial ability) flow from households to firms. D) Factors (land, labor, capital, and entrepreneurial ability) flow from firms to households. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

4) According to the circular flow, the dollar value of a nation's output is equal to A) profits. B) total income. C) the sum of the values of all inputs. D) wages. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 5) In the factor market, households A) sell resources. B) buy resources. C) are neither buyers nor sellers of resources. D) are both buyers and sellers of resources. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 6) Suppose Dana purchases an iTunes download of her favorite song. This purchase has taken place in the A) product markets. B) factor markets. C) black markets. D) resource markets. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 7) In the product markets, households A) are the buyers of goods and services. B) are the sellers of resources. C) are neither buyers nor sellers in the market. D) none of these is correct. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

8) Which of the following would most likely be sold in the product markets? A) a portable power bank B) stocks and bonds C) plastic material D) entrepreneurial ability Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 9) The value of total output and total income in the simple circular flow model A) are measures of the economy's level of savings. B) include only intermediate goods. C) are equal to each other. D) are related in the sense that national income is less than national product. Answer: C Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 10) Which of the following statements is FALSE? A) One definition of total income is that it is the annual cost of producing the entire output of final goods and services. B) Transactions in which households buy final goods and services occur in the factor market. C) The value of total output is identical to total income. D) Saving is the difference between consumer income and expenditures. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 11) Which of the following statements is FALSE? A) The value of total income is equal in value to total output because profit is a cost of production. B) In the circular flow model, households sell factor services to businesses in return for factor payments. C) Businesses sell goods and services to households who use their income to pay for them. D) Total income is always greater than total output. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 3 Copyright © 2021 Pearson Education, Inc.

12) Which of the following is consistent with the circular flow of income? I. Goods and services flow in one direction. II. Payments and incomes flow in one direction. III. Sellers receive less than what buyers spend. A) I only B) II only C) III only D) Both I and II Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 13) According to the circular flow, the value of total output produced and total income A) should differ by the value of intermediate goods. B) should increase by the unanticipated rate of inflation. C) will always be different by the amount of firm profits. D) will be equal. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 14) One of the principles behind the concept of the circular flow is that A) in every economic exchange, the seller receives exactly the same amount that the buyer spends. B) in every economic exchange, the seller receives less than the amount that the buyer spends. C) the seller of goods receives exactly the same amount that the buyer spends, but the seller of resources receives less than the buyer spends. D) in exchange involving products, the seller receives less than the amount the buyer spends, but in resource markets the seller receives more than the buyer spends. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

15) The circular flow of income shows A) goods, services, and money payments flowing in the same direction. B) goods and money payments flowing in one direction and services flowing in the opposite direction. C) goods and services flowing in one direction and money payments in the other direction. D) goods flowing in one direction and services and money payments flowing in the other direction. Answer: C Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 16) In the simple circular flow model, A) households spend the income they receive from labor services but save the income they receive from selling the other factors of production. B) businesses buy labor services from households, but supply other factors of production themselves. C) households spend their entire income on consumer products. D) profits are a type of income that is not received by households. Answer: C Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 17) In the circular flow model, profits are considered to be A) a subtraction from the Gross Domestic Product (GDP). B) a cost of doing business. C) equal to zero, or else the circular flow would be out of balance. D) a form of interest payment. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 18) Economists consider profit to be A) a cost of producing goods and services. B) the same as a salary. C) a reward for incurring losses. D) something that should be eliminated by antitrust laws. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 5 Copyright © 2021 Pearson Education, Inc.

19) Profits represent A) the income earned from a bond. B) the payments firms make to their employees. C) a reward to entrepreneurs. D) the difference between total tax revenue and total government spending. Answer: C Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 20) How do economists view profits? A) Profits are an asset the business holds. B) Profits are one of the costs paid to a factor of production. C) Profits are guaranteed as long as a firm operates ethically. D) The firm's profit equals the sum of all payments to the 5 factors of production. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 21) In the circular flow, ________ provide the factor services. A) households B) businesses C) producers D) businesses and households Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 22) The circular flow of income involves the idea that A) in every economic exchange one party takes advantage of the other party. B) the seller of a good receives less than the buyer spends. C) the seller of a good receives more than the buyer spends. D) the seller of a good receives exactly the same amount as the buyer spends. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

23) The circular flow of income shows A) the dollar value of output is less than the total income. B) the dollar value of output is more than the total income because of the existence of profits. C) the dollar value of output is exactly equal to the total income. D) the dollar value of output is more or less than the total income, depending on whether profits are positive or negative. Answer: C Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 24) The circular flow of income assumes that A) profit is not a cost of production. B) the national income accounting approach is not an adequate way to measure the economy's performance. C) goods and services flow in one direction and money payments flow in the other. D) total income is the sum of the value of intermediate goods and final goods and services. Answer: C Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 25) In the circular flow model, A) households demand goods and services which are supplied by firms, and the firms demand resources that are supplied by intermediate firms. B) households demand goods and services that are supplied by firms, while supplying resources that are demanded by firms. C) households buy goods and services and firms supply goods. Resources are supplied by other firms. D) households buy goods and services while firms sell goods and services. Firms obtain labor from households, capital from government, and raw materials from firms. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

26) Goods and services are sold A) in the product markets. B) in the factor markets. C) by households. D) only as intermediate goods. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 27) Resources can be purchased A) in the product markets. B) in the factor markets. C) exclusively through the government. D) in the financial markets. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 28) Total income A) is the yearly amount earned by owners of the nation's resources. B) includes only wages received by workers. C) includes only wages and interest payments. D) excludes profits. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 29) The amount earned by owners of the nation's factors of production is A) the wages and fringe benefits received by the nation's workers. B) all profits received by businesses. C) total income. D) private and government transfer payments. Answer: C Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

30) Profits A) are a cost of doing business because entrepreneurs would not incur the risk of starting a business if they didn't expect to earn profits. B) are a cost of doing business because they are payments to others. C) are not a cost of doing business because they are owed to resource owners. D) are not a cost of doing business because they are often zero or negative. Answer: A Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 31) Which of the following statements is TRUE about profits? A) Profits are excluded from the circular flow of the income diagram. B) The only portion of profits that are included in the circular flow diagram are the portion paid out in the form of dividends. C) Profits are considered one of the resources necessary for production. D) Profits are considered a cost of doing business. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 32) Total income is defined as A) the total receipts of firms before taxes. B) the total amount earned by all resource owners. C) the sum of the total receipts of firms and the amount earned by households. D) the sum of the total receipts of firms less the amount of tax that must be paid. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 33) All of the following are incomes earned in the factor market EXCEPT A) wages. B) prices of goods and services. C) profits. D) rents. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

34) The annual cost of producing the entire output of goods and services in the economy A) includes financial transactions. B) can be calculated entirely on the basis of financial transactions. C) includes durable goods but excludes nondurable goods. D) is total income. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 35) Households receive their income in the circular flow diagram by A) selling the use of their property. B) selling the goods they produce at home. C) obtaining dividends and interest payments. D) selling resources they own to business firms. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 36) In the simple circular flow model, the funds received by a carmaker when it sells a car goes to A) the workers who helped build the car. B) the owners of firms who sold materials to the carmaker, and the rest stays with the firm. C) only the owners of the carmaker. D) the owners of all of the resources used to make the car. Answer: D Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 37) Which of the following is most likely NOT a final good or service? A) a portable power bank B) bread in a grocery store C) coffee beans in a coffee shop D) a cookie sold in a bakery Answer: C Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge

38) Refer to the above figure. The top two arrows of the figure refer to the product markets. The bottom arrows refer to the factor markets. Which arrow represents the total monetary value of all goods and services? A) Arrow A B) Arrow B C) Arrow C D) Arrow D Answer: A Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 39) Refer to the above figure. The top two arrows of the figure refer to the product markets. The bottom arrows refer to the factor markets. Which arrow represents the final consumer goods and services? A) Arrow A B) Arrow B C) Arrow C D) Arrow D Answer: B Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

40) Refer to the above figure. The top two arrows of the figure refer to the product markets. The bottom arrows refer to the factor markets. Which arrow represents factor services? A) Arrow A B) Arrow B C) Arrow C D) Arrow D Answer: C Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 41) Refer to the above figure. The top two arrows of the figure refer to the product markets. The bottom arrows refer to the factor markets. Which arrow represents total income? A) Arrow A B) Arrow B C) Arrow C D) Arrow D Answer: D Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 42) Refer to the above figure. Which arrows represent items that are measured in dollar terms? A) Arrows A and B B) Arrows C and D C) Arrows A and D D) Arrows B and C Answer: C Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 43) Refer to the above figure. Which arrows represent items that are NOT measured in dollar terms? A) Arrows A and B B) Arrows C and D C) Arrows A and D D) Arrows B and C Answer: D Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 12 Copyright © 2021 Pearson Education, Inc.

44) A firm produces a good and generates $6 million in receipts. Wages are $1 million, rent is $500,000, and interest payments are $1 million. Then A) profits are $500,000, the cost of production is $2.5 million, and households receive income equal to $4.5 million. B) profits are $1.5 million, the cost of production is $6 million, and households receive income equal to $2.5 million. C) profits are $3.5 million, the cost of production is $6 million, and households receive income equal to $6 million. D) profits are $500,000, the cost of production is $5 million, and households receive income equal to $4.5 million. Answer: C Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 45) In an economy, households receive a total income of $5 million. Of this, $3.5 million are wages received for labor services, $1 million are rental payments, and $250,000 are interest payments received. In this economy, what are the costs of production and profits equal to respectively? A) $5 million; $500,000 B) $5 million; $250,000 C) $7.25 million; $250,000 D) $7.75 million; $0 Answer: B Diff: 3 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 46) The dollar value of final output A) is less than total income. B) is equal to total income. C) is greater than total income. D) equals profits. Answer: B Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

47) Which of the following statements is NOT true about the relationship between the dollar value of total output and total income? A) The dollar value of total output equals total income because the spending of one group is the income of another. B) The dollar value of total output equals total income because profit is considered a cost of production. C) The dollar value of total output equals total income because profit is not considered a cost of production. D) The dollar value of total output equals total income because of the economic definition of profit. Answer: C Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 48) How much of each dollar spent by a consumer ultimately becomes income to someone else? A) one dollar B) more than one dollar C) It depends on how much labor was needed to produce the good that the consumer buys. D) It depends on how much the cost there is in the distribution channel that delivers the good from the manufacturer to the consumer. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 49) The two sectors of the economy in the simple circular flow model are A) the employed and the unemployed. B) foreign markets and domestic markets. C) households and businesses. D) the private sector and the public sector. Answer: C Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

50) In the simple circular flow model, total income in one nation must equal A) the sum of wages, rents, interest and profits. B) the total monetary value of all final goods and services. C) the yearly amount earned by that nation's resources. D) All of these are correct. Answer: D Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 51) Which of the following would most likely be defined as a final good? A) iron ore B) wheat C) a smartphone D) lumber Answer: C Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 52) In the simple circular flow, A) businesses trade goods and services for resources in the product market. B) consumers trade resources for goods and services in the factor market. C) consumers trade goods and services for monetary payments in the factor market. D) producers trade goods and services for monetary payments in the product market. Answer: D Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 53) In the product market, A) businesses trade goods and services for resources. B) consumers trade resources for goods and services. C) consumers trade goods and services for resources. D) consumers trade monetary payments for goods and services. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

54) Which of the following occurs in the factor market? A) Firms exchange goods and services for resources. B) Households exchange resources for goods and services. C) Households exchange money for goods and services. D) Firms exchange money for resources. Answer: D Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 55) Profits are part of the A) total income. B) monetary value of output. C) final consumer goods. D) factor services. Answer: A Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 56) Explain the concept of the circular flow. Answer: The circular flow refers to the interrelationships between income and output. In every exchange the seller receives exactly what the buyer pays. This also means that someone's receipt is someone else's payment. Goods and services flow in one direction and money payments in the other. The total income received by people must equal the total spending of people. Businesses provide goods and services and sell them to households, and households provide the resources used by firms in exchange for income. Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 57) Why must total income be identical to the dollar value of total output? Answer: Total income must be identical to the dollar value of total output because spending by one person is income for another. Further, the definition of profit is important. Profit is the amount left over from total business receipts after all other costs have been paid. Hence, profit is the residual that makes total income equal to the dollar value of total output. Diff: 2 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

58) Where does profit enter in the circular flow? Why? Answer: Profit is a payment made to entrepreneurs just as wages are a payment made to labor. Entrepreneurs must be rewarded for providing their services, and profit is the reward. Hence, profit is a cost of production. Diff: 1 Topic: 8.1 The Simple Circular Flow Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 8.2 National Income Accounting 1) The dollar value of total output in the United States A) equals the value of all physical goods sold in the United States. B) equals the market value of all final goods and services produced in the United States. C) equals all the value of U.S. stocks on the world's stock exchanges. D) equals the value of all resources that can be found in the United States. Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 2) The measurement system used by the U.S. government to estimate national income is A) the GDP deflator. B) national income accounting. C) the sum of financial transactions, transfer payments and secondhand goods. D) the sum of consumption plus investment expenditures. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 3) The approach used in the U.S. to measure the economy's aggregate performance is A) national income accounting. B) to add up the value of intermediate goods. C) the total value of securities. D) to add up the total value of financial transactions, transfer payments, and secondhand goods. E) all of these. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

4) Which of the following would be included in the calculation of Gross Domestic Product (GDP)? A) the value of transfer payments B) the value of the sale of a used guitar C) the value of the sale of 200 shares of Alphabet stock D) the value of spending on a truck Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 5) U.S. Gross Domestic Product (GDP) does NOT include which of the following? A) business investment in the United States B) the value of goods produced in China by a U.S. owned firm C) U.S. exports to Canada D) the purchase of all final goods and services by U.S. households Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 6) Which of the following best describes a nation's Gross Domestic Product? A) the market value of all goods and services produced in the economy, including intermediate goods B) the total market value of all final goods and services produced in the economy during a year C) the constant dollar value of all goods produced in the economy during a year period D) the market value of all goods and services less depreciation Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 7) The total market value of final goods and services produced in an economy during a one-year period is A) Gross Domestic Product. B) net national product. C) profit. D) personal income. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 18 Copyright © 2021 Pearson Education, Inc.

8) Gross Domestic Product measures A) the total value of labor used in the economy. B) the total market value of final goods and services produced within a nation's borders. C) the total income received by residents of a nation. D) the total worth of all goods consumed within the borders of a nation. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 9) Gross Domestic Product is best defined as A) the total market value of all final goods and services produced during a year by factors of production located within a nation's borders. B) the total market value of all intermediate goods and services produced during a year by factors of production located within a nation's borders. C) the value added to all goods produced in an economy during a year. D) the total market value of all final goods and services that exist in an economy at a given point in time. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 10) Suppose the total value of all assets in the Country A is $10 trillion. In 2020, the total value of all final services produced in Country A was $150 billion, the total value of all final goods produced in Country A was $350 billion, and the total value of all final goods and services produced by Country A's firms in other countries was $100 billion. In this situation, Country A's Gross Domestic Product for 2020 was A) $600 billion. B) $510 billion. C) $500 billion. D) $10.5 trillion. Answer: C Diff: 3 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

11) Which of the following transactions is included in Gross Domestic Product? A) a Social Security check received by a retiree B) a gift card that a mother gives her son C) a used textbook that one student gives another student in exchange for a pair of headphones D) tips received by a waitress who reports them to the IRS Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 12) Which of the following is included in determining Gross Domestic Product? A) the purchase of a newly built house B) the purchase of a used car C) a housewife preparing dinner D) a gardener canning vegetables for consumption during the winter Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 13) Goods that are used up entirely in the production of final goods are known as A) durable goods. B) value added goods. C) intermediate goods. D) capital goods. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 14) Which of the following would be included when calculating Gross Domestic Product? A) the purchase of a previously owned house for $300,000 B) the purchase of a used automobile from a friend C) a Social Security check for $1,500 D) none of these Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

15) Intermediate goods are NOT included in Gross Domestic Product (GDP) calculations because A) they are used in the production of final goods and would then be counted twice. B) they are produced overseas. C) they are made from foreign raw materials. D) they have very low value added. Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 16) If Jack refinished his basement himself, the value of his work A) is not included in Gross Domestic Product (GDP). B) is included in Gross Domestic Product (GDP). C) is only included in Gross Domestic Product (GDP) if he uses U.S. made components. D) is included in the next year's Gross Domestic Product (GDP). Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 17) Wheat used for producing bread is A) a final good. B) not going to generate any employment. C) an intermediate good. D) a durable good. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 18) Which of the following transactions would be included in the calculation of Gross Domestic Product (GDP)? A) the purchase of legal services B) the purchase of a share of stock in Apple C) the purchase of wheat by a baker to make bread D) the purchase of a second-hand lawnmower from your neighbor Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

19) Which of the following is a final good? A) seed used for corn B) wheat used for bread C) electricity used for producing automobiles D) a lawn mower purchased by a household Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 20) The farmer pays $0.2 for the seed that is sold to the miller for $0.45; the miller makes flour and sells it to the baker for $0.55. The baker makes bread and sells it to the grocery store for $1.00 and the store sells it to consumers for $1.25. Gross Domestic Product (GDP) is A) $2.20. B) $2.00. C) $1.25. D) $1.00. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 21) A farmer buys seed for 20 cents that is used to grow wheat. The farmer sells the wheat to the miller for 35 cents, and the miller makes flour, which is then sold to the baker for 55 cents. The baker makes bread and sells it to the grocer for 80 cents, and the grocer sells the bread to a family for 90 cents. What is the value added of the baker and what is the sum of the value added at each stage of production? A) 80 cents; $1 B) 80 cents; $2.90 C) 25 cents; $2.90 D) 25 cents; 90 cents Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

22) The term "value added" refers to the dollar value of A) an industry's sales plus profits. B) the intermediate goods and services purchased by an industry. C) an industry's sales less the dollar value of the intermediate goods purchased by the industry. D) the intermediate goods purchased by an industry plus the profits of the industry. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 23) The owner of an oil well in Texas sells 500 barrels of oil to a refinery in Canada for $1,000. This transaction A) will increase Gross Domestic Product (GDP) by $1,000. B) has no effect on Gross Domestic Product (GDP) because the refinery is in Canada. C) decreases Gross Domestic Product (GDP) because oil reserves have fallen by 500 barrels. D) has no effect on Gross Domestic Product (GDP) because this is the sale of an intermediate product. Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 24) Intermediate goods are goods that are used up entirely in the production of final goods. As such, intermediate goods A) are excluded in calculating Gross Domestic Product (GDP) because they are not valuable. B) are excluded in calculating Gross Domestic Product (GDP) because to do so would be to double count them. C) make up only a small portion of Gross Domestic Product (GDP). D) are included in Gross Domestic Product (GDP) only if produced within the borders of the United States. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

25) Why might a homemaker be upset with the way Gross Domestic Product (GDP) is calculated? A) because the government always underestimates the dollar value of the household services produced at home and outside the market that are included in the Gross Domestic Product (GDP) statistic B) because household services produced at home and outside the market are only included in Gross Domestic Product (GDP) if the homemaker is a man C) because household services produced at home and outside the market that are sold to others are not included in Gross Domestic Product (GDP) D) because none of the household services produced for at home and outside the market are included in Gross Domestic Product (GDP) even though they contribute greatly to the welfare of the family Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 26) Social Security payments are A) included in Gross Domestic Product (GDP). B) not included in Gross Domestic Product (GDP), but are included in Gross Domestic Income accounts. C) not included in Gross Domestic Product (GDP). D) not included in Gross Domestic Product (GDP), but are included in Net Domestic Product. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 27) Which of the following statements is FALSE? A) Gross Domestic Product (GDP) measures the market value of final goods and services produced during a particular time period. B) Transfers of used goods are not included in Gross Domestic Product (GDP). C) Private transfer payments, such as an inheritance, are included in the Gross Domestic Product (GDP). D) If statisticians counted intermediate goods, the estimate of Gross Domestic Product (GDP) would be too high. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

28) A car sold from a used car lot A) would be counted in Gross Domestic Product (GDP). B) would fall under net exports, and would then be counted in Gross Domestic Product (GDP). C) would not be counted in Gross Domestic Product (GDP). D) would only be counted in Gross Domestic Product (GDP) if it was a foreign made car. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 29) Which of the following is included in Gross Domestic Product (GDP)? A) the buying and selling of securities B) government transfer payments C) private transfer payments D) the sale of used goods E) none of these Answer: E Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 30) A valid rationale for the decision NOT to include non-compensated housework in Gross Domestic Product (GDP) calculations is that A) it would decrease the employment rate for domestic work. B) there is some difficulty in measuring quality and quantity. C) it is not a product or service. D) it would understate the value of production in the economy. Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 31) Which of the following is NOT included in the calculation of Gross Domestic Product (GDP)? A) the purchase of a raincoat by Mr. Z B) Mrs. T's use of a lawyer C) Mr. J's purchase of a share of General Motors stock D) All of these would be included. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 25 Copyright © 2021 Pearson Education, Inc.

32) The purchase of a share of stock is excluded in the calculation of Gross Domestic Product (GDP) because it A) is an intermediate good. B) produces value added. C) only represents the transfer of ownership rights. D) is a final service and not a good. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 33) Which of the following transactions would be included in Gross Domestic Product (GDP)? A) the purchase of new tires by a family to replace worn out tires on the family car B) the purchase of a used car C) the purchase of 100 shares of Microsoft stock D) the purchase of a used textbook from a friend Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 34) If you buy stocks and bonds, the dollar value of those stocks and bonds is A) included in Gross Domestic Product (GDP) under investment. B) included in Gross Domestic Product (GDP) under consumer expenditures. C) not included in calculating Gross Domestic Product (GDP) for they merely represent a transfer of ownership. D) included in Gross Domestic Product (GDP) if the stocks and bonds were issued by business firms but not if they were issued by governments. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 35) Gross Domestic Product (GDP) figures may understate the value of goods and services due to A) the exclusion of the underground economy. B) the inclusion of household production. C) the inclusion of legal non-reported, non-taxed income. D) the exclusion of the value of stocks. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 26 Copyright © 2021 Pearson Education, Inc.

36) Which of the following would NOT be included in a nation's Gross Domestic Product (GDP)? A) The government purchases 100 new trucks for the Army. B) The inventory of paper towels goes up. C) A landlord rents an apartment. D) In a poker game a student wins $500 that he does not report as income. Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 37) National income accounting is A) how the amount of unemployment in the system is measured. B) used only to determine the government deficit. C) an approach to measuring an economy's aggregate performance. D) the system that measures the value of the Dow Jones average. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 38) Which of the following items are included in GDP? A) used cars B) all transactions involving bonds C) newly built homes D) unemployment benefits Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 39) Which of the following is included in GDP? A) A computer manufacturer produces and sells a computer. B) A woman mows her own yard and trims her own hedges. C) An individual smuggles illegal drugs into the country and sells them. D) An illegal gambling operation profits from secret betting activities. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

40) Which of the following items is excluded from GDP? A) services a barber performs in cutting hair B) production and sale of hair-cutting equipment C) services a barber performs in repairing his own hair-cutting equipment D) the construction of a new barbershop Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 41) Gross Domestic Product (GDP) is A) the total wholesale value of all final goods and services produced by factors of production owned by citizens of a nation. B) the total market value of all services produced by factors of production located within a nation's borders. C) the total market value of all goods produced within a nation's borders. D) the total market value of all final goods and services produced by factors of production located within a nation's borders. Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 42) The total value of all final goods and services produced by factors of production located within a nation's borders is A) GDP. B) NI. C) PI. D) net investment. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

43) Suppose that in 2020, the total value of all final services produced in a nation was $300 billion; the total value of all final goods produced in that nation was $500 billion; and the total value of all final goods and services produced by that nation's firms in other countries was $300 billion. Gross domestic product (GDP) was A) $800 billion. B) $500 billion. C) $900 billion. D) $1,100 billion. Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 44) GDP A) is a stock measure since it represents the total market value. B) is a flow measure since it represents the value of a flow of production over a year's period. C) is neither a stock or flow measure since it is measured in dollars. D) could be either a stock or flow measure depending upon whether it is measured in dollars or units of production. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 45) GDP is a A) stock because it measures income for the entire country. B) stock because it measures wealth at a distinct point in time. C) flow because dollar values are used. D) flow because it measures income over a period of time. Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 46) When dealing with anything that is measured as a flow, one must A) use dollar values. B) make sure the thing can be measured accurately. C) specify a time period. D) specify one day in time. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

47) Intermediate goods are A) goods that are used up entirely in the production of final goods. B) the stock of all resources excluding labor. C) goods that get sold to the U.S. government. D) equal to the receipts of firms. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 48) GDP does NOT include intermediate goods because A) intermediate goods are not valuable. B) intermediate goods are not useful to consumers. C) that would count the value of intermediate goods twice. D) that would understate the true size of GDP. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 49) The farmer pays 15 cents for wheat seeds. When the wheat is grown and harvested, the farmer sells it to the miller for 30 cents, who makes flour and sells the flour to the baker for 60 cents. The baker makes bread and sells it to the grocer for 90 cents, and the grocer sells it to a family for $1.55. The contribution to GDP is A) 45 cents. B) $1.55. C) $1.95. D) $3.20. Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 50) Value added is A) the price of an intermediate product. B) the amount of dollar value contributed to a product at each stage of its production. C) the sum of the prices of intermediate products. D) the dollar value contributed to a product at the last stage of its production. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 30 Copyright © 2021 Pearson Education, Inc.

51) The dollar value of an industry's sales minus the value of intermediate goods is A) GDP. B) NDP. C) transfer payments. D) value added. Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 52) The total value added A) equals the retail price. B) equals the wholesale price. C) equals the sum of the prices on the intermediate goods. D) equals the retail price less the wholesale price. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

53) Refer to the above table. The production of this good goes through 4 different stages of production. What is the value added at Stage 2? A) $0.02 B) $0.08 C) $0.10 D) $0.75 Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

54) Refer to the above table. The production of this good has been through the first 3 stages of production. What is the total value added in Stage 1 through 3? A) $0.75 B) $0.43 C) $0.07 D) Cannot be computed without more information. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 55) Refer to the above table. The production of this good goes through 4 different stages of production. What is the total dollar value added when production is completed? A) $0.07 B) $0.32 C) $0.25 D) Cannot be computed without more information. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 56) Refer to the above table. The production of this good goes through 4 different stages of production. What does the total value added equal? A) $0.07 B) $0.32 C) $0.75 D) Cannot be computed without more information. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

57) A farmer buys seed for 15 cents that is used to grow wheat. The farmer sells the wheat to the miller for 30 cents, who makes flour. The flour is sold to the baker for 75 cents and the baker makes bread, which is sold to the grocer for 90 cents. The grocer sells the bread for $1.25. What is the value added for the miller? A) 65 cents B) 15 cents C) 45 cents D) 90 cents Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 58) The production of a wireless earbud involves 5 stages. The value added after the first stage of production occurs is $1.20. The sale price of the wireless earbud is $2.50. Based on the above information, what amount is used to measure GDP? A) $3.70 B) $1.20 C) $1.30 D) $2.50 Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 59) A farmer buys seed for 15 cents that is used to grow wheat. The farmer sells the wheat to the miller for 30 cents, who makes flour. The flour is sold to the baker for 60 cents and the baker makes bread, which is sold to the grocer for 90 cents. The grocer sells the bread for $1.40. What is the value added for the grocer? A) 15 cents B) 50 cents C) 35 cents D) $1.40 Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

60) A good goes through three stages of production. The value added at stage 1 is $3; the value added at stage 2 is $5; the value added at stage 3 is $1. What is the retail price of the good? A) $6 B) $9 C) $10 D) Cannot be determined based on the information given. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 61) Which of the following transactions would NOT be included in GDP? A) the purchase of 100 shares of newly issued Microsoft stock B) the purchase of a newly issued government bond C) the purchase of previously issued corporate bond D) all of these Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 62) Which of the following transactions is included in GDP? A) funds given to a college student by her parents B) funds received by a college student for working in the college dining hall C) funds given to a family on welfare D) Social Security check received by an elderly couple Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 63) Which of the following is included in measuring GDP? A) the value added at each stage of production of a final product B) the buying and selling of securities C) the transfer of secondhand goods D) household services rendered by homemakers Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

64) Which of the following items is included in GDP? A) the value of a medical service B) the value of home cooking C) proceeds for a garage sale of used goods D) purchase of a government bond Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 65) Which of the following items is NOT included in GDP? A) purchase of a hamburger at a fast-food restaurant B) sales at a grocery store C) sale of Microsoft security stock D) downloads of iTunes music charged to a credit card Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 66) GDP is a measure of all of the following EXCEPT A) the overall level of economic activity. B) the total of production. C) overall welfare. D) the total value of expenditures. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 67) A family sells the house they have lived in for two years to a friend. They received $300,000 and paid $100,000 three years ago. This transaction A) increases GDP by $200,000. B) increases GDP by $100,000. C) has no effect on GDP because the house was not built this year. D) has no effect on GDP because the buyer is the family's friend. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

68) Which of the following statements is NOT true of GDP? A) GDP excludes nonmarket production. B) There are no significant weaknesses in using GDP as a measure of the nation's economic performance. C) GDP is the value of final goods and services produced in the economy. D) GDP is not a measure of a nation's overall welfare. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 69) Which of the following is a significant weakness of GDP as a measure of the nation's economic performance? A) GDP excludes the secondhand good market because it is impossible to obtain an estimate of the amount sold. B) GDP excludes the value of the buying and selling of securities. C) GDP considers product and factor markets but not services. D) GDP excludes nonmarket production, such as black market activities. Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 70) GDP as a measure of the nation's economic performance A) excludes the sale of secondhand goods. B) excludes the value of intermediate goods. C) includes the value of final goods and services produced in the economy. D) excludes nonmarket transactions. Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 71) When considering GDP as a measure of the nation's economic performance, which of the following statements is NOT true? A) GDP is a good measure of a nation's overall welfare. B) GDP is useful to map changes in the economy's domestic economic performance over time. C) GDP is underestimated because it does not include illegal activities. D) GDP would be a better measure of economic performance if it included nonmarket activities. Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

72) Which of the following is a main limitation of GDP? A) GDP figures are grossly inaccurate due to sampling errors. B) The real definition of what is and is not included in GDP is unclear. C) GDP is not a good measure of a nation's overall welfare. D) GDP includes some products, which by their very nature are bad products, such as military weapons. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 73) Which one of the following is NOT included in GDP? A) You pay a roofer $2,000 to repair your roof after it is damaged in a hailstorm. B) You pay a roofer $2,000 to repair your roof after you discover leaks have appeared due to normal wear and tear. C) You give up a weekend of leisure to repair your roof yourself. D) You purchase $20 worth of first aid supplies at the local drugstore to treat the cuts and scrapes you suffered while crawling around on the roof. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 74) Which one of the following is NOT included in GDP? A) You look after your neighbor's plants during her vacation in exchange for her agreement to feed your fish while you are gone. B) A homeowner hires a cleaning service to take care of household chores she chooses not to do because of the demands of her job. C) A bicycle manufacturer pays an advertising agency to develop a new promotional campaign. D) You purchase new tires for your old car. Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

75) Which of the following is included in GDP? A) A newly laid-off worker receives his $400 unemployment compensation check from the state government. B) A college senior receives a $1,000 graduation gift from a grandparent. C) You buy a $12 snow shovel to have on hand for the next snow storm. D) You purchase $300 worth of clothes from a thrift shop selling second-hand clothing. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 76) GDP is a measure of A) production. B) innovation. C) inflation. D) the amount of money available. Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 77) The total market value of the nation's annual final products produced domestically best defines the A) GDP. B) GNP. C) CPI. D) PPI. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 78) Gross domestic product is a measure of A) the total value of all transactions in U. S. markets. B) the added value of production. C) the dollar value of final goods and services produced in the United States. D) the dollar value of the aggregate measure of business as measured by the Dow Jones Industrial Average. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 38 Copyright © 2021 Pearson Education, Inc.

79) Which of the following is NOT included when calculating GDP? A) the dollar value of a new car B) the dollar value of a new iPhone C) the dollar value of a newly issued corporate bond D) the dollar value of tuition expenditures at a community college Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 80) Which of the following is counted in the GDP in a given year? A) the sale of Facebook stock B) the sale of a used Mazda convertible C) the dollar value of the housework done by a stay-at-home mom D) the sale of a new screwdriver Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 81) Suppose you drive downtown, pay for parking at a private parking garage, and go to see an investment advisor. He charges you a $5 fee to advise you to purchase 100 shares of stock, which you do. Which of these transactions is NOT included in GDP? A) the purchase of gas for the trip B) paying the parking fee C) paying the $5 fee to the investment advisor D) your purchase of the stock Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 82) Which one of the following is NOT included in GDP? A) The federal government pays a defense contractor to develop a new weapons system. B) You volunteer to organize a neighborhood watch group on your block. C) You pay your monthly apartment rent. D) A mail-order firm constructs a new warehouse in Kansas as a central distribution facility. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

83) National income accounting is A) used by businesses to calculate their profits during a given year. B) a system utilized to measure macroeconomic activity. C) a measure of consumer income. D) used by accountants to calculate the tax obligations of multinational corporations. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 84) Gross domestic product is the A) market value of all intermediate and final goods produced in a year. B) market value of all final goods produced in a year. C) total spending in an economy in a year. D) value of total exports in a year. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 85) The value added method of calculating GDP means A) adding up the market values of all intermediate goods. B) calculating the percentage changes in the GDP between two years. C) adding up the incomes of all businesses in a given year. D) adding up the difference between the sale price and the value of intermediate goods of each product at every stage of production. Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 86) Your parents surprise you with a $500 check. As a result, the U.S. GDP A) increases because this is unexpected income to you. B) decreases because you will spend it on useless goods. C) remains unchanged because it was counted when your parents earned it. D) decreases because you have to pay taxes on this income. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

87) Using above table, how much is contributed to the GDP from the production of the textbook? A) $118.90 B) $32.00 C) $78.90 D) $40.00 Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 88) Using above table, the market price of the textbook is A) $118.90. B) $32.00. C) $78.90. D) $40.00. Answer: D Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 89) Consider the following: Farmer Jones bought seed and fertilizer for $100. He grew wheat that he sold to the Harvest Bread Company for $200. Harvest Bread produced and sold bread to the ABC Grocery Store for $250. Consumers bought the bread from the grocery for $400. How much was added to the GDP? A) $700 B) $950 C) $400 D) $550 Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

90) Which of the following transactions would NOT contribute to the GDP? A) the purchase of 100 shares of Apple stock B) the purchase of a new Tesla automobile C) the purchase of a bag of chips from a convenience store D) the purchase of gasoline for your Honda Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 91) Which of the following would NOT be included in the calculation of the GDP? A) the value of the service of legally produced gambling in Las Vegas B) the value of the services of a homemaker C) the value of a bottle of domestically made wine D) the value of the production of nuclear weapons Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 92) The Social Security check received by a retired couple A) is included in the GDP because it will be spent on goods and services. B) is excluded from GDP calculations because it is a transfer payment. C) is included in the GDP because she is entitled to it as a citizen. D) is included in the GDP because it is part of her income. Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 93) Which of the following will be included in this year's GDP? A) a Pablo Picasso (1881-1973) painting purchased this year by the art museum B) the purchase of a used textbook by your friend C) the purchase of 200 shares of Alphabet stock through your broker D) the purchase of an insurance policy for your home Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

94) GDP measures A) the nation's economic welfare. B) the nation's economic activity. C) the changes in the unemployment rate in a given year. D) the amount of underground activity in a nation. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 95) GDP measures A) the annual total value of all services produced by factors of production located within a national border. B) the annual value of final goods and services produced by factors of production located within a national border. C) the annual value of goods and services produced by factors of production owned by companies headquartered in a given country. D) the value of all goods and services sold in a given country. Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 96) Goods used up entirely in the production of final goods are A) intermediate goods. B) production goods. C) process goods. D) inventory goods. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 97) In calculating GDP, the value of intermediate goods is eliminated by using the A) distributive method. B) value association method. C) value added method. D) Federal Reserve method. Answer: C Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 43 Copyright © 2021 Pearson Education, Inc.

98) The sum of the value added at all stages of production for a product is A) the product's final price. B) the product's price plus the value of intermediate goods. C) the product's price minus the value of intermediate goods. D) the sum of all the transactions in the production of the product. Answer: A Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 99) Which of the following transactions is included in GDP? A) sales of used goods B) buying and selling of stocks and bonds C) the sales of houses produced in that given year D) government transfer payments Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 100) Many economists argue that real GDP is A) not a good measure of economic well-being because it overvalues increases in leisure time. B) not a good measure of economic well-being because it excludes increases in leisure time. C) a good measure of economic well-being because it includes increases in leisure time. D) a good measure of economic well-being because it includes changes in personal safety. Answer: B Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 101) Many economists argue that real GDP is NOT a good measure of economic well-being because A) it overvalues the increases in nonmarket transactions. B) it excludes Social Security payments made to retirees. C) it includes the taxes we pay to the federal government. D) it excludes the environmental quality of life. Answer: D Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

102) Which of the following transactions is included in the GDP? A) paying a doctor for a medical checkup B) giving your friend a gift worth of $20 C) selling your 2018 Tesla vehicle D) cleaning your own house Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 103) Suppose you buy a new Tesla Model S. The battery that comes with the car is a(n) A) final good. B) intermediate good. C) transfer good. D) financial good. Answer: B Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 104) Which of the following transactions is included in gross output (GO)? A) sales of used goods B) the sales of corporate bonds to an investor C) the sales of an accounting software package to an accounting firm D) the estimated costs of human health effects due to air pollution Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 105) The total market value of all goods and services produced by factors of production within a nation is called A) gross output. B) gross domestic product. C) value added. D) gross domestic income. Answer: A Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

106) Gross output exceeds gross domestic product by A) the total value of all used goods. B) transfer payments between the governments and households. C) the total value of business spending on intermediate inputs. D) sales in underground or illegal markets. Answer: C Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 107) What is value added and how is it related to Gross Domestic Product (GDP)? Answer: Value added is the dollar value of an industry's sales minus the value of intermediate goods used in production. Both Gross Domestic Product (GDP) and value added do not include the value of intermediate goods. Gross Domestic Product (GDP) can be calculated by adding up the value added at each stage of production. Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 108) Suppose Gross Domestic Product (GDP) figures were changed to reflect household production. How would the size of household production relative to Gross Domestic Product (GDP) have changed over the last fifty years? Answer: The relative size of household production would be less as people have substituted market production for household production. Fifty years ago, people did not eat out as much as now. As the labor force participation rate of women has increased, families have relied less on household production and more on market production. Diff: 3 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 109) Define and explain gross domestic product. Answer: Gross domestic product is the total market value of all final goods and services produced by factors of production located within a country's borders. GDP does not count intermediate goods but counts only final goods and services. GDP is also measured for a given period of time, usually a year, so it is a flow concept. It also counts only market transactions, so the values of home production and illegal activities is not included. Diff: 1 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

110) Why aren't financial transactions, sales of secondhand goods, and household production included in measuring GDP? Answer: Financial transactions do not involve the production of final goods and services, so they are not included. Secondhand goods also were not produced in the relevant time period. They were counted in GDP when they were sold as new products. Hence, including them when they are not new would be double-counting them. Household production is not included because it is a nonmarket activity and difficult to quantify. Diff: 2 Topic: 8.2 National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 8.3 Two Main Methods of Measuring GDP 1) The two principle methods of measuring Gross Domestic Product are the A) flow approach and the stock approach. B) expenditures approach and the income approach. C) intermediate approach and the value-added approach. D) domestic approach and the international approach. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 2) Which of the following statements is TRUE? A) The value of illegal activities is included in Gross Domestic Product (GDP). B) The value of a homemaker's services is included in Gross Domestic Product (GDP). C) The value of intermediate goods is included in Gross Domestic Product (GDP). D) Gross Domestic Product (GDP) may be calculated using the income or the expenditure approach. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 3) Which one of the following statements about GDP is TRUE? A) GDP can be calculated using the income approach. B) The value of household production is excluded from GDP. C) GDP can be calculated using the expenditures approach. D) All of these Answer: D Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 47 Copyright © 2021 Pearson Education, Inc.

4) When we use the term fixed investment, we include in investment A) the purchase of stocks and bonds. B) the purchase of intangible goods. C) the purchase of corporate bonds, but not government bonds. D) the purchase of equipment and other capital goods. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 5) When one uses the expenditure approach to calculate Gross Domestic Product (GDP), which of the following would be included? A) government spending at the state level B) household purchases of legal services C) inventory investment D) all of these Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 6) Suppose that for the economy of Utopia, we have the following information for 2020: consumption expenditures = $5,000; wages = $3,500; gross private domestic investment = $1,200; government expenditures = $2,000; exports = $900; imports = $1,100. Using the expenditure approach what would the Gross Domestic Product (GDP) be for Utopia in 2020? A) $6,200 B) $8,000 C) $8,400 D) $11,500 E) $11,900 Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

7) Which of the following spending components makes up the largest percentage of Gross Domestic Product (GDP)? A) consumption expenditures B) government expenditures C) gross private domestic investment expenditures D) expenditures on net exports of goods and services Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 8) Durable consumer goods include all of the following EXCEPT A) an automobile. B) Alphabet company stock. C) a laptop. D) a smartphone. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 9) Examples of nondurable consumer goods include all of the following EXCEPT A) a pizza delivered to your home. B) a cup of coffee. C) a dinner table. D) a movie ticket. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 10) Services include all of the following EXCEPT A) payment for a doctor's visit. B) the face value of a corporate bond. C) school tuition. D) payment for a restaurant meal. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

11) Which of the following is an example of the gross private domestic investment component of Gross Domestic Product (GDP)? A) You buy a share of Facebook stock. B) Dell computer company buys an office desk. C) You put money into your savings account. D) You put money into your checking account. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 12) Which of the following are examples of the gross private domestic investment component of Gross Domestic Product (GDP)? I. The purchase of production equipment II. An increase in finished goods inventory A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 13) Which of the following is part of gross private domestic investment? A) purchases of stocks and bonds B) a decline in consumer debt C) purchases of pizza pie for a family dinner D) a positive change in business inventories Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 14) Which one of the following is a durable consumer good? A) a tablet device B) gasoline C) food D) office supplies that will be used up this year Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 50 Copyright © 2021 Pearson Education, Inc.

15) When the total quantity of unsold new Tesla Model 3 vehicles increases from 40,000 to 45,000, A) the economy experiences an increase in inventory investment. B) the economy's level of consumption has increased. C) there is a decrease in aggregate output. D) the economy experiences a decrease in investment. Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 16) Inventory investment occurs when A) grocers sell stocks of canned goods off their shelves. B) individuals buys more company stock shares online. C) shopkeepers check their inventories. D) automobile dealers add to their stocks of unsold cars. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 17) Durable consumer goods are goods that A) last for more than three years. B) last for more than one year. C) are used up within three years. D) are used up within one year. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 18) Food and gasoline can be classified as A) nondurable goods. B) durable goods. C) capital goods. D) long-term goods. Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

19) Calculating Gross Domestic Product (GDP) by the expenditure approach requires summing the value of A) all income paid to individuals. B) all transactions in the economy. C) all final goods and services produced in the economy. D) all expenditures by individuals. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 20) Which of the following is included in gross private domestic investment? I. The purchase of new capital goods II. An increase in business inventories A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 21) If a firm produces more output than it sells, there will be I. An increase in the firm's inventories II. An increase in the gross private investment of the nation A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

22) Fixed investment includes A) business spending on plant and equipment. B) business spending on printing paper. C) business salaries. D) expenses for training employees. Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 23) Which of the following is an example of investment in computing Gross Domestic Product (GDP)? A) an increase of inventory stock in a retail store B) a deposit of $10,000 in a bank C) a laptop purchased by a student D) the purchase of company stock by a retiree Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 24) Which of the following is included in Gross Domestic Product (GDP)? A) purchases of stocks and bonds by individuals B) purchases of stocks and bonds by firms C) sales of financial assets to foreign firms D) investment spending on capital goods Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 25) Depreciation is A) added to Gross Domestic Product (GDP) to reach Net Domestic Product (NDP). B) the reduction in the value of capital goods due to physical wear and tear. C) not included in Gross Domestic Product (GDP) from the income side. D) always higher than the capital consumption allowance. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

26) Net Domestic Product (NDP) is A) Gross Domestic Product (GDP) minus depreciation. B) Gross Domestic Product (GDP) minus private investment. C) Gross Domestic Product (GDP) minus the foreign sector. D) Gross Domestic Product (GDP) minus government transfers. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 27) The components of the expenditure approach to measuring Gross Domestic Product (GDP) include all of the following EXCEPT A) government purchases of goods and services. B) government Social Security payments. C) durable consumer goods. D) nondurable consumer goods. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 28) An example of an increase in gross private domestic investment spending that also increases Gross Domestic Product (GDP) is when A) a family sells its home because of a transfer. B) a farmer buys a used tractor. C) inventories of new cars accumulate on the lots of car dealers. D) government increases spending on infrastructure. Answer: C Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 29) A capital good is A) one produced by the government. B) part of investment spending when purchased by either private businesses or by the federal government. C) one that is purchased in order to make other goods and services. D) not part of Gross Domestic Product (GDP) because it is an intermediate product. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

30) If all other factors are held constant, an increase in imports A) causes an increase in exports of the same size. B) causes Gross Domestic Product (GDP) to increase. C) causes Gross Domestic Product (GDP) to decrease. D) can cause Gross Domestic Product (GDP) to increase or decrease, depending on whether the imports are purchased by consumers or by business firms. Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 31) If Gross Domestic Product (GDP) equals $900 billion, gross private investment expenditures are $200 billion, exports equal imports, and government spending is $400 billion, then A) consumption expenditures are $200 billion. B) consumption expenditures are $300 billion. C) spending on consumer durables must be $400 million. D) we cannot determine what expenditures on consumption are without more information. Answer: B Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 32) Because of improved productivity, wages increase 10 percent. As a result, gross domestic income increases. What happens to Gross Domestic Product? A) Gross Domestic Product also increases since consumption expenditures would increase. B) Gross Domestic Product decreases as people pay more taxes on their higher incomes. C) Gross Domestic Product would not change since consumption expenditures would rise but investment spending would fall. D) Gross Domestic Product would decrease because businesses are spending more on wages. Answer: A Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 33) An increase in a U.S. resident's income earned in Japan implies a(n) A) decrease the United States' Gross Domestic Product. B) increase Japan's Gross Domestic Product. C) increase the United States' Gross Domestic Product. D) decrease Japan's Gross Domestic Product. Answer: B Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 55 Copyright © 2021 Pearson Education, Inc.

34) If Net Domestic Product (NDP) is $100 less than Gross Domestic Product (GDP), we know that A) inventories increased over the year. B) inventories decreased over the year. C) net investment equals $100. D) depreciation equals $100. Answer: D Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 35) If C = consumption, G = government expenditures, and I = gross private investment expenditures, the mathematical representation of Gross Domestic Product (GDP) using the expenditure approach is A) Gross Domestic Product (GDP) = C + I + G + Transfers. B) Gross Domestic Product (GDP) = C + I + G + Imports. C) Gross Domestic Product (GDP) = C + Imports. D) Gross Domestic Product (GDP) = C + I + G + Net exports. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 36) One method of calculating Gross Domestic Product (GDP) is to add together A) investment, consumption, gross profits, and net exports. B) consumption, investment, government spending, and net exports. C) wages, gross profits, net investment, and net exports. D) consumption, wages, interest, rental income, and exports. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 37) Gross Domestic Product (GDP) exceeds Net Domestic Product by an amount equal to A) indirect business taxes. B) corporate profits plus personal taxes. C) the capital consumption allowance (depreciation). D) transfer payments minus personal taxes. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 56 Copyright © 2021 Pearson Education, Inc.

38) According to the above table, Gross Domestic Product (GDP) is A) $2,190. B) $2,840. C) $2,465. D) $2,750. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 39) Which of the following is included when measuring Gross Domestic Product (GDP)? A) the value of services of durable goods purchased in previous years B) the value of leisure time C) the value of services provided by homemakers D) the rental income received by a landlord Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 40) When using the income approach to estimate Gross Domestic Product (GDP), which of the following would NOT be included? A) the implicit rental value of owner-occupied housing B) proprietors' income C) personal consumption expenditures D) net interest received by households Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

41) The value of Gross Domestic Product (GDP), when estimated by the income approach, is the sum of A) consumption expenditures, investment spending, and profits. B) consumption, wages, rents, interest, and profits. C) income earned by all factors of production, indirect business taxes, corporate income taxes, and personal income taxes. D) wages, rent, interest, gross corporate profits, proprietor's income, and taxes unrelated to incomes, and depreciation. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

42) According to the above table, Gross Domestic Product as calculated by the income approach is A) $10,121 billion. B) $10,646 billion. C) $14,925 billion. D) $15,619 billion. Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

43) According to the above table, net domestic product is A) $8,813 billion. B) $12,603 billion. C) $13,092 billion. D) $13,750 billion. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

44) According to the above table, Gross Domestic Product is A) $14,140. B) $13,965. C) $13,315. D) $12,115. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 45) According to the above table, net domestic product is A) $14,390. B) $13,190. C) $12,540. D) $12,365. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

46) Calculating Gross Domestic Product (GDP) by the income approach would require including A) all transfer payments by the government. B) all wages paid. C) all restaurant sales. D) the market value of all final goods and any profits. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 47) Which of the following is included in the calculation of Gross Domestic Product (GDP) using the income approach? I. Wages and salaries II. Net exports A) I only B) II only C) Both I and II D) Neither I nor II Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 48) Non-income expense items included in the Gross Domestic Product (GDP) calculation include A) depreciation and indirect business taxes. B) depreciation and corporate profits. C) corporate profits tax and indirect business taxes. D) indirect business taxes and corporate profits. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 49) Indirect business taxes refer to A) depreciation expenses. B) sales and local taxes paid by business. C) payments for low-skilled labor. D) dividend taxes paid by the corporation. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 60 Copyright © 2021 Pearson Education, Inc.

50) The largest category of gross domestic income is A) interest. B) rent. C) wages. D) profits. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 51) If households pay $1,000 in interest payments and receive $1,200 in interest, wages equal $8,000, rental receipts on land are $200, total business profits before taxes are $2,200, depreciation is $1,750, and indirect business taxes are $1,000, then gross domestic income is A) $15,350. B) $13,350. C) $13,150. D) $11,400. Answer: B Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 52) The two main methods of measuring GDP are A) the income approach and the expenditure approach. B) the income approach and the receipts approach. C) the goods approach and the services approach. D) the saving approach and the investment approach. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 53) The expenditure approach to measuring GDP A) adds the dollar value of final goods and services. B) adds the income received by all factors of production. C) excludes durable consumer goods since they last more than a year. D) excludes profits since profits are a cost of production. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

54) The computation of GDP by adding up the dollar value at current market prices of all final goods and services is A) the expenditure approach. B) the income approach. C) transfer payments. D) the value of all securities. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 55) The components of the expenditure approach to measuring GDP include all of the following EXCEPT A) net exports. B) government purchases of goods and services. C) expenditures for business investments. D) the implicit payments for unpaid household work. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 56) In calculating GDP, your tuition expenditures at college are classified as A) consumer expenditures on services. B) consumer expenditures on goods. C) consumer expenditures on durable goods. D) investment spending. Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 57) A consumer good that has a life span of more than three years is a(n) A) durable consumer good. B) nondurable consumer good. C) service. D) investment. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

58) A consumer good that is used up within three years is a(n) A) durable consumer good. B) nondurable consumer good. C) service. D) investment. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 59) Mental or physical labor or help purchased by consumers is a(n) A) durable consumer good. B) nondurable consumer good. C) service. D) investment. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 60) Durable consumer goods are goods that last more than A) one year. B) three years. C) five years. D) seven years. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 61) Which of the following would NOT be included in consumption expenditures when calculating GDP? A) an individual's purchase of a new car B) an individual's purchase of medical services C) an individual's purchase of newly issued shares of IBM stock D) an individual's purchase of legal services Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

62) A nondurable good A) has a life span of more than 3 years. B) is used up within 3 years. C) applies only to services. D) is an intangible commodity. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 63) A durable good A) has a life span of more than 3 years. B) is used up within 3 years. C) has an infinite life span. D) is an intangible commodity. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 64) An example of a durable good is A) a candy bar purchased at a grocery store. B) a microwave oven. C) a two-year contract of an Internet service. D) a bottle of old wine. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 65) An example of a nondurable good is A) a chicken purchased at a grocery store. B) a tablet device. C) the purchase of labor for a business. D) a truck. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

66) Which of the following is included in government expenditures when measuring GDP? A) Medicare benefits for retirees B) unemployment insurance payments C) goods imported into the United States D) the President's income Answer: D Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 67) When economists refer to investment expenditures they mean the A) purchase of a consumer nondurable goods. B) purchase of stocks or bonds. C) use of today's resources to expand tomorrow's production or consumption. D) production of intermediate goods. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 68) Suppose a firm purchases new equipment to replace worn-out equipment at its factory. This purchase of new equipment is considered A) durable consumption goods. B) inventory investment. C) gross private domestic investment. D) none of these. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 69) Any use of today's resources to expand tomorrow's production or consumption is a(n) A) durable consumer good. B) nondurable consumer good. C) service. D) investment. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

70) An increase in fixed investment spending that increases GDP occurs when A) a family purchases a new truck. B) a business buys a new office desk. C) inventories of new cars are drawn down on the lots of car dealers. D) the government builds a new office building. Answer: B Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 71) A capital good is A) a good that lasts more than three years. B) a good that is used to make other goods and services. C) an intermediate product and therefore not part of GDP. D) a good that should increase in value over time. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 72) Capital purchases by businesses of newly produced durables is known as A) the expenditure approach. B) the income approach. C) fixed investment. D) inventory investment. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 73) Changes in the stocks of finished goods and goods in process as well as changes in the raw materials that businesses keep on hand is known as A) the expenditure approach. B) the income approach. C) fixed investment. D) inventory investment. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

74) Fixed investment is A) the change in stocks of finished goods. B) the change in the stocks of goods in process. C) capital purchase by businesses of newly produced durables. D) purchases by consumers of newly produced consumer durables. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 75) A decrease in net exports A) causes GDP to decrease. B) causes GDP to increase. C) causes an increase in imports of the same size. D) can cause GDP to either increase or decrease, depending on whether the exports are durable or nondurable. Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 76) Net exports equal the A) total value of all exports. B) total value of all government produced exports. C) value of exports minus the value of imports. D) value of imports minus the value of exports. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 77) Using the expenditure approach, GDP is calculated as A) wages + interest + rent + profits. B) consumption expenditures + wages. C) consumption expenditures + wages + interest. D) consumption expenditures + investment expenditures + government expenditures + net exports. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

78) The components of GDP using the expenditure method are A) consumption expenditures, investment expenditures, and government expenditures. B) consumption expenditures, investment expenditures, government expenditures, and net exports. C) wages and interest. D) wages, interest, rents, and profits. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 79) C + I + G + X equals A) GDP. B) DPI. C) NDP. D) PI. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 80) C + net I + G + X equals A) GDP. B) DPI. C) NDP. D) PI. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 81) If imports are $100 million more than exports, government spending is $500 million, consumer expenditures are $900 million, and investment spending is $600 million, then GDP is A) $2.0 billion. B) $1.8 billion. C) $1.9 billion. D) $2.1 billion. Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

82) If consumption expenditures are $600 million, spending on gross investment is $100 million, imports are $50 million, exports are $55 million, government spending on goods and services is $400 million, than GDP is A) $790 million. B) $905 million. C) $1,105 million. D) $1,010 million. Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 83) Gross domestic product is A) NDP plus net exports. B) NDP plus taxes. C) NDP plus depreciation. D) NDP less changes in inventories. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 84) Net investment refers to A) the change in the capital stock after subtracting out depreciation. B) the change in inventories over a 1-year period. C) the change in investment spending and the change in government expenditures on infrastructure. D) exports minus imports. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

85) If consumption expenditures are $220 million, investment expenditures are $50 million, imports are $20 million, exports are $10 million, government spending on goods and services is $40 million, Social Security spending is $15 million, and sales of existing homes equals $50 million, then what is the measure of GDP? A) GDP = $185 million B) GDP = $300 million C) GDP = $225 million D) GDP = $195 million Answer: B Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 86) The components of GDP using the income method (excluding indirect business taxes and depreciation) are A) consumption expenditures, investment expenditures, and government expenditures. B) consumption expenditures, investment expenditures, government expenditures, and net exports. C) wages and interest. D) wages, interest, rents, and profits. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 87) All of the following are included in the calculation of gross domestic income (GDI) EXCEPT A) consumer expenditures. B) wages. C) profits. D) indirect business taxes. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

88) Excluding indirect business taxes and depreciation, Gross Domestic Income (GDI) A) is the sum of all income paid to the factors of production. B) never equals GDP. C) would equal GDP if there was no depreciation. D) cannot be computed. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 89) Which of the following statements is TRUE? A) GDP = NDP B) GDP = NI C) GDP = GDI D) GDP = PI Answer: C Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 90) The income approach to measuring GDP A) adds the dollar value of final goods and services. B) adds the income received by all factors of production. C) excludes durable consumer goods since they last more than a year. D) excludes profits since profits are a cost of production. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 91) The computation of GDP by adding up all components of national income including wages, interest, rent and profits is A) the expenditure approach. B) the income approach. C) transfer payments. D) the value of all securities. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

92) The largest component of gross domestic income is A) interest payments. B) wages. C) profits. D) taxes. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 93) Indirect business taxes include all of the following EXCEPT A) sales taxes. B) taxes on business property. C) taxes on corporate profits. D) taxes on business equipment. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 94) If, in an economy, households receive $200 in interest payments and make interest payments of $210, wages equal $500, rental receipts are $300, royalties are $100, profits are $200, depreciation is $50, and indirect business taxes are $50, then gross domestic income is A) $1190. B) $1110. C) $1180. D) $1280. Answer: A Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 95) Because of a major hurricane, gross domestic product for the first quarter of the calendar year falls by 10 percent. As a result, gross domestic income A) falls by less than 10 percent. B) also falls by 10 percent because they always have to be equal. C) falls by more than 10 percent because incomes always vary more than GDP. D) would not change since the time span is less than a year. Answer: B Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 72 Copyright © 2021 Pearson Education, Inc.

96) Which of the following is included in the calculation of investment when measuring GDP? A) the purchase of new capital goods B) changes in business inventories C) new home construction D) all of these Answer: D Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 97) Net exports is equal to A) total exports minus total imports. B) total imports minus total exports. C) total exports adjusted for price changes. D) total exports minus transfer payments. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 98) Indirect business taxes include A) property taxes and corporate income taxes. B) sales taxes and income taxes. C) business property taxes and sales taxes. D) income taxes and Social Security taxes. Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 99) If no other national income variables change when ________ increase, then GDP will decrease. A) inventories B) imports C) investments D) amounts of solid waste Answer: B Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

100) GDP can be calculated using A) the expenditure approach and the production approach. B) the expenditure approach and the income approach. C) the expenditure approach and the factor of production approach. D) the expenditure approach and the resource approach. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 101) Why are exports added to (rather than subtracted from) the other expenditure components to arrive at GDP using the expenditure method? A) because exports account for those goods that were produced in the economy but that were not devoted to domestic consumption, used for domestic investment, or provided as government goods B) because exports have a higher profit margin for manufacturers than do similar products sold in domestic markets C) because exported goods are not valued properly, due to problems with the purchasing power parity index D) because it is only through exporting that we can generate jobs in our own economy Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 102) Which one of the following is TRUE? A) Net investment is negative when gross investment is greater than depreciation. B) Our productive capacity declines when net investment is less than zero. C) Negative net investment occurs when imports are less than exports. D) Negative net investment occurs when exports are less than imports. Answer: B Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

103) Inventory investment can be defined as A) changes in the stocks of finished goods and raw materials. B) the system of accounts that is used to count certain goods. C) goods that must be excluded from the GDP to avoid double counting. D) the value of monetary transactions by businesses. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 104) Net exports for the United States A) are always positive numbers. B) may be negative. C) are a result of decreasing investment in the manufacturing industries. D) are a result of decreasing domestic consumption. Answer: B Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 105) The expenditure approach to deriving gross domestic product sums the following categories of spending: A) consumption, investment, government spending, and net exports. B) consumption, income, government spending, and net exports. C) consumption, savings, investment, and government spending. D) consumption, government spending, transfer payments, and net exports. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 106) Using the expenditure approach to deriving gross domestic product, if imports rise and exports remain the same, A) GDP rises. B) GDP remains the same. C) GDP falls. D) GDP indicates a recession. Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

107) Gross domestic income can be defined as A) the sum of all incomes earned by all factors of production in a year. B) the sum of all incomes earned by individuals. C) the sum of all profits earned by businesses in a year. D) the sum of all profits earned minus depreciation. Answer: A Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 108) The two main approaches to measuring GDP are the A) concept approach and the reality approach. B) flow approach and the stock approach. C) government approach and the consumer approach. D) income approach and the expenditure approach. Answer: D Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 109) What is the proper formula for computing the GDP using the expenditure approach? A) S + I + G + X B) C + I + G + X C) C + O + G + S D) 0.5(w + r) + k Answer: B Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 110) Given the following data, calculate the GDP. wages = $500 government spending = $2,500 private investment = $2,100 rent = $100 consumer spending = $7,800 net exports = $300 A) GDP = $11,300 B) GDP = $12,000 C) GDP = $12,700 D) GDP = $13,000 Answer: C Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

111) The appropriate formula for computing Gross Domestic Product using the income approach (excluding depreciation and indirect income taxes) is A) consumption + investment + government spending + net exports. B) wages + rent + interest + profits. C) wages + rent + interest + profits + indirect business taxes. D) wages + rent + interest + profits + indirect business taxes + depreciation. Answer: B Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 112) The difference between Gross Domestic Income (GDI) and Gross Domestic Product (GDP) is that A) GDI is GDP less indirect business taxes and depreciation. B) GDP is GDI less indirect business taxes and depreciation. C) GDI is equal to GDP. D) GDP is always smaller than GDI. Answer: C Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 113) Which sector of our economy accounts for the largest percentage of total spending? A) households B) businesses C) government D) exports Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 114) In calculating GDP using the expenditure approach, the largest component is A) consumption spending. B) government spending. C) investment spending. D) spending on durable goods. Answer: A Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

115) Consumption expenditures do NOT include purchases of A) durable goods. B) nondurable goods. C) intermediate goods. D) services. Answer: C Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 116) What constitutes investment when measuring gross private domestic investment? Answer: Investment is the use of today's resources to expand tomorrow's production or consumption. It includes the purchase of capital goods, which can increase future production and consumption, and inventory investments which can increase future consumption. It does not include financial transactions such as buying stocks and bonds. Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 117) "If we sum up all factor payments, we will get gross domestic income." Do you agree or disagree with this statement? Why? Answer: Disagree. The sum of all factor payments leaves out non-income expense items that must be included. These items are indirect business taxes and depreciation. Diff: 2 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 118) Explain the two main methods used to measure GDP. Answer: The two methods used to measure GDP are the expenditure approach and the income approach. The expenditure approach measures GDP by adding up the flows of expenditures— consumption, government, gross private domestic investment, and net exports. The income approach measures GDP by adding up the flows of income—wages, interest, rent, and profits. Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

119) How do GDP and NDP differ? What does it mean if net investment is negative? Answer: Net domestic product equals GDP minus depreciation, which is also known as the capital consumption allowance. In the course of a year, machines and plants deteriorate. Depreciation is the estimate of the value of this wear and tear on capital goods. Net investment is gross investment minus depreciation, and measures the change in the capital stock. If depreciation is greater than the addition of new capital, the capital stock gets smaller. When this happens, future production and/or consumption possibilities will be diminished. Diff: 3 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 120) How is interest measured when used in deriving GDP plus non-income expense items, such as indirect businesses and depreciation? Answer: Interest is expressed in net terms. It is the interest received by households, less the interest they pay. It also includes the net interest received from foreigners. Diff: 1 Topic: 8.3 Two Main Methods of Measuring GDP Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 8.4 Other Components of National Income Accounting 1) All of the following statements are correct EXCEPT A) NDP = Gross Domestic Product (GDP) - depreciation (capital consumption allowance). B) NI = NDP + indirect business taxes. C) net exports = total exports - total imports. D) Gross Domestic Product (GDP) = NDP + capital consumption allowance (depreciation). Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 2) If consumption expenditures are $600, spending on fixed investment is $100, imports are $40, exports are $75, the capital consumption allowance is $25, government spending is $50, and inventories have fallen by $5, then Gross Domestic Product (GDP) is A) $25 greater than NDP. B) $20 greater than NDP. C) $50 greater than NDP. D) the same as NDP. Answer: A Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 79 Copyright © 2021 Pearson Education, Inc.

3) National income includes all of the following EXCEPT A) proprietors' income. B) net interest. C) corporate profits. D) depreciation. Answer: D Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 4) The amount of income households receive after personal income taxes have been paid is known as A) national income. B) personal income. C) disposable personal income. D) gross domestic income. Answer: C Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 5) National income is equal to A) Gross Domestic Product (GDP) plus depreciation and indirect business taxes. B) the sum of all factor payments to resource owners. C) Gross Domestic Product (GDP) minus indirect business taxes. D) Gross Domestic Product (GDP) minus NDP. Answer: B Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 6) The annual cost of producing the entire output of final goods and services in an economy is A) equal to the quantity of total output produced. B) greater than the total income of households in the economy. C) equal to total income. D) equal to the total income of households in the economy only if profits are zero. Answer: C Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

7) The total factor payments to all resource owners is called A) gross output. B) personal income. C) national income. D) gross domestic income. Answer: C Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 8) Suppose net domestic product is $4.8 billion, net income earned abroad is $0.7 billion, other business income adjustments net of indirect business taxes and transfers are $0.4 billion, and personal income taxes are $0.8 billion. Then, national income equals A) $2.9 billion. B) $3.6 billion. C) $5.9 billion. D) $6.7 billion. Answer: C Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 9) Gross Domestic Product (GDP) = $14.0 trillion, consumption = $9.5 trillion, depreciation = $1.8 trillion, other business income adjustments less indirect business taxes = $0.2 trillion, and net U.S. income earned abroad = $0.1 trillion. Use this information to calculate national income (NI). A) NI = $12.0 billion B) NI = $12.3 billion C) NI = $12.4 billion D) NI = $12.5 billion Answer: D Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

10) National income is income ________ the factors of production. A) paid by B) earned by C) invested in D) households owe to Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 11) Personal income is equal to A) NDP minus national income. B) disposable personal income plus personal income taxes. C) disposable personal income plus personal and corporate income taxes. D) national income minus (corporate income taxes and Social Security). Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 12) If you take national income and add transfer payments, then subtract income earned but not received, the result will be A) net national product. B) disposable personal income. C) personal income. D) wages. Answer: C Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 13) The difference between personal income and disposable personal income is that A) disposable personal income includes only the funds available to spend on non-necessities. B) personal income taxes are not included in disposable personal income. C) personal income includes personal income taxes and indirect business taxes, which are not included in disposable personal income. D) personal income does not include transfer payments, such as Social Security payments or welfare payments and disposable personal income includes them. Answer: B Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 82 Copyright © 2021 Pearson Education, Inc.

14) The amount of income received by households prior to the payment of personal income taxes is called A) disposable wages. B) personal income. C) national income. D) net domestic product. Answer: B Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 15) If disposable personal income (DPI) = $700 and personal income taxes = $100, then what is personal income (PI)? A) $800 B) $700 C) $600 D) can't tell from the information provided Answer: A Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 16) Which of the following will be the smallest in value? A) national income B) net domestic product C) personal income D) disposable personal income Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 17) Disposable personal income is found by taking A) personal income taxes minus personal income. B) personal income minus personal income taxes. C) personal income taxes plus personal income. D) personal income times personal income taxes. Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

18) Disposable personal income is equal to A) national income minus personal income taxes. B) personal income plus transfer payments. C) Gross Domestic Product (GDP) minus depreciation. D) personal income minus personal income tax payments. Answer: D Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 19) Income earned by the factors of production is called A) gross domestic income. B) disposable personal income. C) personal income. D) national income. Answer: D Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 20) Which of the following accurately represents income earned by all factors of production? A) national income B) personal income C) disposable personal income D) wages and salaries Answer: A Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 21) Income received by the factors of production is called A) gross domestic income. B) disposable personal income. C) personal income. D) national income. Answer: D Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

22) The income that individuals have after personal income taxes have been paid is called A) gross domestic income. B) disposable personal income. C) personal income. D) national income. Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 23) One key difference between national income and net domestic product is A) net domestic product does not include income earned by the factors of production while national income does. B) net domestic product represents income that is available to individuals while national income does not. C) net domestic product includes indirect business taxes and transfers while national income does not. D) net domestic product only includes the net additions to the economy's stock of capital while national income does not. Answer: C Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 24) Individuals receive income and pay taxes over the course of a year. The difference between the income they receive and the taxes they pay is referred to as A) net national income. B) net domestic product. C) per capita real GDP. D) disposable personal income. Answer: D Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

25) The difference between personal income and disposable personal income is A) disposable personal income is what is left after personal income taxes have been paid while personal income includes personal income taxes. B) personal income is what is left after personal income taxes have been paid while disposable income includes personal income taxes. C) personal income includes transfer payments while disposable personal income does not. D) personal income includes indirect business taxes while disposable income does not. Answer: A Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 26) Suppose gross domestic product (GDP) is $5 billion, government transfer payments are $1.5 billion, indirect business taxes and transfers are $0.25 billion, and depreciation is $0.5 billion. Then national income equals A) $5 billion. B) $4.25 billion. C) $3.25 billion. D) $2.75 billion. Answer: B Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 27) Which of the following will have the smallest dollar value? A) personal income B) disposable personal income C) national income D) net domestic product Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 28) One difference between net domestic product and national income is that A) net domestic product includes depreciation. B) national income includes government and business transfer payments. C) net domestic product includes indirect business taxes and transfers. D) net domestic product doesn't include Social Security taxes or corporate retained earnings. Answer: C Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

29) A decrease in Social Security contributions will make A) gross domestic product larger. B) national income larger. C) national income smaller. D) personal income larger. Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 30) Personal income taxes are the difference between A) national income and personal income. B) personal income and disposable personal income. C) national income and disposable personal income. D) net domestic product and personal income. Answer: B Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 31) National income is $600, corporate taxes are $20, Social Security contributions are $60, retained earnings are $10, personal taxes are $100, and transfer payments are $80. Disposable income is A) $510. B) $450. C) $410. D) $490. Answer: D Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 32) An increase in corporate income taxes would reduce A) net domestic product. B) gross domestic product. C) national income. D) personal income. Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 87 Copyright © 2021 Pearson Education, Inc.

33) Suppose Social Security contributions rise by $5 billion while Social Security benefits also rise by $5 billion. Further, personal income taxes fall by $700 million. As a result, A) both personal and disposable personal income should increase. B) national income, personal income, and disposable income should increase. C) disposable income should increase while personal income and national income are unchanged. D) personal income, disposable personal income, and national income remain unchanged. Answer: C Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 34) What is the difference between personal income and disposable personal income? A) the amount of personal income taxes B) indirect personal taxes and transfers C) net U.S. income earned abroad D) depreciation Answer: A Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 35) Transfer payments are included in A) gross domestic product. B) net domestic product. C) national income. D) personal income. Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

36) Using the above table, the Gross Domestic Product (GDP) for the country is A) 662. B) 84. C) 746. D) 338. Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 37) Using the above table, the Net Domestic Product (NDP) for the country is A) 662. B) 84. C) 328. D) 338. Answer: C Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 38) Using the above table, the National Income (NI) for the country is A) 338. B) 228. C) 318. D) 662. Answer: C Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

39) Using the above table, the Personal Income (PI) for the country is A) 84. B) 228. C) 155. D) 306. Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 40) Using the above table, the Disposable Personal Income (DPI) for the country is A) 78. B) 220. C) 147. D) 298. Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 41) Personal income is A) the sum of all incomes received by households on welfare. B) the income households have after paying federal taxes. C) the sum of all incomes received by households. D) the sum of all incomes earned by sole proprietorships and partnerships. Answer: C Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 42) Which of the following would NOT be a part of personal income? A) indirect business taxes B) payments received from Social Security C) retirement checks D) corporate dividend payments to shareholders Answer: A Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

43) The amount of income that households actually receive before they pay personal income taxes defines A) national income (NI). B) personal income (PI). C) disposable personal income (DPI). D) net domestic product (NDP). Answer: B Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

44) Using the above table, the GDP is (in billions of dollars) A) 10,200. B) 8,200. C) 8,900. D) 9,500. Answer: D Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 45) Using the above table, the net domestic product is (in billions of dollars) A) 8,000. B) 9,700. C) 8,300. D) 6,500. Answer: A Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

46) Using the above table, the national income is (in billions of dollars) A) 8,950. B) 7,250. C) 6,850. D) 8,050. Answer: B Diff: 3 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 47) GDP minus depreciation equals A) national income. B) aggregate spending. C) personal income. D) net domestic product. Answer: D Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 48) Which one of the following accounting identities is TRUE? A) Disposable personal income plus indirect business taxes equals personal income. B) Disposable personal income plus non-income expense items equals personal income. C) Disposable personal income plus personal income taxes equals personal income. D) National income plus profit equals personal income. Answer: C Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 49) Social Security payments received by your grandmother A) are excluded from GDP, but are included in personal income. B) are included in both GDP and personal income. C) are included in GDP, but are excluded from personal income. D) are excluded in both GDP and personal income. Answer: A Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

50) National income is A) the total of factor payments to owners of resources. B) the dollar value of all final goods and services produced in a country in a year. C) the amount of monetary payments households actually receive before paying personal income taxes. D) the amount of monetary payments households actually receive after paying personal income taxes. Answer: A Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 51) Disposable personal income is A) the total of factor payments to owners of resources. B) the dollar value of all final goods and services produced in a country in a year. C) the amount of monetary payments households actually receive before paying personal income taxes. D) the amount of monetary payments households actually receive after paying personal income taxes. Answer: D Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

52) According to the above table, net domestic product (NDP) is A) $1,995. B) $2,265. C) $2,550. D) $2,850. Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

53) According to the above table, national income is A) $2,190. B) $2,550. C) $2,465. D) $2,750. Answer: A Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 54) Which of the following is a component of net domestic product (NDP), but NOT of national income? A) capital consumption allowance B) indirect business taxes C) corporate taxes D) personal taxes Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 55) To compute national income, which of the following items are added to net domestic product (NDP)? I. business income adjustments net of indirect business taxes and transfers II. capital consumption allowance III. net income earned abroad A) I only B) II only C) both I and III D) both II and III Answer: C Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking

(amounts in billions of dollars)

56) According to the above table, Gross Domestic Product as calculated by the expenditure approach is A) $14,337 billion. B) $13,617 billion. C) $13,384 billion. D) $13,278 billion. Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge 57) According to the above table, net domestic product is A) $12,531 billion. B) $11,998 billion. C) $11,892 billion. D) $11,811 billion. Answer: D Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

58) According to the above table, national income is A) $12,637 billion. B) $11,968 billion. C) $11,943 billion. D) $11,866 billion. Answer: B Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

59) According to the above table, national income is A) $13,271 billion. B) $11,917 billion. C) $10,770 billion. D) $10,646 billion. Answer: A Diff: 1 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Application of knowledge

60) To calculate GDP once national income has been computed, we must A) add indirect business taxes and transfers and subtract profits. B) add depreciation and subtract indirect business taxes. C) add depreciation and indirect business taxes and transfer payments and subtract other business income adjustments and net U.S. income earned abroad. D) add indirect business taxes and transfers and subtract depreciation, other business income adjustments, and net U.S. income earned abroad. Answer: C Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 61) Explain how disposable personal income is derived from Gross Domestic Product. Answer: Gross domestic product is the same thing as gross domestic income. National income is found by taking Net domestic Product (NDP) and adding net U.S. income earned abroad and other business income adjustments less indirect business taxes and transfers. NDP is GDP minus depreciation. Personal income is found by subtracting income earned but not received (corporate taxes, Social Security contributions, and corporate retained earnings) and adding in government transfer payments. Subtracting all personal income taxes and nontax payments generates disposable personal income. Diff: 2 Topic: 8.4 Other Components of National Income Accounting Learning Outcome: Macro-2: Explain the relationship between expenditure and income AACSB: Analytical thinking 8.5 Distinguishing between Nominal and Real Values 1) When economists discuss the nominal value of an economic variable, the variable is A) expressed in current dollars. B) expressed as an index figure. C) adjusted for a changing price level. D) expressed as a percentage. Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

2) Suppose that in 2020, nominal Gross Domestic Product (GDP) for the economy of Chiconia was $10 trillion and the Gross Domestic Product (GDP) price index was 200.0. What is Chiconia's real Gross Domestic Product (GDP) in 2020? A) $5 trillion B) $10 trillion C) $20 trillion D) $200 trillion Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 3) Which of the following statements does NOT describe the real value of an economic variable? A) It is adjusted for changes in the price level. B) It is expressed in constant dollars. C) It is a measure of the purchasing power of the variable. D) It is the variable's nominal value adjusted for unemployment. Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 4) If nominal Gross Domestic Product (GDP) in 2010 was $500 billion with a price index of 100, what would be the real Gross Domestic Product (GDP) in 2020 if the 2018 nominal Gross Domestic Product (GDP) was $900 billion and the 2020 price index was 140? A) $900 billion B) $540 billion C) $800 billion D) $643 billion Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge

5) If nominal Gross Domestic Product (GDP) in 2001 was $1 trillion, nominal Gross Domestic Product (GDP) in 2020 was $2 trillion, and the 2001 and 2020 price indexes were 100 and 250 respectively, A) real Gross Domestic Product (GDP) increased between 2001 and 2020. B) real Gross Domestic Product (GDP) decreased between 2001 and 2020. C) real Gross Domestic Product (GDP) remained constant. D) we cannot draw any conclusions about changes in real Gross Domestic Product (GDP). Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 6) If nominal Gross Domestic Product (GDP) in 2020 was $3,000 billion, and the price level index was 330 (2000 = 100), then real Gross Domestic Product (GDP) in terms of the price level in 2020 was about A) $105 billion. B) $4,220 billion. C) $909 billion. D) $537 billion. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 7) The difference between nominal and real values is that real values take into account A) depreciation. B) changes in the composition of output. C) changes in prices between years. D) the presence of durable goods. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 8) The nominal value of Gross Domestic Product (GDP) is expressed in A) inflation-adjusted prices. B) constant dollars. C) base-year dollars. D) none of these. Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 99 Copyright © 2021 Pearson Education, Inc.

9) Adjusting nominal Gross Domestic Product (GDP) for price changes from a base year yields A) current Gross Domestic Product (GDP). B) real Gross Domestic Product (GDP). C) constant disposable income. D) Gross Domestic Product (GDP) net of relative price changes. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 10) Constant dollar Gross Domestic Product (GDP) A) is the same as nominal Gross Domestic Product (GDP). B) is nominal Gross Domestic Product (GDP) divided by the price index. C) is equal to real GDP multiplied by the overall price level. D) all of these Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 11) Suppose 2010 is the base year. From 2010 to 2020, the price index increases from 100 to 102.5. If nominal Gross Domestic Product (GDP) is $2,800 in 2020, then the real Gross Domestic Product (GDP) in 2020 is A) $2,700. B) $2,800. C) $2,732. D) $2,870. Answer: C Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 12) If Gross Domestic Product (GDP) and other national income accounts are expressed in nominal values, then they are A) measured in real values. B) measured in market prices at which goods actually sold. C) measured in constant prices instead of actual market prices. D) readily comparable to Gross Domestic Product (GDP) figures for other years. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 100 Copyright © 2021 Pearson Education, Inc.

13) The price-corrected value for Gross Domestic Product is A) real Gross Domestic Product (GDP). B) net Gross Domestic Product (GDP). C) net national product. D) per capita income. Answer: A Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 14) Nominal income per person in the United States in 1960 was about $2,800 per year, while in 1990 nominal income per person was about $21,000. This indicates that A) nominal income was about 7.5 times greater in 1990, but we can't tell if this increase is due to inflation, economic growth, or a combination of the two. B) people enjoyed a standard of living about 7.5 times higher in 1990 than in 1960. C) a dollar in 1960 was worth less than a dollar in 1990. D) the average person would consider him/herself about 7.5 times happier in 1990 than in 1960. Answer: A Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 15) If deflation is occurring and nominal Gross Domestic Product (GDP) is increasing over time, then real Gross Domestic Product (GDP) is A) decreasing. B) increasing at the same rate as nominal Gross Domestic Product (GDP). C) increasing more slowly than nominal Gross Domestic Product (GDP). D) increasing faster than nominal Gross Domestic Product (GDP). Answer: D Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 16) To determine how well an economy is doing, it is better to use A) nominal Gross Domestic Product (GDP) figures. B) real Gross Domestic Product (GDP) figures. C) Gross Domestic Product (GDP) figures measured by the expenditure approach. D) Gross Domestic Product (GDP) figures measured by the income approach. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 101 Copyright © 2021 Pearson Education, Inc.

17) Nominal values are A) measured in terms of actual market prices at which the goods are sold. B) based on inflation-adjustments. C) based on Gross Domestic Product (GDP) per capita. D) measured in terms of total purchasing power. Answer: A Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 18) Per capita real Gross Domestic Product (GDP) is A) real Gross Domestic Product (GDP) divided by the population. B) real Gross Domestic Product (GDP) divided by a price index. C) real Gross Domestic Product (GDP) minus depreciation. D) population divided by real Gross Domestic Product (GDP). Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 19) Per capita real Gross Domestic Product (GDP) A) does not tell us the welfare level in the country. B) tells us the overall welfare conditions of all the country's citizens. C) gives only the welfare of the country's corporations. D) gives only the welfare of the richest areas of the country. Answer: A Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 20) Suppose Country X and Country Y each have the same real Gross Domestic Product (GDP), equal to $440 billion. Country X has 100 million people and Country Y has 175 million people. In this situation, per capita real Gross Domestic Product (GDP) is A) the same in both countries. B) higher in Country X. C) higher in Country Y. D) an irrelevant factor. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 102 Copyright © 2021 Pearson Education, Inc.

21) Suppose that the following occurred in two countries during the past decade. Country X, real Gross Domestic Product (GDP) rose 40 percent and population rose 50 percent; Country Y, real Gross Domestic Product (GDP) increased 80 percent and population increased 70 percent. Based on this information, which is TRUE? A) Both countries have experienced growth in per capita real Gross Domestic Product (GDP). B) Neither country has experienced growth in per capita real Gross Domestic Product (GDP). C) Chances for an improved standard of living are greater in Country X. D) Only Country Y has experienced growth in its per capita real Gross Domestic Product (GDP). Answer: D Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge

22) Refer to the above table. Real GDP in 2017 is A) 190.8. B) 477. C) 500. D) 524.1. Answer: D Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 23) Refer to the above table. Real GDP in 2019 is A) 146.4. B) 682.9. C) 700. D) 717.5. Answer: B Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge

24) Refer to the above table. Real GDP in 2020 is A) 103.1. B) 128.9. C) 775.9. D) 824.8. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 25) Refer to the above table. All real GDP numbers are expressed in terms of the purchasing power of dollars in A) 2017. B) 2018. C) 2019. D) 2020. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 26) When GDP and other national income accounts are measured in nominal values, then they A) are measured in current market prices. B) are measured in real values. C) are not comparable because they are not in real terms. D) should be converted into money values before comparing them over time. Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 27) Between two years, GDP at constant prices increased by 5 percent while GDP at current prices increased by 7 percent. Based on this information, the price level A) increased by 2 percent. B) increased by 12 percent. C) decreased by 2 percent. D) decreased by 12 percent. Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge

28) The GDP deflator is equal to A) nominal GDP divided by real GDP. B) nominal GDP multiplied by real GDP. C) nominal GDP minus real GDP. D) nominal GDP plus real GDP. Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 29) Which of the following represents how real GDP is calculated? A) nominal GDP multiplied by the GDP deflator B) nominal GDP divided by the population C) nominal GDP divided by the PPI, the producer price index D) nominal GDP divided by the GDP deflator Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 30) The nominal value of an economic variable is A) the consumer price index. B) the producer price. C) expressed in terms of actual market prices at which goods are sold. D) computed by taking the nominal value and dividing by the appropriate price index. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 31) The real value of an economic variable is A) the consumer price index. B) the producer price. C) expressed in terms of actual market prices at which goods are sold. D) computed by taking the nominal value and dividing by the appropriate price index. Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

32) Constant dollars are A) the same as current dollars. B) dollars corrected for general price level changes. C) what nominal GDP is measured in. D) when an individual does not receive a cost of living increase. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 33) The values of variables such as GDP expressed in current dollars are referred to as A) the price index. B) a deflator. C) nominal values. D) real values. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 34) Measurement of economic values after adjustments have been made for changes in the average of prices between years in known as A) the price index. B) a deflator. C) nominal values. D) real values. Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 35) Real GDP is A) the nominal value of all real goods produced in the nation in a year. B) nominal GDP corrected for changes in the average of overall prices. C) a misnomer since all GDP figures have to be in dollar values. D) the value of output in current dollars. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

36) Comparing two countries' nominal GDP over time is likely to be misleading if one wants to determine whether standards of living are better in one country because A) the figures must be adjusted for different types of currency. B) the figures must be adjusted for price changes and population differences. C) the figures must be adjusted to account for production differences. D) NDP instead of GDP should be used. Answer: B Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

37) Refer to the above table (figures in billions). The value of the GDP deflator in 2016 is A) 100. B) 102. C) 104. D) uncertain without more information. Answer: A Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 38) Refer to the above table (figures in billions). Between 2016 and 2017 real GDP A) increased by $191.7 billion. B) increased by $1.76 billion. C) increased by $176.17 billion. D) increased by $360.5 billion. Answer: C Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 107 Copyright © 2021 Pearson Education, Inc.

39) Refer to the above table (figures in billions). The nominal GDP for 2020 is A) $4819.6 billion. B) $4091.3 billion. C) $5677.5 billion. D) uncertain without more information. Answer: C Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 40) Refer to the above table (figures in billions). Real GDP for year 2019 was A) $4819.6 billion. B) $5222.2 billion. C) $4617.3 billion. D) uncertain without more information. Answer: C Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 41) If a nation's nominal GDP is $3,257 million and its price level is 110, then its real GDP is A) $1960.9 million. B) $24.67 million. C) $2960.9 million. D) $2467.42 million. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 42) Suppose nominal GDP in Mexico decreased by 10% in 2020. Given this information, we know with certainty that A) the aggregate price level in Mexico decreased in 2020. B) real GDP in Mexico decreased in 2020. C) both the aggregate price level AND real GDP decreased in Mexico in 2020. D) more information is needed to answer this question. Answer: D Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

43) Nominal GDP is calculated using A) the market prices during the year under consideration. B) the prices from some base year to adjust for price changes. C) the average of prices from the three preceding years. D) the prices from the preceding year. Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 44) Real GDP is A) nominal GDP adjusted for depreciation. B) nominal GDP adjusted for price changes. C) nominal GDP adjusted for transfer payments. D) nominal GDP adjusted for indirect business taxes. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 45) Measuring total aggregate production in current dollars uses which of the following measures? A) real personal income B) real gross domestic product C) nominal gross domestic product D) nominal net domestic product Answer: C Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 46) Assume that the nominal GDP for a given year is equal to $12,400 billion and the GDP deflator equals 112. Real GDP for that year is approximately A) $13,888.0 billion. B) $12,512.0 billion. C) $11,071.4 billion. D) $12,228.1 billion. Answer: C Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

47) Constant dollars are dollars A) corrected for general price level changes. B) measured in terms of current-year prices. C) issued by the U.S. Treasury with values that fail to change even in the face of inflation or deflation. D) issued by the Federal Reserve with values that fail to change even in the face of inflation or deflation. Answer: A Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 48) When one converts nominal GDP to real GDP, one takes into account which of the following? A) changes in the population B) changes in the quality of goods C) changes in the distribution of income D) none of these Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 49) Measuring total aggregate production in constant dollars uses which of the following measures? A) real personal income B) real gross domestic product C) nominal gross domestic product D) nominal net domestic product Answer: B Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

50) Using the data in the above table, what is the real GDP for year 2010 (in billions of constant dollars)? A) 9,250 B) 8,500 C) 7,708 D) 8,950 Answer: D Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 51) Using the data in the above table, what is the real GDP for year 2020 (in billions of constant dollars)? A) 9,250 B) 8,500 C) 7,708 D) 8,950 Answer: C Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 52) Which of the following statements is TRUE? A) During periods of inflation, nominal GDP increases more rapidly than does real GDP. B) Nominal values are expressed in constant dollars. C) Real values are expressed in current dollars. D) Increases in real GDP are evidence that the distribution of wealth is becoming more equal. Answer: A Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

53) The most accurate way to compare standards of living throughout the world is to look at A) total Gross Domestic Product (GDP). B) GNP. C) purchasing power parity. D) foreign exchange rates. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 54) The foreign exchange rate is A) an adjustment that takes into account differences in the true cost of living across countries. B) the price of one currency in terms of another. C) another name for purchasing power parity. D) part of the circular flow diagram. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 55) Comparing GDP across countries is unrealistic unless we make adjustment in exchange rates to take into account differences in the cost of living via A) real GDP. B) purchasing power parity. C) price index. D) international GDP. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 56) Purchasing power parity refers to A) adjustments in GDP figures to put everything into one common currency for comparison sake. B) adjustments in exchange rate conversions that take into account differences in inflation rates across countries. C) adjustments in exchange rate conversions that take into account the differences in true cost of living across countries. D) calculating real, per capita GDP in dollars. Answer: C Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 112 Copyright © 2021 Pearson Education, Inc.

57) The problem with using foreign exchange rates to convert one country's GDP into dollars is that A) the values of currencies are not comparable. B) exchange rates do not reflect differences in inflation rates. C) not all goods and services are sold on world markets. D) the dollar has been losing value over the last twenty years. Answer: C Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 58) To find the U.S. dollar equivalent of a given amount of Mexican pesos, you would have to know A) per capita GDP in Mexico. B) per capita GDP in the United States. C) per capita GDP in both the United States and Mexico. D) the foreign exchange rate between dollars and pesos. Answer: D Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 59) A purchasing power parity index would help you A) predict changes in U.S. real GDP. B) identify those goods and services that are becoming relatively more important in chainweighted GDP. C) make international comparisons of living standards. D) estimate the growth rate of U.S. personal income. Answer: C Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 60) The foreign exchange rate A) is the price of one good or service as compared to a similar good or service. B) is the same as the price of a product in U.S. dollars. C) is not relevant when comparing the GDPs of various countries. D) is the price of one currency in terms of another. Answer: D Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 113 Copyright © 2021 Pearson Education, Inc.

61) Of the following, which country has the highest annual real GDP per capita according to the International Monetary Fund and World Bank? A) China B) Italy C) United States D) Russia Answer: C Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 62) Purchasing power parity exists when domestic currency A) maintains a fixed exchange rate with a foreign currency. B) is not convertible to a foreign currency. C) buys more goods at home than abroad. D) buys as many goods abroad as at home. Answer: D Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 63) Assume that a Tesla Model 3 sells for $30,000 in the United States and that the exchange rate is $1 = 0.8 euro. For purchasing power parity to hold, the same car in Europe should sell for A) 24,000 euros. B) 30,000 euros. C) 36,250 euros. D) 37,500 euros. Answer: A Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 64) How many U.S. dollars does a U.S. importer need to pay for an invoice of 1 million yen when the price of 1 yen is $0.006? A) $1,666 million B) $1.66 million C) $166.7 D) $6,000 Answer: D Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Application of knowledge 114 Copyright © 2021 Pearson Education, Inc.

65) Which of the following allows us to compare average levels of real production per person in different nations in a way that adjusts for differences in true costs of living? A) nominal GDP based on purchasing power parity B) per capita real GDP based on purchasing power parity C) real GDP based on foreign exchange rates D) per capita nominal GDP based on foreign exchange rates Answer: B Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 66) Suppose you know that a certain country with a growing population has experienced steady growth in real per capita GDP. What do you then also know to be TRUE? A) The distribution of income in this country has become relatively more equal. B) The growth in goods and services produced and exchanged in the marketplace has outpaced the growth in population. C) This country exports more than it imports. D) This country imports more than it exports. Answer: B Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 67) The adjustment in exchange rate conversions that takes into account differences in the true cost of living across countries is called A) nominal purchasing power. B) purchasing power parity. C) raw purchasing power. D) currency-adjusted purchasing power. Answer: B Diff: 1 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

68) The most meaningful way to compare per capita Gross Domestic Product (GDP) across countries is to A) use foreign exchange rates to convert each country's per capita Gross Domestic Product (GDP) into dollars. Then compare. B) first adjust each country's per capita Gross Domestic Product (GDP) to exclude all the goods and services that are not exchanged with other countries. C) assume that the cost of living in each country is the same as the United States' cost of living. D) first use purchasing power parity to factor in each country's true cost of living. Answer: D Diff: 2 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 69) Is looking at changes in gross domestic product over time a good way to determine whether the people in a country are experiencing an increase in their standards of living? Why or why not? Answer: No. GDP figures need to be corrected for inflation, so real GDP and not nominal GDP should be used. But even using real GDP may be incorrect because increases in real GDP will not mean a higher standard of living if population is growing faster. A better measure is per capita real GDP. Even this is not perfect because there are many important economic activities that are not included in real GDP, and real GDP figures ignore household production and the value of leisure time. Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 70) How can we compare standards of living across countries? Answer: It is difficult to compare standards of living across countries. Per capita Gross Domestic Product (GDP) is a good starting point, but figures using different currencies must be converted to one currency if comparisons are to be made. There are problems with using the exchange rate to make these conversions because not all goods and services are sold in world markets. The best method is to use purchasing power parity comparisons, but this has drawbacks, too, because the value of leisure and the value of household production are not included. Diff: 3 Topic: 8.5 Distinguishing between Nominal and Real Values Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 9 Global Economic Growth and Development 9.1 How Do We Define Economic Growth? 1) An increase in growth rates will cause the production possibilities curve to A) shift inward. B) become steeper. C) become flatter. D) shift outward. Answer: D Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 2) An outward shift of the production possibilities curve represents A) economic contraction. B) economic growth. C) economic recession. D) economic inflation. Answer: B Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 3) Which of the following variables is used to measure economic growth? A) nominal GDP B) nominal GDP per capita C) real GDP D) real GDP per capita Answer: D Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

4) According to your text, which of the following countries has experienced the highest annual per capita Gross Domestic Product (GDP) growth rate since 1970? A) China B) Mexico C) Germany D) United States Answer: A Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 5) The term "economic growth" refers to increases in A) resources use. B) societal well-being. C) satisfaction. D) productive capacity. Answer: D Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 6) Economic growth is usually defined as A) the rate of increase in output divided by the increase in labor. B) the increase in output over time, as measured by real per capita Gross Domestic Product (GDP). C) the increase in input availability. D) the reduction in the real cost of necessities. Answer: B Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 7) Using a production possibilities curve, economic growth is represented by A) an outward shift in the curve. B) a movement along the curve. C) an inward shift of the curve. D) a pivot of the curve. Answer: A Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

8) Economic growth is best measured by increases in A) nominal personal income. B) nominal Gross Domestic Product (GDP). C) per capita real Gross Domestic Product (GDP). D) per capita nominal Gross Domestic Product (GDP). Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9) High economic growth of a country refers to A) a high level of real Gross Domestic Product (GDP). B) a high level of per capita real Gross Domestic Product (GDP). C) a large increase in per capita real Gross Domestic Product (GDP). D) a large increase in the values of natural resources. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

10) Refer to the above table (all figures in millions). Which country experienced the greatest economic growth from 2019 to 2020? A) A B) B C) A and B D) D Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge

11) Refer to the above table. Which country had the highest growth rate of real Gross Domestic Product (GDP) from 2019 to 2020? A) A B) B C) C D) D Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 12) Economic growth may understate changes in standards of living if A) the growth is accompanied by increasing congestion. B) leisure time is also increasing. C) the types of jobs generated feelings of alienation. D) deflation is taking place. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 13) There are a number of benefits that usually accompany economic growth. The following are such benefits EXCEPT A) increase in literacy. B) increased expected life-spans. C) political stability. D) urban congestion. Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 14) Costs associated with economic growth include all of the following EXCEPT A) environmental pollution. B) psychological problems such as depression. C) urban congestion. D) improved health care. Answer: D Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

15) The growth rate of per capita real Gross Domestic Product (GDP) is a reasonable measure of A) the amount of money each person has. B) productive activity. C) personal well-being. D) quality of life. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 16) Which of the following best represents economic growth? A) a movement down a given production possibilities curve B) a movement up a given production possibilities curve C) an outward or, equivalently, a rightward shift of the production possibilities curve D) an inward or, equivalently, leftward shift of the production possibilities curve Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 17) The faster economic growth is, the A) steeper the slope of the production possibilities curve. B) farther the production possibilities curve shifts out. C) closer to the origin the production possibilities curve becomes. D) more bowed the production possibilities curve becomes. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 18) Which of the following is NOT an important factor affecting economic growth? A) the rate of saving B) the growth of leisure C) the rate of growth of capital D) the rate of growth in labor productivity Answer: B Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

19) Which of the following is TRUE? A) Real standards of living can increase without any positive economic growth. B) Real growth rates fail to account for by price level changes. C) Real and nominal values are not related. D) Real standards of living decrease with positive economic growth. Answer: A Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 20) When a nation's real per capita Gross Domestic Product (GDP) increases, which of the following is TRUE? A) Every individual in that nation shares in the economic gain. B) A nation must channel most of the economic gains to its poorest citizens. C) Low income people are guaranteed to lose; they never share in their nation's economic gains. D) We don't know who has most benefited from economic growth unless we look at the distribution of income. Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 21) Is it possible to see gains in a nation's real standard of living without any positive economic growth? A) No, a nation's standard of living cannot improve without economic growth. B) Yes, but only if the government prints more money so people feel rich. C) Yes, if workers can produce the same level of output in fewer work hours, so that more leisure time could push up the real standard of living. D) None of these: Economic growth has nothing to do with a nation's standard of living. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

22) A nation's technological gains have increased labor productivity and, as a result, the average number of hours worked each week has been falling. How do Gross Domestic Product (GDP) calculations account for this shortening of the average workweek? A) Real Gross Domestic Product (GDP) does not factor in an increase in leisure time, but per capita real Gross Domestic Product (GDP) does. B) Neither real Gross Domestic Product (GDP) nor per capita real Gross Domestic Product (GDP) includes the increase in leisure time that results, so the nation's actual economic growth will be overstated. C) Gains in leisure time are dollar-valued and included in real per capita Gross Domestic Product (GDP) gains. D) Gains in leisure time are not included in Gross Domestic Product (GDP), so any increase in real per capita Gross Domestic Product (GDP) will understate the nation's actual economic growth. Answer: D Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 23) How should per capita real Gross Domestic Product (GDP) be used? A) It is an accurate measure of economic well-being. B) It is a reasonably good measure of productive activity. C) Per capita real Gross Domestic Product (GDP) is a good gauge of a nation's quality of life because it takes into account a nation's cultural and spiritual values. D) All of these Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 24) Does economic growth have any negative side effects? A) No. Every person in a nation experiencing economic growth will benefit. B) No, because where negative side effects do occur, a nation's government is required to neutralize them C) Quite possibly. Some say economic growth puts people on a never-ending quest to satisfy newly created wants, so we always feel disappointed with our lives. D) Yes, but only for the poorest segment of a nation's population. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

25) Countries are concerned about small changes in their average annual growth rates in per capita income because A) growth rates tend to decline over time. B) the power of compounding means small changes have large effects over time. C) the faster a country grows today, the less it will be able to consume in the future. D) growth rates are a factor in U.N. participation. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 26) Suppose that Country A and Country B each had the same per capita real Gross Domestic Product (GDP) of $10,000 in 2015. Country A's per capital real Gross Domestic Product (GDP) had a growth rate of 3 percent per year and Country B's per capital real Gross Domestic Product (GDP) had a growth rate of 4 percent per year. By 2020, the per-capita real Gross Domestic Product (GDP) for the two countries, respectively, were A) $11,941 and $12,653. B) $11,593 and $12,167. C) $10,300 and $10,400. D) $14,000 and $16,000. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 27) Economic growth is measured by A) increases in GDP. B) increases in per capita real GDP. C) increases in the population. D) increases in the value of the total output of society. Answer: B Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

28) Economic growth can be depicted as A) a movement up on the production possibilities curve. B) a movement down on the production possibilities curve. C) an outward shift on the production possibilities curve. D) an inward shift on the production possibilities curve. Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 29) Economic growth can be defined as a percentage increase in A) per capita real GDP. B) real GDP. C) nominal GDP. D) consumption by households. Answer: A Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 30) Which of the following statements is NOT true about economic growth? A) When growth occurs, the production possibilities curve shifts outward. B) Growth represents an increase in a nation's productive capacity. C) Growth is measured as the overall level of real GDP. D) Growth generally means that overall the members of the nation are better off materially. Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 31) Which of the following nations has experienced the highest average annual rate of growth of per capita real GDP since 1990? A) India B) United States C) China D) Germany Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

32) Per capita real GDP is a measure of A) economic welfare. B) cost of living standards. C) cultural harmony. D) productive activity. Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 33) Which of the following is a benefit of economic growth? A) reduction in illiteracy B) reduction in poverty C) improved health D) all of these Answer: D Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 34) The real GDP in a nation has just increased from $2 billion to $2.1 billion. A) This country has experienced economic growth because there is a $.1 billion increase in real GDP. B) We do not know if this country experienced economic growth since the increase in the population was not given. C) We do not know if this country experienced economic growth since information on nominal GDP was not given. D) This country did not experience economic growth since $.1 billion is not a large number. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 35) The historical record for the United States since 1900 shows A) mostly positive economic growth, with a few periods of negative economic growth. B) economic growth for about half the years and economic decline for the other half. C) growth until 1970 and then a period of constant per capita real GDP. D) continuous economic growth, although at different rates, throughout the entire century. Answer: A Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

36) Suppose per capita real GDP grows by 10% per year. Based on the Rule of 70, approximately how many years will it take for the level of per capita real GDP to double? A) 70 years B) 7 years C) 10 years D) none of these Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 37) Which of the following is a TRUE statement concerning economic growth? A) Changes in per capita nominal GDP are used to measure economic growth because population growth can distort the figures and we want to use the nominal amounts since that is what people identify with. B) Changes in per capita nominal GDP are used to measure economic growth, but there are serious problems concerning the desirability of using figures that do not account for pollution and urban sprawl. C) Changes in per capita real GDP are used to measure economic growth because this accurately measures all the differences in living standards across countries. D) Changes in per capita real GDP are used to measure economic growth because inflation and population growth can distort nominal GDP figures or total GDP figures. Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 38) Which of the following statements is NOT true about using per capita real GDP to measure a nation's economic growth? A) The definition does not indicate how the increase in growth is being disturbed among the nation's population. B) The definition assumes that some of the increase in productivity goes to the poor. C) The definition has understated actual economic growth because it does not take into consideration changes in leisure. D) The definition is not perfect for measuring increases in a nation's productive capacity. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

39) When examining the growth record of any nation, A) all that must be examined is increases in per capital real GDP. B) no consideration should be given to the change in the average amount of leisure time in the nation. C) increases in per capita real GDP must be considered along with how far the production possibilities curve has shifted. D) we must consider which income groups have benefited most from the growth. Answer: D Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

40) Refer to the above table. Which country had the largest increase in per capita real GDP between 2019 and 2020? A) A B) B C) C D) D Answer: A Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 41) Refer to the above table. Which country has the lowest increase in per capita real GDP between 2019 and 2020? A) A B) B C) C D) D Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge

42) If we are interested in knowing whether a poor country is improving economically, we want to know not only what the economic growth rate is, but also A) whether the economic growth rate is faster than other nations' growth rates. B) whether government spending is growing at the same rate. C) whether the economic growth rate is greater than last year's rate. D) whether the lowest income groups are benefiting from the growth. Answer: D Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 43) Real standards of living can increase A) if the country is producing the same amount they traditionally have and are enjoying more leisure time. B) only if there is positive economic growth. C) if there is positive growth in the manufacturing sector. D) only at the cost of increased urban congestion. Answer: A Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 44) Economic growth may overstate changes in the standard of living if A) people are retiring at a younger age. B) the average workweek is increasing. C) the number of students attending college is increasing. D) expected life spans are increasing. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 45) A country has had its per capital real GDP remain constant for several years. During this period this country A) has not experienced any economic growth. B) may have experienced economic growth if the average hours worked per week have fallen. C) will have experienced an inward shift of the production possibilities curve. D) will have an increase in the number of poor people. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 13 Copyright © 2021 Pearson Education, Inc.

46) An example of a cost of economic growth is A) longer life spans. B) political instability. C) alienation. D) a larger population size. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 47) The measurement of economic growth cannot take into account A) the service sector of an economy. B) productive activity in an economy. C) cultural aspects of life in a country. D) differences in inflation rates across countries. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 48) Suppose two countries have identical growth rates of real GDP and the same initial value of per capita real GDP. We know, then, that A) life expectancies are the same in both countries. B) economic well-being is the same in both countries. C) living standards may differ in the two countries because we don't know how income is distributed in the countries. D) living standards in the two countries are probably identical, or very close to each other. Answer: C Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 49) The reason that differences in economic growth rates are important in the long run is that A) growth compounds over time. B) population naturally shrinks in most countries. C) real GDP usually drops when adjusted for inflation. D) nominal GDP typically increases faster than real GDP. Answer: A Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

50) A one percentage point in the growth rate A) does not make much difference in the long run per capita real GDP. B) will not influence the real standard of living in a country. C) can make a big difference in the per capita real GDP because of urban congestion. D) can make a big difference in the per capita real GDP because of compounding. Answer: D Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 51) A small reduction in a country's growth rate is a concern to policy makers because A) a small change can have large effects on per capita GDP over time. B) a reduction usually leads to future reductions until finally the economy stagnates. C) policy makers focus too much on economic growth and not enough on increasing savings rates. D) the larger GDP is the better the economic welfare will be in the future. Answer: A Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 52) Suppose two countries have per capita real GDP of $20,000 in 2017. Country A has a growth rate of 4 percent and Country B has a growth rate of 5 percent. By 2020, the per capita real GDPs for the two countries, respectively, are (rounded) A) $21,630 and $22,050. B) $22,400 and $23,000. C) $22,500 and $23,150. D) $25,000 and $26,500. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge

53) According to the above table, if per capita real GDP is currently $100, then at a constant annual rate of growth of 8 percent, per capita real GDP ten years from now will be equal to A) $200. B) $214. C) $216. D) $259. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 54) Refer to the above table. How long would it take for a country to triple its GDP if the GDP grew at a 20 percent rate? A) 2 years B) 4 years C) 6 years D) 10 years Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge

55) Refer to the above table. Two countries have per capita real GDPs in 2015 of $5000. If country A has a 4 percent growth rate and Country B a 5 percent growth rate, what will the per capita real GDPs of each be in the year 2065? A) A: $40,000; B: $60,000 B) A: $35,550; B: $57,500 C) A: $24,000; B: $35,200 D) A: $15,000; B: $30,000 Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 56) Refer to the above table. Suppose one country has a per capita real GDP of $1000 and another has a per capita real GDP of $10,000, or ten times larger. If both countries have a growth rate of 5 percent, how much larger will per capita real GDP be in the second country be than the first after 50 years? A) 4 times larger B) 5 times larger C) 8 times larger D) 10 times larger Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 57) Refer to the above table. Country A has a per capita real GDP of $1000 and B has a per capita real GDP of $10,000. A is growing at a rate of 5 percent a year and B at a rate of 4 percent a year. After 50 years, how much larger is per capita real GDP in B than A? How much is this in real dollars? A) B is 8 times larger, or $175,000 larger on a real per capita basis. B) B is 12 times larger, or $230,000 larger on a real per capita basis. C) B is a little over 6 times larger, or almost $60,000 larger on a real per capita basis. D) B is a little less than 2 times smaller, or almost $20,000 smaller on a real per capita basis. Answer: C Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

58) Refer to the above table. If an economy's current per capita real GDP is $3,000, and if its economy grows at an constant annual rate of 5 percent for 50 years, what will be its per capita real GDP at the end of that period? A) $13,140 B) $21,330 C) $34,500 D) $55,200 Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 59) Refer to the above table. You have a choice among four alternatives. Choice A lets you invest $250,000 at 4 percent; B lets you invest $125,000 at 6 percent; C lets you invest $62,500 at 8 percent, and D lets you invest $31,250 at 10 percent. Which choice will get you to $1 million faster? A) A B) B C) C D) D Answer: A Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 60) All of the following will cause the reported growth rate in a country to change EXCEPT A) population changes. B) changes in the number of poor people in the country. C) a shift of the production possibilities curve. D) changes in productivity. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

61) Graphically, economic growth is represented as A) a movement along the production possibilities curve. B) a movement from a point inside the production possibilities curve to a point on the curve itself. C) an inward shift of the production possibilities curve. D) an outward shift of the production possibilities curve. Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 62) One of the problems with the definition of economic growth is that A) it overstates economic growth because it does not account for leisure time. B) it does not account for the distribution of income. C) it overstates economic growth because it does not account for the reduction in work time. D) it understates economic growth because it does not account for a higher standard of living. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 63) Economic growth is A) an increase in the per person real production in a nation. B) an increase in stock market values. C) an increase in real estate values. D) an increase in the number of people employed in agriculture. Answer: A Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 64) The variable used to measure economic growth is A) the growth of the money supply. B) the trade surplus. C) the growth in per capita real GDP. D) the number of new jobs created. Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

65) Why do very small differences in annual growth rates amount to big differences in the degree of long-term economic growth? A) because the faster-growing countries gain a political advantage over poorer countries, and use that advantage for their economic gain B) because the annual growth rate is compounded over time C) because the slower-growing countries save too much D) because the slower-growing countries don't export enough Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 66) An outward shift of the production possibilities curve demonstrates A) a recession. B) an increased rate of inflation. C) economic growth. D) a cyclical shock. Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 67) Economic growth is defined as A) an increase in the satisfaction of all people within a country. B) an increase in per capita real GDP measured by its rate of change per year. C) any increase in per capita nominal GDP measured by its rate of change per year. D) an increase in the supply of money measured by its rate of change per year. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 68) According to the World Bank and the International Monetary Fund, which of the following countries has shown the greatest rate of economic growth in the past two decades? A) China B) Germany C) United States D) Mexico Answer: A Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 20 Copyright © 2021 Pearson Education, Inc.

69) Which of the following would typically be considered a cost of economic growth? A) increased illiteracy B) decreased levels of health C) increased poverty D) urban congestion Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 70) A small increase in the annual rate of economic growth can lead to a larger increase in growth over time due to the effects of A) the money supply. B) compounding. C) regression towards the mean. D) averaging. Answer: B Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 71) The definition of economic growth is the annual percentage A) increase in the per capita real GDP. B) increase in the per capita nominal GDP. C) increase in the total nominal GDP. D) increase in total exports. Answer: A Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 72) Economic growth will A) shift the production possibilities curve inward. B) shift the production possibilities curve outward. C) shift along the production possibilities curve toward the X-axis. D) be a movement from inside the productions possibilities curve to the curve itself. Answer: B Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

73) Suppose per capita real GDP grows by 2% per year. Based on the Rule of 70, approximately how many years will it take for the level of per capita real GDP to double (i.e., increase by 100%)? A) 3.5 years B) 20 years C) 35 years D) 70 years Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 74) Assume a country produces two types of goods: manufactured goods and agricultural goods. When this country experiences economic growth, we know that A) the production possibilities curve will shift outward. B) the production possibilities curve will shift inward. C) there will be a movement along the curve toward more manufactured goods. D) there will be movement along the curve toward more agricultural goods. Answer: A Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 75) When looking at economic growth in a country, the distribution of output and income A) generally follows predictable patterns. B) is not taken into consideration. C) is skewed toward the lowest quintile of the population. D) is shared equally. Answer: B Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 76) Which of the following is NOT a benefit of economic growth? A) urban congestion B) reduction in illiteracy C) improved health D) longer lives Answer: A Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 22 Copyright © 2021 Pearson Education, Inc.

77) Which of the following is a negative effect of economic growth? A) higher inflation B) higher unemployment C) environmental pollution D) all of these Answer: C Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 78) A change in the growth rate of a country of one percentage point annually has A) very little impact on the economy of a country. B) a large impact in the future due to compounding. C) a small impact in the current year, and smaller impact in the future because of compounding. D) a large impact on the economy in the current year, but not in the future. Answer: B Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 79) The modification of manufacturing processes so as to reduce the resulting environmental damage is an endeavor that requires capital investment, labor inputs, and technology. What then follows from this statement? A) Economic growth can benefit the environment. B) Environmental damage is a regrettable but necessary side effect of economic growth. C) The condition of the environment will be better in slower-growing countries. D) The way to reduce pollution is to educate people about its effects. Answer: A Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 80) What is the real GDP after four years if Country A's average annual growth rate is 8.6 percent and the initial real GDP was $2,756.0 million? A) $2,993.0 million B) $3,833.5 million C) $1,077.5 million D) $3,250.4 million Answer: B Diff: 3 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 23 Copyright © 2021 Pearson Education, Inc.

81) Suppose that the per capita GDP for Japan in 2019 was $48,500 and in 2020 was $49,470. How much did the Japanese per capita GDP grow between 2019 and 2020? A) -2 percent B) 3 percent C) 2 percent D) Cannot be determined without further information Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 82) A constant rate of U.S. economic growth over a given period of years would involve A) adding the same amount of nominal dollars to real GDP per capita each year. B) adding the same amount of real dollars to real GDP per capita each year. C) compounding the percentage increase in real GDP per capita over the years. D) None of these are correct. Answer: C Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 83) When economic growth is compared between countries, the best measure to use is A) nominal GDP. B) real GDP. C) chain-weighted GDP. D) real GDP per capita. Answer: D Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 84) What is economic growth and why are growth rates so important? Answer: Economic growth is measured by increases in per capita real Gross Domestic Product (GDP). Economic growth results in a higher standard of living, measured in production of new final goods and services, for the average member of society. Sustained small increases in the growth rate of per capita real Gross Domestic Product (GDP) can lead to large absolute increases in per capita real Gross Domestic Product (GDP) due to the power of annual growth compounding. Diff: 1 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

85) "There is a direct relationship between economic growth rates and the wealth of a nation." Do you agree or disagree? Why? Answer: Disagree. Wealthier nations often have smaller growth rates than poorer nations. Part of the reason is that a two percent growth rate for a rich nation means a lot more actual growth of the level of per capita real Gross Domestic Product (GDP) than it does for a poor nation. Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 86) What are the shortcomings of using changes in per capita real GDP to measure economic growth? Answer: GDP does not include all goods and services that people consider valuable. Household production is left out, as is the value of leisure. GDP also does not take into consideration cultural and spiritual aspects of life. To the extent economic growth is accompanied by environmental degradation, it is not all a gain. And finally, the level of per capita real GDP does not provide information about how the income is distributed across the population. Diff: 2 Topic: 9.1 How Do We Define Economic Growth? Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9.2 Productivity Growth, Saving, and New Technologies: Fundamental Determinants of Economic Growth 1) If population growth is greater than the growth of real output A) real per capita Gross Domestic Product (GDP) growth will be less than the growth of real Gross Domestic Product (GDP). B) the production possibilities curve is shifting to the left. C) real per capita Gross Domestic Product (GDP) growth will be greater than the growth of real Gross Domestic Product (GDP). D) real per capita Gross Domestic Product (GDP) and real Gross Domestic Product (GDP) will be growing at the same rate. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

2) Labor productivity can best be calculated as A) real Gross Domestic Product (GDP) / Gross Domestic Product (GDP) price index. B) real Gross Domestic Product (GDP) / number of workers. C) number of workers / hours of work. D) real wages / hours of work. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 3) Which resource is the main contributor to economic growth in the United States, Latin America, and South Asia? A) growth in physical capital B) growth in human capital C) growth in labor productivity D) growth in natural resources Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 4) Which of the following variables can be used to measure labor productivity? A) real GDP B) number of workers C) number of labor hours D) all of these Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

5) The majority of evidence points to the fact that, in the last decade in the United States, labor productivity has A) decreased. B) increased. C) stayed the same. D) decreased in the manufacturing sector but increased in the service sector. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 6) Labor productivity rises when A) average worker output falls. B) business investment falls. C) average worker output rises. D) nominal wages fall. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 7) Labor productivity increases when A) the average number of hours people work goes up. B) the unemployment rate decreases. C) the average output produced per worker during a specified time period increases. D) the average output produced per worker during a specified time period decreases. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

8) Suppose a country experiences an increase in output per worker. Such a development represents which of the following? A) a decrease in economic growth B) an increase in labor productivity C) a reduction in the saving rate D) an increase in population growth Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9) Which of the following will cause an increase in economic growth? A) an increase in human capital B) a reduction in the stock of physical capital C) a reduction in the unemployment rate D) a reduction in labor force participation Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 10) Labor productivity is computed as A) per capita real GDP divided by the number of workers. B) real GDP divided by population. C) per capita real GDP divided by population. D) real GDP divided by the number of workers. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

11) Labor productivity is A) the average amount produced times the number of workers. B) the average amount produced times the number of people in the labor force. C) the average amount produced per worker. D) the rate of change in the total amount produced per worker. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 12) The most important thing about higher labor productivity is that it means A) we are doing better than anyone else is. B) we can compete well with other nations. C) we can achieve a happier population. D) we can have a higher standard of living. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 13) Economic growth can be defined as A) the rate of growth in the productivity of labor. B) the rate of growth in the productivity of capital. C) the rate of growth of labor plus the rate of depreciation of capital. D) the rate of growth of labor plus the rate of growth of capital plus the rate of growth in the productivity of labor and capital. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

14) Productivity relates to A) working harder over time. B) working longer over time. C) producing the same output with fewer labor hours. D) producing the same output with more labor hours. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 15) Which of the following is an example of a measure of labor productivity? A) Factory workers produce 100 units of TVs per worker per day. B) Autos get 20 gallons to the mile. C) A household's income increased by 3 percent last year. D) Wages increase by 3 percent per year for 5 years. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 16) Labor productivity increases when A) the population increases. B) output increases even if the labor force has decreased. C) output increases at the same rate as the labor force increases. D) output increases faster than population increases. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 17) In the United States, the main contributor to economic growth is due to the growth in A) physical capital. B) land. C) labor resources. D) foreign capital. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 30 Copyright © 2021 Pearson Education, Inc.

18) Improvements in labor productivity A) affect the level of wages, but do not affect the rate of economic growth. B) affect the level of profit, but do not affect the rate of economic growth. C) hinder economic growth, because they cause unemployment. D) contribute to economic growth. Answer: D Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 19) Labor productivity is commonly measured as A) the number of workers divided by real GDP. B) the change in real GDP divided by change in number of workers. C) nominal GDP divided by number of workers. D) real GDP divided by number of workers. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 20) An increase in human capital will tend to cause which of the following? A) increase economic growth B) increase the standard of living C) increase labor productivity D) all of these Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

21) Which one of the following does NOT contribute to economic growth? A) the growth of capital B) the growth of the capital stock C) the growth of the labor productivity D) increases in the price level Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 22) The formula for the computation of labor productivity is A) real GDP/population. B) real GDP/number of workers. C) nominal GDP/population. D) nominal GDP/number of workers. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 23) Labor productivity is defined as A) the amount of output per worker. B) the amount of input per worker. C) the amount of workers per unit of input. D) the increase in output per unit of machinery. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 24) Labor productivity can be increased if A) people spend less time developing skills before entering the workforce. B) the government mandates it. C) there is an increase in capital goods. D) the standard of living declines. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 32 Copyright © 2021 Pearson Education, Inc.

25) Labor productivity measures A) the growth of per capita real GDP. B) the growth of real output. C) real output per labor hour. D) the growth in the quantity of labor. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 26) Labor productivity can be increased with A) education and training of the workforce. B) an increase in capital goods used. C) improvements in management. D) all of these Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 27) By dividing a country's value of total domestic output by its number of workers, economists can measure A) the net domestic product. B) labor productivity. C) the size of the labor force. D) the rate of capital accumulation. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

28) Whenever average output produced per worker during a specific time-period increases, then A) leisure time increases. B) nominal GDP decreases. C) labor productivity increases. D) the standard of living goes down. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 29) Improvements in information technology over the past decade have enhanced labor productivity. What has been a likely result of this change? A) Capital productivity has declined. B) Unemployment has increased. C) The rate of economic growth has increased. D) Entrepreneurs no longer have an incentive to invest in information technology. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 30) Which of the following contributes to economic growth? A) increase in labor productivity B) increase in consumer spending C) increase in labor regulations restricting the hours of overtime allowed D) increase in environmental protection policies Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

31) Giving up consumption today for consumption tomorrow accelerates economic growth by A) having the economy produce no consumer goods. B) increasing saving out of disposable income. C) increasing the expected rate of inflation. D) rapid expansion of the money supply. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 32) One important factor that affects economic growth is A) the amount of money supply. B) the rate of saving. C) which political party is in power. D) the number of workers in heavy industry. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 33) According to the text, Ethiopia probably has a low per capita real Gross Domestic Product (GDP) because A) it has too many resources. B) it has a corrupt government. C) it has a low rate of saving. D) there are too many skilled workers in the country. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

34) Economic growth occurs as a result of all of the following EXCEPT A) more labor hours. B) growth of capital. C) technological progress. D) less saving. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 35) A higher rate of saving should lead to A) higher current consumption. B) less growth. C) more investment, higher capital growth, and more future consumption. D) a higher price level and reduced future consumption. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 36) The rate of economic growth will be faster if A) the rate of growth of the money supply is higher. B) the rate of saving is higher. C) the rate of growth of the population is higher. D) consumption spending is greater. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 37) Other things being equal, a higher saving rate A) leads to higher interest rates. B) means higher standards of living in the future. C) means higher standards of living today. D) is associated with a decline in the rate of growth of the population. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

38) Other things being equal, an increase in consumption spending implies A) a decline in saving. B) a decline in government spending. C) a higher standard of living in the future. D) that economic growth will soon increase. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 39) Economic growth tends to be higher in a country that A) has a low saving rate. B) has an open economy that encourages the rapid spread of technology. C) has an undeveloped system of property rights. D) does not grant patents to investors. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 40) When comparing across countries, the higher the rate of saving, A) the lower the level of per capita real Gross Domestic Product (GDP). B) the higher the level of per capita real Gross Domestic Product (GDP). C) the less industrialized the country. D) the lower the productivity rates. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

41) An important factor in determining a country's rate of economic growth is A) the diversity of its population. B) its rate of saving. C) the size of its labor force. D) the proportion of the adult population that is working. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 42) Other things held constant, higher saving rates lead to A) a lower standard of living. B) increases in the number of hours workers work. C) decreases in real per capita GDP. D) higher living standards. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 43) Saving is important for economic growth because A) a higher saving rate reduces investment spending. B) a higher saving rate increases investment spending. C) more saving increases consumption immediately. D) a higher saving rate will decrease the standard of living in the future. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

44) A reduction in a country's saving rate will tend to cause which of the following in the long run? A) an increase in the standard of living B) a reduction in economic growth C) an increase in labor productivity D) an increase in per capita real GDP Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 45) The relationship between the rate of saving and per capita real GDP is A) positive. B) negative. C) constant. D) not stable. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 46) There has been some concern in the United States that people are NOT saving enough. This is a concern because A) decreases in saving lead to decreases in labor productivity. B) decreases in saving lead to decreases in investment. C) decreases in saving lead to increases in the capital stock. D) decreases in saving lead to increases in consumption in the future. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

47) If all income is consumed in a year, then A) investment spending will increase. B) income next year will increase. C) investment spending will be zero. D) any investment spending will be done by the government. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 48) Many countries find it difficult to achieve economic growth. This is because economic growth A) is not understood well by economists, so it is difficult to advise policy makers on the best policies to pursue. B) requires saving, and saving means less consumption today. A poor country may find it difficult to consume less today. C) appears to be predetermined and not subject to factors that policy makers can have any affect on. D) depends on technological change and technological change depends on noneconomic factors such as the growth rate of scientific knowledge. Answer: B Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 49) It is likely that a small increase in a country's saving rate will have A) a large effect on per capita real GDP many years later because the increase in saving leads to a slightly higher rate of economic growth which has large effects over time. B) a large effect on per capita real GDP immediately because the increase in saving leads to a much larger rate of economic growth. C) a small effect on per capita real GDP many years later because the increase in saving will have very little effect on the growth rate. D) a small effect on per capita real GDP many years later because the increase in saving will be offset in later years by a decrease in the saving rate. Answer: A Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

50) Countries with higher rates of saving A) experience lower growth rates in the future. B) have a large population. C) have a greater number of poor people. D) have higher rates of growth. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 51) Economic growth depends on A) low tax rates. B) high government spending. C) high rates of consumption. D) increases in the capital stock as a result of saving. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 52) Which one of the following is TRUE? A) Saving deters economic growth, because it takes money out of circulation. B) Saving enables economic growth by providing for investment in the capital stock. C) International comparisons have found no relationship between the rate of saving and the level of per capita real GDP. D) Economies with sophisticated credit markets, such as the United States, have no need for saving. Answer: B Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

53) Of the following nations, the country with the highest saving rate is A) the United States. B) Japan. C) Mexico. D) Ethiopia. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 54) Regarding the role of saving in economic growth, studies indicate that A) there is a positive relationship between economic growth and saving. B) there is no relationship between economic growth and saving. C) there is a negative relationship between economic growth and saving. D) there is both a positive and a negative relationship between economic growth and saving. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 55) Which of the following is an important factor affecting economic growth? A) the rate of saving B) exchange rates C) the rate of interest D) the level of prices Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

56) An increase in a country's saving rate will tend to cause which of the following in the long run? A) a reduction in per capita real GDP B) an increase in economic growth C) an increase in the unemployment rate D) an increase in the rate of inflation Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 57) In order to be able to consume more in the future, you have to consume A) less today and save the difference. B) more today to increase supply. C) more consumer goods. D) fewer capital goods. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 58) Higher saving rates mean higher future growth rates because A) the interest earned from savings gives you more wealth. B) the banks have more money to distribute to their shareholders. C) saving contributes to less investment, which yields a larger capital stock. D) saving contributes to more investment, which yields a larger capital stock. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

59) In order for a nation to be able to consume more in the future, it needs to A) consume less today in aggregate and save the difference between consumption and income. B) consume more today in aggregate and borrow the difference between consumption and income. C) produce more today in aggregate and save the difference between consumption and production. D) produce less today in aggregate and save the difference between consumption and income. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 60) Proponents of the new growth theory argue that which of the following is a determinant of economic growth? A) an effective system of patent protection B) the quality and size of the nation's human capital C) the proportion of income that goes into research and development D) all of these Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 61) Which of the following are mentioned as forces of the new growth theory that influence economic growth? I. Technology II. New ideas III. Innovations A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III Answer: E Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

62) A key idea of the new growth theory is that A) technology is not an important determinant of economic growth. B) economic growth is not as important as leisure time growth. C) the greater the rewards for technological advances, the greater the number of technological advances. D) the rewards associated with technological advances have little to do with the actual rate of invention or innovation. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 63) New growth theory supports the idea that I. economic growth can continue as long as we keep finding new ideas. II. increases in human capital can lead to greater rates of economic growth. A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 64) According to the new growth theory, economic growth will continue with A) the development of new ideas. B) increases in population growth. C) development of natural resources. D) an increased focus on labor-intensive jobs. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

65) All of the following are factors that raise economic development EXCEPT A) establishing a legal system. B) an educated work force. C) reducing trade barriers. D) government control of the country's resources. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 66) Innovation typically increases when A) market incentives and private property rights are encouraged. B) government controls the resource base. C) high taxes are present. D) the legal system is weak. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 67) The development of a strain of wheat that will yield two crops per year rather than one crop per year is an example of economic growth resulting from A) capital accumulation. B) increased gross investment. C) technological progress. D) an increase in per capita real income. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

68) According to new growth theory, as technology becomes more important to growth, so does A) human capital. B) military spending. C) increasing taxes. D) increasing trade barriers. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 69) Economists typically agree that the special protection given to owners of patents tends to A) reduce expenditures on research and development. B) increase expenditures on research and development. C) reduce economic growth. D) reduce productivity. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 70) The transformation of an invention into something that benefits the economy is known as A) an innovation. B) a patent. C) an externality. D) magical growth. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

71) When the government grants an inventor a patent, A) he has the exclusive right to make, sell or use his invention for 5 years. B) the patent holder has less incentive to invest in R&D because one successful invention removes the need to develop others. C) the patent holder is guaranteed a profit on his invention. D) the protection of a current invention would increase spending on R&D. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 72) Regarding open economies, economists tend to find evidence that A) the more closed an economy is, the higher the rate of growth the economy will experience. B) trade tariffs tend to improve economic growth. C) free trade encourages a more rapid spread of technology, and hence increases economic growth. D) open economies tend to have access to smaller markets than do closed economies. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 73) According to the text, data supports the conclusion that lower trade barriers A) help boost per capita real Gross Domestic Product (GDP) growth. B) help to increase welfare payments. C) decrease the standard of living in the country. D) decrease life expectancy. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

74) Free trade is viewed as key to economic development because A) it encourages a faster spread of technology. B) it encourages a country's exports only. C) it brings in expensive new technology. D) none of these is correct. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 75) Which of the following does free trade encourage? A) more rapid spread of technology B) higher rates of economic growth C) domestic industries' access to larger markets D) all of these Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 76) Paul Romer's theory on the importance of knowledge differs from traditional theory in that Romer A) argues that an investment-knowledge cycle allows a once-and-for-all increase in investment to permanently raise a country's growth rate, while traditional theory argues that a once-and-forall increase in investment leads to a higher standard of living but not to a higher growth rate. B) argues, that investment is not important in promoting growth, but that the acquisition of knowledge is the sole determinant of economic growth. C) argues, that an investment-knowledge cycle exists which requires that investment rates keep increasing or else growth rates will fall, while traditional theory argues that growth rates will not fall, although they will not increase either. D) emphasizes investment rates while traditional theory emphasizes the importance of knowledge as a factor of production. Answer: A Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

77) According to economist Paul Romer, economies seeking high economic growth must A) encourage consumption by households. B) invest in knowledge. C) drastically lower their standards of living. D) reduce their population growth by adopting a one-child policy. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 78) For developing countries, one of the more effective ways to become more developed is A) to invest in human capital. B) to invest more in the military. C) to increase trade barriers. D) to reduce direct foreign investment. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 79) What does the fact that U.S. students are falling behind other nations' students in math and science have to do with economic growth? A) Nothing. People in the United States just don't like to fall behind in anything as a matter of pride. B) If U.S. students don't excel in math and science, the nation will see fewer plays written and fewer pieces of music composed. C) Better technology, a key to economic growth, depends largely on math and science skills. D) Math and science skills don't foster economic growth, but it takes math skills to calculate a nation's rate of economic growth. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

80) Human capital is A) the saving done by human beings. B) the knowledge and skills that people in the work force acquire through education and training. C) a measure of the labor productivity of workers. D) the investment people make in industries that make capital goods. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 81) Which of the following is TRUE of trends in the number of new U.S. patents? A) There was a steady increase in new patents throughout the 1970s. B) There was a surge in new patents in the latter part of the 1990s. C) The number of new patents granted each year has remained unchanged since the early 1970s. D) The number of new patents granted each year declined by more than 50 percent after 2001. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 82) Traditionally, economists regarded improvements in technology as A) the most important factor that helped explain economic growth, and basically the only factor that would cause economic growth. B) an outside factor that helped explain economic growth. C) an important factor in explaining economic growth that was due to economic forces that also could easily be explained. D) unrelated to economic growth in any systematic way. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

83) Which of the following is NOT associated with the new growth theory? A) natural resources B) research C) technology D) innovation Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 84) New growth theory is concerned with A) finding a good way to measure economic growth. B) increasing the savings rate in the U.S. C) understanding the forces that increase productivity. D) understanding how compounding works. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 85) Recently economists have added what factor as a major explanation of economic growth? A) the growth rate of labor B) the growth rate of capital C) the growth rate in labor and capital productivity D) technology Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

86) New growth theory argues that A) growth is due to the proper government policies concerning interest rates. B) growth relies on maintaining lower growth rates of population, especially in less developed countries. C) technology cannot be looked at as an outside factor without an explanation of what drives it. D) technology is the key factor that explains growth but technology is beyond economic explanation itself. Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 87) An important foundation of the new growth theory is that A) we will get more technological advances the more the government is involved. B) we will get more technological advances when the rewards for producing them are greater. C) the growth rate of the capital stock is more important than the growth rate of new knowledge in generating economic growth. D) improvements in labor productivity are poor measures of technological growth. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 88) Which of the following will tend to cause an increase in technology? A) an increase in research and development expenditures B) the development of new ideas C) increases in human capital D) all of these Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

89) The development of new products through research and development in new growth theory is important because A) there can be a positive impact on future growth. B) society's scarce resources are being used when they could be used for current consumption. C) it will lead to a reduction in the savings rate. D) new patents are created. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 90) Firms are more likely to devote resources to research and development when A) the country is in recession. B) they expect to earn rewards from successful research and development. C) it is easy to copy new techniques of other firms. D) the country has been experiencing slow economic growth in order to spur economic growth. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 91) A patent is A) a government protection that gives an inventor the exclusive right to the invention for a limited time period. B) a government protection that gives an inventor the exclusive right to the invention for an unlimited time period. C) the right to make a product and sell it at a reasonable price. D) a recognizable right to the profits associated with a new product or new way of making goods granted by business associations. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

92) The reason that patents are granted is A) to encourage a high rate of consumption. B) to protect new techniques developed through research and development. C) to encourage free trade. D) to increase the labor force. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 93) In the United States, a patent lasts A) 7 years. B) 14 years. C) 20 years. D) forever. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 94) Patents stimulate technological advance by A) making capital more productive. B) enabling the government to determine which potential technological advances firms should pursue. C) providing information about the status of technical knowledge in the economy. D) allowing inventors to capture the economic rewards of their inventions. Answer: D Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

95) The benefits from research and development activities A) are limited to the firm winning a patent. B) are limited to the firms investing in similar research and development projects. C) are limited to the nation in which the research and development is taking place. D) spill over to others, including foreign residents. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 96) Foreign residents can benefit from U.S. research and development activity because A) they ignore U.S. patent laws and steal the technology. B) they can import the goods, obtaining inputs at lower cost than they would otherwise. C) countries usually share patented ideas. D) patents do a poor job of protecting the inventor. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 97) Innovation is A) another term for something new. B) the transformation of an invention into something that is useful to humans. C) the term for invention when a firm obtains a patent. D) the term for inventions in the electronic and computer industries. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 98) Which of the following statements is NOT consistent with new growth theorists' beliefs? A) Innovation can lead to lower productivity costs. B) Inventions are much more important than innovation. C) Technology must be understood in terms of what drives it. D) Rewards lead to technological advances. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 56 Copyright © 2021 Pearson Education, Inc.

99) New growth theorists believe that A) economic growth comes from innovation. B) economic growth comes only from saving. C) economic growth is due to capital spending and not research and development spending since much research and development spending fails to produce an invention. D) inventions spread very rapidly, thereby curtailing the need for more innovations. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 100) Paul Romer's theory of economic growth differs from traditional theories in that A) Romer argues that investment in capital goods is not important in encouraging growth while investment in human capital is, whereas traditional theorists emphasize both human and physical capital. B) Romer argues that investment in human capital always occurs before investment in physical capital, while traditional theories emphasize the priority of physical capital. C) Romer argues an investment-knowledge cycle can exist, but requires constant increases in investment rates, while traditional theories argue that investment rates can be constant. D) Romer argues an investment-knowledge cycle allows a one-time increase in investment to permanently increase a country's growth rate, while traditional theory argued such an investment would have only a short-term effect. Answer: D Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 101) According to Romer, A) capital drives economic growth. B) invention drives economic growth. C) ideas drive economic growth. D) government drives economic growth. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

102) According to new growth theorists, more technological improvements can be brought about by A) a government policy that encourages increased consumption. B) government policies that lead to increases in human capital. C) tougher immigration laws. D) the government taking a more active role in regulating industries. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 103) Which one of the following helps preserve incentives to develop new technologies? A) patents B) tariffs C) quantity restrictions on imports D) income taxes Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 104) According to the new growth theory, A) technology should be considered as a factor of production. B) technology plays a minor role in economic development. C) technology provides few rewards to the society. D) technology is a natural by-product of invention. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

105) New growth theory emphasizes all of the following EXCEPT A) technology. B) import restrictions. C) research and development. D) innovation. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 106) A government protection for an inventor that provides the inventor with the right to make use of her invention in any way she desires is A) an innovation. B) a copyright. C) a patent. D) a trademark. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 107) One of the implications of new growth theory is that economic growth arises from A) more government spending, such as military spending. B) investments in knowledge. C) financial safety nets for the poor, such as Medicaid. D) reductions in the birth rate. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

108) New growth theorists conclude that A) invention is more important than innovation in spurring economic growth. B) the amount of technological innovation in an economy is independent of the rewards offered for innovation. C) rates of global economic growth are limited by the amount of raw materials available. D) economic growth can continue as long as we keep coming up with new ideas. Answer: D Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 109) The development of human capital A) is a form of investment. B) does not appear to enhance economic growth. C) enhances economic growth, but it does not improve the productivity of the labor force. D) enhances economic growth, but the individuals acquiring the capital are not made better off themselves. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 110) Which of the following factors are considered under "new growth theory"? A) technology B) research C) innovation D) All of these are correct. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

111) When considering international trade, which of the following would be most conducive to domestic economic growth? A) a closed economy B) an economy in which its domestic industries are protected by tariffs C) an economy with free and open markets to the outside world D) an economy in which most decisions are made by a central governmental authority Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 112) The new growth theory examines the role of A) technology in economic growth. B) natural resources in economic growth. C) exports in economic growth. D) government in economic growth. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 113) The new growth theory of economic growth examines the interaction of A) labor and population. B) regulations and capital expansion. C) resources and labor productivity. D) technology, research, and innovation. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

114) A patent is a government protection that gives A) consumers the right to sue when products are unsafe. B) inventors exclusive rights to their product for a time. C) monopolies the right to be sole producers due to economies of scale. D) companies the right to produce any good they choose. Answer: B Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 115) The reason that the government offers inventors exclusive rights to their product for a period of time is to A) reduce market concentration. B) increase profits of certain companies. C) maximize consumer utility. D) promote innovation. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 116) Economic growth occurs when there is A) growth in technology that increases productivity. B) growth in government spending. C) lower taxes on individuals. D) more environmental regulation. Answer: A Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

117) Free trade A) hurts economic growth because foreigners are not bound by the same patent laws as we are. B) helps economic growth by encouraging the sharing of technology and industrial ideas. C) hurts economic growth because foreign countries can produce goods with lower labor costs. D) helps economic growth by increasing tariffs. Answer: B Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 118) All of the following unambiguously contribute to economic growth EXCEPT A) increase in human capital. B) increase in technology. C) increase in labor productivity. D) increase in government spending. Answer: D Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 119) A patent is A) a bond issued by the government. B) a bond issued by a state. C) the monopoly right given to a producer/company. D) an agreement between a union and management on certain labor issues. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 120) Which of the following is most likely to reduce the rate of economic growth? A) a high domestic saving rate B) investment in human capital C) subsidies for R&D activities D) slow technological progress Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 63 Copyright © 2021 Pearson Education, Inc.

121) Innovation is A) always financed by the government. B) an invention financed by the sale of bonds. C) the transformation of an invention into something useful. D) an invention financed by the sale of stock certificates. Answer: C Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 122) According to new growth theory, economic growth is driven by A) positive externalities. B) the division of labor. C) higher birth rates. D) new ideas. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 123) A government grant that gives an inventor the exclusive right or privilege to make, use, or sell his or her invention is known as A) a positive externality. B) a negative externality. C) a protectionism clause. D) a patent. Answer: D Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

124) The federal government awards a patent holder the exclusive right to make, use, and sell an invention for a period of A) 20 years. B) 17 years. C) unlimited period. D) 100 years. Answer: A Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 125) Which of the following is a TRUE statement? A) The most important sources of economic growth are the quantity and quality of the land and other natural resources a country controls. B) The most important source of economic growth is the rate of population growth since a growing population stimulates demand for goods and services, and provides the labor to produce the goods and services. C) The most important sources of economic growth are the new ideas generated by entrepreneurs in an economic system that permits them to capture the rewards of their entrepreneurial activities. D) The most important source of economic growth is the extent to which the government directly enters into decisions where research and development activities should be directed and who should be involved in research and development activity. Answer: C Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 126) Which one of the following does NOT appear to contribute to economic growth? A) innovation B) knowledge C) protectionism D) a system of well-defined property rights Answer: C Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

127) Explain the relationship between economic growth and labor productivity. Answer: Economic growth equals the sum of the growth rates of all inputs plus the rate of growth in the productivity of the inputs. Hence, other things constant, an increase in labor productivity leads to an increase in economic growth. Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 128) Why are economic growth and saving related? Answer: To consume more in the future less must be consumed today. That is, saving is necessary for investment to occur, and investment is necessary for economic growth to occur. Diff: 1 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 129) What is the economic role of a patent? Answer: A patent grants the inventor the exclusive right to make, use, or sell an invention for 20 years. This gives the inventor property rights on the invention, which enables the inventor to profit from the invention. The number of inventions should be greater if people can profit from inventive activity, so patents help stimulate investment in new technology and increase economic growth. Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 130) How does innovation differ from invention? Why is innovation required for economic growth? Answer: Innovation involves the transformation of an invention into something that benefits the economy by lowering production costs or by providing a new good or service. It is innovation, then, that stimulates economic growth. Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

131) According to Romer and other new growth theorists, what could poor countries do to stimulate greater economic growth? Answer: According to new growth theory, poor countries can stimulate greater economic growth by investing more in human capital as well as physical capital, by moving toward freer trade, and by encouraging innovation. Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 132) Explain how the "new growth theory" treats technology differently from the way economists used to treat technology. Answer: Technology used to be treated as an outside factor of growth that could not be explained itself. The new growth theory includes technology as another factor of production and argues that the greater the reward to technology the greater will be technological advance. Firms engage in research and development activity with the expectations of increasing their profitability. Diff: 2 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 133) Would a new growth theorist expect economic growth to be very rapid in one of the Communist nations before the fall of Communism? Why or why not? Answer: No. These centrally planned economies did not provide for private property rights, which reduces the incentives people have to use the assets efficiently. Further, the lack of property rights reduces the incentive to engage in research activity. Finally, these economies tended to be more closed, and there is a negative relationship between protectionism and economic growth. Free trade encourages a more rapid spread of new technology and ideas. Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

134) Explain Paul Romer's ideas concerning economic growth. Answer: Romer argues that knowledge is a factor of production just as capital and labor are. Economies must invest in education as they do in capital. Past investments in capital make it profitable to acquire more knowledge, implying that investment leads to new knowledge that leads to new investment. There can be an investment-knowledge cycle that continually stimulates economic growth. According to Romer, ideas drive economic growth. Diff: 3 Topic: 9.2 Productivity Growth and Saving, and New Technologies: Fundamental Determinants of Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9.3 Immigration, Property Rights, and Growth 1) Of the following views on the effects of immigration on the receiving nation's economic growth, which have NOT been suggested by economist Julian Simon? A) Technological progress is driven by population growth. B) Immigrants raise the standard of living of a nation's native population. C) Immigration increases a nation's labor pool and encourages ingenuity. D) Immigration costs the local population jobs and greatly lowers their incomes. Answer: D Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 2) Which of the following will NOT lead to increased capital investment within a country? A) government ownership of all properties within the country B) increased certainty about private property rights C) the decreased possibility of nationalization of private property D) increased certainty about being able to reap the gains from investing Answer: A Diff: 1 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 3) The more certain private property rights are, A) the less people need to invest in education or human capital development. B) the less entrepreneurship there will be. C) the more capital accumulation there will be. D) the more an economy must grow to maintain a certain living standard. Answer: C Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 68 Copyright © 2021 Pearson Education, Inc.

4) A system of private property rights A) enhances economic growth by creating incentives for the government to sell its assets. B) enhances economic growth by inducing people to make capital investments today. C) retards economic growth by serving the interests of the wealthy only. D) retards economic growth by limiting the options of people who own nothing. Answer: B Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 5) Entrepreneurship functions better when A) the government performs the entrepreneurial function. B) there is a well-defined property rights system. C) saving is relatively low. D) most of the population has low levels of education. Answer: B Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 6) The immediate effect of increased population growth, with real GDP growth unchanged, is to A) reduce economic growth by reducing per capita real GDP. B) increase economic growth by stimulating more saving. C) increase economic growth by boosting the capital stock. D) leave economic growth unchanged. Answer: A Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

7) According to economist Julian Simon, A) legal immigrants have a favorable impact on the welfare of American citizens, but illegal immigrants have a negative impact. However, the positive effect of the legal immigrants is stronger than the negative impact of the illegal immigrants. B) legal immigrants have a favorable impact on the welfare of American citizens, but illegal immigrants have a negative impact that almost exactly offsets the positive effect of the legal immigrants. C) legal and illegal immigrants have a positive effect on the welfare of American citizens. D) legal and illegal immigrants have a negative effect on the welfare of American citizens. Answer: C Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 8) A system of private property rights A) encourages economic growth by creating incentives to invest in capital and to be innovative. B) discourages economic growth by discouraging the development of new ideas and ways of doing things. C) reduces the efficiency of government, which reduces the growth rate of the economy over time. D) encourages investment but discourages entrepreneurial activity, so the effect on economic growth is uncertain. Answer: A Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9) Entrepreneurship functions better when A) patent laws are not strongly enforced since they make imitation difficult. B) government provides technical support to entrepreneurs. C) a system of private property rights permits entrepreneurs to capture the rewards from their entrepreneurial activities. D) universities provide research that is closely interrelated with the entrepreneurial activities. Answer: C Diff: 3 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

10) The protection of property rights leads to A) more poverty. B) more illiteracy. C) more capital formation. D) unemployment. Answer: C Diff: 1 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 11) Entrepreneurs often undertake the innovations that are necessary to bring inventions to the marketplace. Accordingly, what empirical pattern should be expected in an international comparison? A) Countries with higher rates of entrepreneurship have higher rates of poverty. B) Countries with higher rates of entrepreneurship have lower rates of immigration. C) Countries with higher rates of entrepreneurship have lower rates of economic growth. D) Countries that protect the property rights of entrepreneurs will have higher rates of economic growth. Answer: D Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 12) In the absence of well-defined property rights, we would likely find A) people with more incentives to take risks. B) people with less incentives to take risks. C) higher economic growth rates. D) increases in investment activity. Answer: B Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 13) Well-defined property rights give entrepreneurs the incentive to A) engage in risky business endeavors in order to accumulate future wealth. B) use the eminent domain laws to seize property for public use. C) lobby Congress in order to increase environmental regulations. D) evade taxes. Answer: A Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

14) Would one expect economic growth to be higher or lower in a country that had poorly defined property rights? Why? Answer: Lower, because entrepreneurs are more likely to engage in entrepreneurial activity when property rights allow them to capture the rewards from these activities. Further, innovation is more likely when there are property rights on ideas. Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 15) Why might population growth and immigration stimulate economic growth? Answer: Faster population growth means the pool of innovators is larger, and innovation leads to more growth. Further, immigrants tend to be entrepreneurial and help stimulate innovation and growth. Diff: 2 Topic: 9.3 Immigration, Property Rights, and Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9.4 Economic Development 1) Economists have found that as a nation's per capita real Gross Domestic Product (GDP) increases, A) the rate of population growth declines. B) the rate of population growth experiences dramatic increases. C) there is no effect on population growth. D) the rate of population growth increases at the same rate as economic growth. Answer: A Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 2) All of the following are listed in the text as being keys to economic development EXCEPT A) a system of property rights. B) an educated population. C) an open economy. D) a higher rate of population growth. Answer: D Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

3) What did Malthus say about population growth? A) Population growth is the key to a nation's economic growth. B) Population growth is not a problem if food production keeps up, and Malthus predicted that it would. C) Population growth is a huge problem if housing and medical care don't also increase. D) The population would grow faster than food supplies, which would be a recipe for disaster. Answer: D Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 4) Have Malthus' predictions about population growth come TRUE? A) no, because modern birth control has limited population growth in all nations B) yes, as evidenced by the famine and food shortages affecting every nation today C) no, because the world's food supply has grown much more rapidly than Malthus foresaw D) Yes. The world's food supply, measured by calories per person, continues to fall. Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 5) The three stages of economic development include A) the agriculture stage, the manufacturing stage, and the service sector stage. B) the computerized stage, the agriculture stage, and the manufacturing stage. C) the feudal stage, the agriculture stage, and the totalitarian stage. D) the agriculture stage, the manufacturing stage, and the socialist stage. Answer: A Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

6) What occurs in the second stage of economic development? A) Most of the labor force works in agriculture. B) The service sector shrinks in its relative size. C) The manufacturing sector declines in importance. D) Manufacturing gains in importance and employs a large portion of the labor force. Answer: D Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 7) Economists have determined that there are four factors that seem to strongly affect a nation's rate of economic development. Which is NOT one of these four factors? A) establishing a system of property rights B) developing an educated population C) supporting current industries and the jobs they provide instead of adopting new technology that brings disruptive social changes D) limiting the extent to which the government imposes trade barriers Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 8) The study of factors that contribute to the economic growth of a country is known as A) natural resource economics. B) entrepreneurial economics. C) development economics. D) political economics. Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

9) The study of factors that contribute to the economic development of a country is A) population growth economics. B) development economics. C) classical growth theory. D) the new technology theory. Answer: B Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 10) As more economic development occurs, A) technological progress slows. B) capital accumulation decreases. C) the population growth rate decreases. D) the population growth rate increases. Answer: C Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 11) Which of the following is NOT a stage of development that modern rich nations have gone through? A) service stage B) agricultural stage C) manufacturing stage D) inflation stage Answer: D Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

12) To raise economic development, developing countries should A) focus on their comparative advantage. B) focus on producing service goods. C) produce goods that are capital intensive and not labor intensive. D) not focus on economic growth. Answer: A Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 13) To encourage economic development a country should do all of the following EXCEPT A) invest in human capital. B) limit the amount of imports allowed into the country. C) allow creative destruction to run its course. D) establish a system of property rights. Answer: B Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 14) Creative destruction refers to A) the destruction of the government system which limits economic growth. B) the movement from an agricultural society to a service economy. C) the mechanism for establishing property rights. D) the creation of new jobs and economic growth after destroying old jobs. Answer: D Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 15) Trade between countries should be A) encouraged for developed countries but not for developing countries. B) encouraged for both developed and developing countries. C) discouraged for developed countries but encouraged for developing countries. D) discouraged for both developed and developing countries. Answer: B Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 76 Copyright © 2021 Pearson Education, Inc.

16) Which of the following factors will NOT increase economic development? A) increasing the amount of education in the population B) establishing a system of property rights C) creative destruction where old jobs, companies and industries are destroyed D) increasing the amount of protectionism Answer: D Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 17) The term "creative destruction" refers to A) the process by which immigrants build a new life in their country of destination. B) the process by which new jobs are created and old ones destroyed. C) the effects of population growth on the environment. D) All of these are correct. Answer: B Diff: 3 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 18) An economy that is an active participant in international trade is A) an egalitarian economy. B) a closed economy. C) a protectionist economy. D) an open economy. Answer: D Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

19) Research indicates that A) countries with lower tariff rates experience higher rates of economic growth. B) countries with lower tariff rates experience lower rates of economic growth. C) there is no relationship between the level of tariff rates and economic growth. D) countries with higher tariff rates experience higher rates of economic growth. Answer: A Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 20) The concept of an open economy means that A) imports should be limited while exports should be expanded. B) a nation's borders are open to flows of imports and exports. C) exports should be controlled but imports should be allowed in without restriction. D) imports and exports should be restricted. Answer: B Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 21) Which one of the following is a key to economic development? A) the removal of property rights B) the preservation of natural resources as means of production C) an educated population D) a high level of protection against imported products Answer: C Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

22) The study of development economics is to understand A) why some products are successful in the market as soon as they are developed, whereas others do not catch on for years. B) why most of the patents on record have been given to men rather than to women. C) why some countries are rich and others are poor. D) the personality factors that lead people to become entrepreneurs. Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 23) Which one of the following is TRUE? A) As a country becomes more prosperous, it experiences a higher birth rate. B) Over the past century, the supply of food has grown more quickly than has the demand for food. C) Over the past century, the real price of food has risen, reflecting the pressure of population growth on food supplies. D) Over the next half-century, it is expected that population growth in industrially advanced nations will outpace population growth in developing countries. Answer: B Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 24) Which one of the following describes the current state of economic development in the United States? A) The United States is running out of natural resources, and therefore it will soon experience a drop in the rate of economic growth. B) Employment is declining in the manufacturing sector and growing in the service sector. C) Employment is declining in the manufacturing sector and growing in the agricultural sector. D) The lack of well-defined property rights in the United States means that entrepreneurs do not expect to capture the benefits of innovations they bring to the marketplace. Answer: B Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

25) Which one of the following is TRUE? A) Investments in secondary education produce gains in the form of economic growth. B) Secondary education does not boost economic growth in developing nations, because so much of the workforce remains in agriculture. C) New growth theory suggests that there is no connection between the level of education in a country and its rate of economic growth. D) New growth theory suggests that education benefits only those people who receive it, and not the population as a whole. Answer: A Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 26) Which one of the following is TRUE? A) For every country that experiences an increase in its growth rate, there must be another experiencing a decline. B) Small changes in the annual growth rate amount to a measurable difference in the long-term growth trend of a country. C) Restricting imports will enhance a country's economic growth. D) A well-defined system of property rights benefits only the wealthy, and consequently it produces income inequality that will stifle economic growth. Answer: B Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 27) What can be expected to happen in a country that enacts trade barriers? A) The rate of immigration will increase. B) The rate of technological innovation will increase. C) The rate of economic growth will decrease. D) The rate of population growth will decrease. Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

28) Which of the following is NOT an obstacle to economic development? A) lack of capital investment B) political instability C) corruption D) a free market system Answer: D Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 29) Which of the following is an obstacle to economic development? A) poorly defined property rights B) foreign direct investment C) immigration D) openness to trade Answer: A Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 30) A reasonable estimate of the world's population that lives on less than $2 per day is A) 10 percent. B) 40 percent. C) 50 percent. D) 80 percent. Answer: A Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

31) Thomas Robert Malthus believed A) that food supplies would always be more than sufficient to feed the world's population. B) that the world's population would eventually exceed the amount food supplies can support. C) that population growth was good for the world. D) that population growth would eventually lead to an increase in the quality of life for everyone. Answer: B Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 32) According to many economists, as nations become wealthier, the average size of family A) increases. B) decreases. C) does not change. D) increases first and then decreases later. Answer: B Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 33) When analyzing stages of economic development in the United States, it appears that we have entered the "tertiary stage." This is a stage marked by a shift toward A) agriculture. B) manufacturing. C) services. D) population increases. Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

34) Which of the following factors are considered by economists who study economic development to be directly related to the rate of economic growth? A) plentiful natural resources B) openness to international trade C) an educated population D) All of these are correct. Answer: D Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 35) All of the following are keys to economic development EXCEPT A) an educated workforce. B) establishment of a system of property rights. C) minimizing "creative destruction." D) open economies. Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 36) Which of the following factors would economists consider "key" to economic development? A) expansionary monetary policy B) establishing a system of property rights C) policies that promote consumption expenditures by households D) All of these are correct. Answer: B Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

37) Raising protectionism means A) increasing trade barriers. B) reducing corruption. C) reducing consumer fraud. D) increasing domestic market competition. Answer: A Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 38) Which of the following do development economists NOT recommend to nations seeking to increase their rates of economic growth? A) protecting home producers from international competition B) letting creative destruction run its course C) promoting increased education D) promoting private property rights Answer: A Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 39) An educated population contributes to economic growth because A) schools provide many jobs for teachers. B) education allows workers to develop skills that increase their productive capabilities. C) educated people tend to work more hours than less educated people. D) educated people understand the importance of protectionism. Answer: B Diff: 1 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

40) Institutions and laws, such as patent protection, that foster innovations lead to economic growth because they A) allow the government control of the innovations. B) give confidence to inventors that they will profit from their innovation. C) give confidence to consumers that the products they buy are safe. D) give businesses loans to buy new machinery. Answer: B Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 41) According to the United Nations, the largest expected growth in population for the coming decades will occur on which continent? A) Europe B) South America C) North America D) Africa Answer: D Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 42) It can be argued that Thomas Malthus' An Essay on the Principle of Population statement that population growth will always outstrip food production has been discredited due to A) an increase in the world-wide farming population. B) less world-wide food consumption. C) improvement in technology of food production. D) a reduction in resource scarcity. Answer: C Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

43) Of the following, which best explains why Thomas Malthus was incorrect in his prediction that population would outstrip food supplies? A) Malthus failed to realize that that human population would increase considerably. B) Malthus failed to recognize that economic growth is accompanied by smaller family sizes. C) Malthus incorrectly believed that economic growth would reduce birthrates. D) Malthus incorrectly predicted that modernization would increase the demand for children. Answer: B Diff: 2 Topic: 9.4 Economic Development Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 10 Real GDP and the Price Level in the Long Run 10.1 Output Growth and the Long-Run Aggregate Supply Curve 1) The aggregate supply curve A) shows what each producer is willing and able to produce at each income level. B) relates planned aggregate production to price level. C) is the sum of all supply curves of natural resources. D) shows a negative relationship between the price level and real Gross Domestic Product (GDP). Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 2) The total of all planned production for the entire economy is known as A) aggregate expenditures. B) aggregate demand. C) aggregate supply. D) aggregate capacity. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 3) The long run aggregate supply curve (LRAS) also represents A) the full-information level of output. B) the full-employment level of output. C) the full-adjustment level of output. D) all of these. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

4) All of the following would shift the LRAS curve to the right EXCEPT A) an increase in the size of the labor force. B) a net inflow of human capital. C) an increase in the overall price level. D) an improvement in technology. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 5) Long-run aggregate supply reflects A) total production in the economy at full employment. B) total spending in the economy at full employment. C) both production and spending in the economy. D) the amount of natural resources in a nation. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 6) The long-run aggregate supply curve is A) horizontal at the full-employment level of real Gross Domestic Product (GDP). B) vertical at the full-employment level of real Gross Domestic Product (GDP). C) sloping upward due to the effects of price level changes on real Gross Domestic Product (GDP). D) the same as the short run aggregate supply (SRAS) curve. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 7) The long-run aggregate supply curve A) shifts to the right when there is a tax increase. B) indicates the level of output (GDP) that occurs when resources are fully employed. C) indicates that an increase in the overall price level will cause an increase in production. D) shifts to the right when the Federal Reserve increases the money supply. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

8) The long-run aggregate supply curve is vertical because A) the economy has yet to use all its available resources. B) the economy has reached its potential real Gross Domestic Product (GDP) and is at full employment. C) the economy has contracted. D) the economy has large numbers of unemployed. Answer: B Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 9) The long-run aggregate supply curve A) shows that at higher prices, potential real Gross Domestic Product (GDP) increases. B) slopes up and to the right. C) shows that long-run aggregate supply equals potential real Gross Domestic Product (GDP). D) is very sensitive to changes in the price level. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 10) What is measured on the vertical axis of the aggregate demand/aggregate supply model? A) real Gross Domestic Product (GDP) B) nominal income C) the price level D) the interest rate Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 11) In the aggregate demand/aggregate supply model, the vertical axis shows the values of ________ and the horizontal axis shows the values of ________. A) the unemployment rate; the inflation rate B) real Gross Domestic Product (GDP); the price level C) the price level; real Gross Domestic Product (GDP) D) the inflation rate; the unemployment rate Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

12) What is measured on the horizontal axis of the aggregate demand/aggregate supply model? A) real Gross Domestic Product (GDP) B) nominal income C) the price level D) the interest rate Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 13) Which of the following statements is TRUE? A) The long-run aggregate supply curve is upward sloping. B) The long-run aggregate demand curve is upward sloping. C) The short-run aggregate supply curve is vertical. D) The long-run aggregate supply curve is vertical. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 14) Long-run aggregate supply is A) the sum of planned expenditures by consumers and firms. B) the level of output that occurs when the economy is operating on the production possibilities curve. C) downward sloping. D) upward sloping. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 15) The long-run aggregate supply curve is A) upward sloping. B) downward sloping. C) vertical. D) horizontal. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

16) The long-run aggregate supply curve of an economy corresponds to A) a point inside the production possibilities curve. B) a point outside the production possibilities curve. C) a point on the production possibilities curve. D) none of these: there is no relationship between the long-run aggregate supply curve and the production possibilities curve. Answer: C Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 17) If a nation's production possibilities curve shifts inward, we should expect its long-run aggregate supply curve to A) have an upward movement along the curve. B) have a downward movement along the curve. C) have a leftward shift. D) have a rightward shift. Answer: C Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 18) The full-employment and full-adjustment level of real Gross Domestic Product (GDP) in the economy is represented by A) the LRAS curve. B) the horizontal line at the price level. C) the AD curve. D) the distance between the LRAS curve and the AD curve. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 19) A human resource such as ingenuity can be thought of as A) the outcome of more investment spending. B) part of a country's endowment. C) part of government spending programs. D) a causal factor for aggregate supply shifting left. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 5 Copyright © 2021 Pearson Education, Inc.

20) Which of the following will NOT cause a leftward shift in the long-run aggregate supply curve? A) a net outflow of human capital B) an increase in the costs of obtaining energy resources C) a reduction in the amount of capital D) a reduction in government spending Answer: D Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 21) Which of the following will cause the long-run aggregate supply curve to shift? I. Changes in the amount of capital II. Changes in the price level III. Changes in the money supply A) I only B) II only C) I, II, and III D) only I and II Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 22) As the capital stock reduces , we would expect the long-run aggregate supply curve to A) shift left. B) shift right. C) remain the same. D) first shift right, then shift left. Answer: A Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 23) The long-run aggregate supply will increase when A) labor supply decreases. B) international trade barriers are removed. C) the price level increases. D) tax rates increase. Answer: B Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

24) A country's long-run aggregate supply curve will shift to the left when there is (are) A) fewer regulatory impediments to business. B) a discovery of new oil reserves in that country. C) a reduction in the labor force. D) a reduction in the money supply. Answer: C Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 25) Over time in a growing economy, the long run aggregate supply curve will A) move so as to match the short run aggregate supply (SRAS) curve. B) shift outward to the right. C) shift inward to the left. D) become increasingly steep. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 26) Aggregate supply is A) the summation of all product supply curves. B) the horizontal summation of all supply curves for services. C) the stock of all goods in the economy. D) the sum of all planned production in the economy. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 27) Economic growth can be depicted as A) a shift of the LRAS curve to the left. B) an inward shift of the production possibilities curve. C) a shift of the LRAS curve to the right. D) a movement along the production possibilities curve. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

28) An assumption on the LRAS curve is A) technology remains unchanged. B) an increase in the average price level occurs. C) the economy is operating to the right of the production possibilities curve. D) labor productivity is increasing. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 29) The total of all planned production for the economy is A) aggregate supply. B) aggregate demand. C) endowments. D) equal to the total value of unplanned production. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 30) The total of all planned production for the economy is A) determined only by individuals and firms. B) determined only by the government. C) aggregate demand. D) aggregate supply. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 31) When talking about aggregate supply, it is necessary to A) focus on the short run. B) focus on the long run. C) distinguish between the long-run aggregate supply curve and the short-run aggregate supply curve. D) distinguish between the long-run aggregate supply curve and the long run aggregate demand curve when all adjustments to price level changes have been made. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

32) The real output of the economy under conditions of full employment A) is long-run aggregate supply. B) is long-run aggregate demand. C) happens only when there is no inflation. D) is determined by the real-balance effect. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 33) The full-employment level of GDP is A) endowments. B) long-run aggregate demand. C) long-run aggregate supply. D) economic growth. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 34) The position of the long-run aggregate supply curve is determined by A) the long-run aggregate demand curve. B) the production possibilities curve. C) the open economy effect. D) the interest rate effect. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 35) The long-run aggregate supply when resources are fully employed A) has no relationship with the production possibilities curve. B) will always be associated with a point outside the production possibilities curve. C) will always be associated with a point on the production possibilities curve. D) is determined by demand. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

36) The long-run aggregate supply curve is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 37) The long-run aggregate supply curve is vertical because A) the production possibilities curve is vertical. B) the aggregate demand curve is downward sloping. C) technology increases at a constant rate. D) a change in the level of prices will have no effect on real output in the long-run. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 38) The long-run aggregate supply curve occurs at the level of real GDP consistent with A) individuals' tastes and preferences. B) the natural rate of unemployment. C) no inflation. D) low levels of inflation. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 39) Which of the following does NOT affect the long-run aggregate supply curve? A) technology B) production possibilities curve C) endowments of resources D) price level Answer: D Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

40) An increase in the level of prices of goods and services will do what to the long-run aggregate supply curve? A) shift it to the right B) shift it to the left C) a movement along the curve D) make the curve flat Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 41) The long-run aggregate supply curve is determined by all of the following EXCEPT A) aggregate demand. B) human capital. C) technology. D) the amount of resources that exist in the economy. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 42) The long-run aggregate supply curve can be thought of as the A) level of output that the nation is currently producing. B) full-employment level of real GDP. C) level of real GDP associated with a constant price level. D) level of output for which real GDP equals nominal GDP. Answer: B Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 43) The long-run aggregate supply curve will shift to the left when A) population decreases. B) the price level increases. C) technology improves. D) new sources of natural resources are discovered. Answer: A Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

44) The long-run aggregate supply curve will shift outward to the right when A) there is economic growth. B) the price level decreases. C) government spending increases. D) the amount of labor decreases. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 45) The natural rate of unemployment helps determine A) the unemployment rate when the economy is not on its long-run supply curve. B) the position of the long-run aggregate supply curve. C) the level of economic growth in the economy. D) the slope of the long-run aggregate supply curve. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

46) The above figure shows a A) short-run aggregate demand curve. B) short-run aggregate supply curve. C) long-run aggregate demand curve. D) long-run aggregate supply curve. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

47) The curve in the above figure will shift to the right when A) the price level falls. B) labor productivity increases. C) population falls. D) the proportion of the population that is elderly increases. Answer: B Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 48) Which of the following will NOT lead to a rightward shift of the long-run aggregate supply curve? A) increase in labor productivity B) increase in aggregate spending C) increase in capital D) increase in labor Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 49) Which of the following would cause the long-run aggregate supply curve to shift to the left? A) an increase in wages B) a decrease in aggregate demand C) a decrease in labor productivity D) a decrease in taxes on profits Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 50) If our economy is growing at a constant rate of 2 percent per year, then over a period of 20 years we would expect to see which of the following? A) nice, steady flat-line growth B) an upward-sloping growth path C) a downward-sloping growth path D) It is impossible to say what kind of growth path we would see. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

51) Economic growth can be thought of as A) an increase in the price level. B) a decrease in the price level. C) an increase in long-run aggregate supply. D) an increase in aggregate demand. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 52) Real GDP will increase over the long run if A) prices continually go up. B) the long-run aggregate supply curve shifts continually to the right. C) the long-run aggregate supply curve shifts continually to the left. D) the long-run aggregate demand curve shifts continually to the left. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

53) Refer to the above figures. Which panel(s) represent economic growth? A) Panel A only B) Panels A and C only C) Panel D only D) Panels B and D only Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 54) Refer to the above figures. Which panel(s) represent the effect of an increase in the price level? A) Panel A only B) Panels A and C only C) Panel D only D) none of the panels Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

55) Refer to the above figures. Which panel(s) represent the effect of a decrease in labor productivity? A) Panel A only B) Panels A and C only C) Panel D only D) Panels B and D only Answer: D Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 56) The aggregate supply curve tells us A) anything about the quantity demanded of all commodities and the price level. B) what the effect of changes in interest rates will be on real GDP. C) the total amount of planned production in an economy. D) how changes in the price level affect the amount paid for all commodities. Answer: C Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 57) The long-run aggregate supply curve shows A) the total amount of planned production for an economy. B) the various quantities of goods consumers will purchase. C) that real GDP can only increase when the price level increases. D) what an economy can produce if resource prices are constant. Answer: A Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 58) Aggregate supply A) is the total amount of raw materials available in an economy. B) is the overall wealth within an economy. C) is the total amount of money circulating in an economy. D) is the total amount of planned production in an economy. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

59) We draw the long-run aggregate supply curve as a vertical line to reflect the fact that A) the productive capacity of the economy never changes after full adjustment has occurred. B) changes in the price level do not alter the level of long-run real GDP after full adjustment has occurred. C) technology and resource endowments do not affect long-run real GDP after full adjustment has occurred. D) an accurate depiction of the production possibilities curve is vertical after full adjustment has occurred. Answer: B Diff: 3 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 60) The level of real GDP identified by the long-run aggregate supply curve is A) the full-employment level of real GDP. B) the level of GDP at which each business firm is experiencing growth in sales. C) the level of GDP at which each industry is experiencing growth in sales. D) the level of GDP at which no one is below the poverty line. Answer: A Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 61) What is measured on the vertical axis when we draw a graph of long-run aggregate supply? A) production of capital goods B) spending on goods and services in an economy C) the price level D) real GDP Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 62) The values on the axes of the long-run aggregate supply diagram are A) real GDP per year and the price level. B) nominal GDP and the price level. C) real GDP and interest rates. D) real GDP and nominal GDP. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 17 Copyright © 2021 Pearson Education, Inc.

63) When the production possibilities curve shifts outward, A) the long-run aggregate supply curve shifts to the left. B) the long-run aggregate supply curve is unchanged. C) the price level rises in the long run. D) the long-run aggregate supply curve shifts to the right. Answer: D Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 64) What is measured on the horizontal axis when we draw a graph of the long-run aggregate supply curve? A) production of capital goods B) production of consumer goods C) the price level D) real GDP Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 65) What causes the long-run aggregate supply curve to shift right? A) economic growth B) inflation C) unemployment D) scarcity Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 66) The long-run aggregate supply curve shifts right at the same time as A) wages increase. B) the production possibilities curve shifts outward. C) the production possibilities curve shifts inward. D) the inflation rate increases. Answer: B Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

67) A rightward shift of the long-run aggregate supply curve is caused by A) an increase in the minimum wage. B) an increase in the average duration of unemployment. C) improvements in technology. D) an increase in the GDP deflator. Answer: C Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 68) The long-run aggregate supply curve assumes that A) the unemployment rate is more than 9 percent. B) all factors of production are fully employed. C) only laborers are fully employed. D) there is no government purchasing of goods and services. Answer: B Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 69) The long-run aggregate supply curve is A) U-shaped. B) horizontal. C) upward sloping. D) vertical. Answer: D Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 70) Long-run aggregate supply curve corresponds to A) real GDP when the economy is above full employment. B) real GDP when the economy is at full employment. C) the economy outside its production possibilities curve. D) the economy inside its production possibilities curve. Answer: B Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

71) The slope of the long-run aggregate supply curve is A) positive. B) negative. C) zero. D) undefined. Answer: D Diff: 3 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 72) Why is the long-run aggregate supply curve a vertical line? A) At that level of real GDP, the unemployment rate is 0 percent. B) At that level of real GDP, the inflation rate is 0 percent. C) At that level of real GDP, the production costs are at their lowest level. D) At that level of real GDP, production costs have fully adjusted to price changes. Answer: D Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 73) Long-run aggregate supply is A) the possible combinations of real GDP and inputs after full adjustments have been made. B) the extraction of natural resources. C) the real production of goods and services after full adjustments have been made. D) all of the physical and human resources in the economy. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 74) Long-run aggregate supply and a country's production possibility curve (PPC) A) are closely related. B) are inversely related. C) have no relationship. D) are examples of microeconomic models. Answer: A Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

75) A long-run aggregate supply curve may graphically be represented as A) a vertical line. B) a horizontal line. C) an upward-sloping line. D) a downward-sloping line. Answer: A Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 76) Economic growth is represented on the aggregate supply model by a A) shift in the long-run aggregate supply curve to the left. B) shift in the long-run aggregate supply curve to the right. C) shift in the short-run aggregate supply curve to the left. D) shift in the short-run aggregate supply curve to the right. Answer: B Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 77) Economic growth can be shown by A) a leftward shift in the long-run aggregate supply curve. B) no change in the long-run aggregate supply curve. C) a rightward shift in the long-run aggregate supply curve. D) a leftward shift in the production possibilities curve. Answer: C Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 78) Economic growth is demonstrated by the LRAS as it A) shifts to the right. B) shifts to the left. C) becomes more horizontal. D) becomes more vertical. Answer: A Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

79) Economic growth causes the A) production possibilities curve to shift rightward and the long-run aggregate supply curve to shift rightward. B) production possibilities curve to shift leftward and the long-run aggregate supply curve to shift rightward. C) production possibilities curve to shift rightward and the long-run aggregate supply curve to shift leftward. D) production possibilities curve to shift leftward and the long-run aggregate supply curve to shift leftward. Answer: A Diff: 2 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 80) What is the shape of the long-run aggregate supply curve? Why? Answer: The long-run aggregate supply curve is vertical because, in the long run, people have full information about all relevant facts and make their decisions based only on relative prices and not on the absolute price level. In the long run, all factors of production can change, so a change in the level of prices of goods and services has no effect on real GDP because higher prices will be accompanied by comparable changes in input prices. Diff: 1 Topic: 10.1 Output Growth and the Long-Run Aggregate Supply Curve Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 10.2 Total Expenditures and Aggregate Demand 1) Which of these questions does aggregate demand help us answer? I. What determines the total amount of our output that individuals, firms, governments and foreigners want to buy? II. What is the economy's long-run real Gross Domestic Product (GDP)? III. What determines the economy's equilibrium price level? A) I only B) I and II C) II and III D) I and III Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

2) The total level of all planned expenditures in the economy best describes A) short-run aggregate supply B) the total amount of household wealth. C) long-run aggregate supply. D) aggregate demand. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 3) All of the following explain the downward slope of the aggregate demand curve EXCEPT A) changes in the stock of real wealth held by individuals. B) the effect of changing interest rates on the quantity demanded of interest-rate-sensitive goods. C) the availability of foreign substitute goods. D) the presence of unused production capacity and unemployment. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 4) Other things being equal, the economy's aggregate demand curve shows that A) as the price level falls, total planned expenditures fall as well. B) a change in the general price level causes the curve to shift. C) a change in the general price level causes a change in the quantity of final goods and services purchased. D) real Gross Domestic Product (GDP) and the price level are not related. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 5) Aggregate demand reflects A) planned total spending in the economy. B) planned total production in the economy. C) both spending and production in the economy. D) planned demand for consumer goods only. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

6) What is measured on the horizontal axis of the aggregate demand/aggregate supply model? A) prices B) real Gross Domestic Product (GDP) C) planned expenditures D) nominal income Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 7) The sum of all planned expenditures for the entire economy at each possible price level is A) aggregate supply. B) effective demand. C) aggregate demand. D) actual expenditures by consumers. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 8) The aggregate demand curve plots A) desired expenditures against production. B) total expenditures against the level of employment. C) planned expenditures against the price level. D) employment against the price level. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 9) The aggregate demand curve is usually A) vertical. B) upward sloping. C) downward sloping. D) horizontal. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

10) The horizontal axis for an aggregate demand curve measures A) quantity demanded of the representative good. B) real Gross Domestic Product (GDP). C) output of all goods and services measured as a quantity index. D) disposable personal income. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 11) The vertical axis for an aggregate demand curve measures A) a nation's production level. B) real Gross Domestic Product (GDP). C) the interest rate. D) the price level. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 12) Which of the following is NOT a reason for the slope of the aggregate demand curve? A) the substitution effect B) the real balance effect C) the interest rate effect D) the open-economy effect Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 13) At each price level, the aggregate demand curve indicates A) the nominal value of total production of goods and services domestic income that will be produced. B) the total amount of real planned expenditures. C) the nominal Gross Domestic Product (GDP) that will be produced. D) the total amount of real Gross Domestic Product (GDP) that will be produced. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

14) The aggregate demand curve shows that, if other factors are held constant, A) higher price levels will result in lower total planned spending. B) higher price levels will result in higher total planned spending. C) higher price levels will result in lower interest rates. D) lower price levels will result in inflationary conditions. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 15) According to the interest rate effect, an increase in the price level, if other factors are held constant, will lead to A) a reduction in total real spending on interest-rate-sensitive goods. B) an increase in the stock of real wealth held by the public. C) an outward shift of the aggregate demand curve. D) an increase in the real interest rate. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 16) The real-balance effect implies that when A) the price level decreases, the value of money balances held by individuals, firms, government, and foreigners increases and spending decreases. B) the price level increases, the value of money balances held by individuals, firms, government, and foreigners increases and spending increases. C) the price level increases, the value of money balances held by individuals, firms, government, and foreigners decreases and spending decreases. D) the price level decreases, the value of money balances held by individuals, firms, government, and foreigners decreases and spending decreases. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

17) The real-balance effect refers to A) the economy's response to interest rate changes. B) the change in the value of cash balances due to price level changes. C) the change in net exports. D) the economy's ability to balance recession and expansion. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 18) According to the real-balance effect, the value of money balances held by individuals A) increases as the price level increases. B) decreases as the price level increases. C) does not change regardless of any change in the price level. D) changes only when the price level remains constant. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 19) When prices increase, the real interest rate A) will increase and total planned spending on goods and services will increase. B) will increase and total planned spending on goods and services will decrease. C) will decrease and total planned spending on goods and services will decrease. D) will not be affected. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 20) The interest rate effect implies that A) the aggregate demand curve has a positive slope. B) the aggregate demand curve has a negative slope. C) the short-run aggregate supply curve is horizontal. D) the short-run aggregate supply curve is vertical. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

21) In the above figure, a movement from point A to point B can be explained by A) a decrease in the quantity of money in circulation. B) a decrease in the real value of cash balances. C) the decrease in interest rates. D) the increase in exports to the foreign sector. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 22) In the above figure, a movement from point B to point A can be explained by A) an increase in spending due to a war. B) an increase in spending due to increases in education expenditures. C) an increase in the demand for manufacturing goods due to new technology. D) a drop in the price level. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

23) The interest rate effect operates through A) credit markets by changing borrowing costs. B) the purchasing power of individuals' checking accounts. C) government spending levels. D) labor supply. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 24) When a change in the price level causes a change in the purchasing power of currency, which then changes planned real expenditures at all income levels, it is called A) the real-balance effect. B) the substitution effect. C) the open-economy effect. D) the interest rate effect. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 25) One reason that the aggregate demand curve slopes downward is because A) higher price levels increase real wealth and consumption. B) higher price levels reduce net exports. C) higher price levels reduce interest rates. D) higher price levels increase investment. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 26) A rise in the price level has a direct effect on spending because A) people like to spend more when prices are higher. B) the real value of the money people have varies directly with the price level. C) the real value of the money people have decreases and they can buy less with it. D) a higher price gives people more money, and so the more goods and services they can buy. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

27) The real-balance effect shows that A) aggregate demand is upward sloping. B) a higher price level leads to higher interest rates. C) a lower price level will increase the purchasing power of currency and increase personal consumption. D) consumption and the price level are positively correlated. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 28) Another term for the real-balance effect is A) the substitution effect. B) the wealth effect. C) the indirect effect. D) the interest rate effect. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 29) If other factors are held constant, an increase in the price level A) causes desired net export spending to rise. B) causes desired net export spending to fall. C) causes the real value of the money to increase. D) induces people to spend their money faster. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

30) The interest rate effect that helps explain the slope of the aggregate demand curve arises because A) interest rates and total planned real expenditures are unrelated. B) an increase in the price level lead to decreases in interest rates, which induces more borrowing and hence raises planned real expenditures. C) an increase in the price level boosts interest rates, which discourages borrowing and hence reduces planned real expenditures. D) a decrease in the price level boosts interest rates, which discourages borrowing and hence frees up income for more planned real expenditures. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 31) Higher interest rates tend to A) reduce the total planned spending on goods and services. B) lower the costs of building new plants and equipment. C) increase the quantity demanded of goods and services. D) make it less costly for people to buy houses and cars. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 32) When interest rates rise, A) borrowing costs increase, and total planned real expenditures decline. B) borrowing costs increase and total planned real expenditures increase. C) borrowing costs decline, and total planned real expenditures increase. D) borrowing costs decline, and total planned real expenditures decline. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 33) When the relative prices of U.S.-manufactured goods go up, the result is A) an increase in exports. B) a decrease in exports. C) a decrease in imports. D) no net change in imports or exports. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 31 Copyright © 2021 Pearson Education, Inc.

34) A price level increase tends to reduce net exports, thereby reducing the amount of real goods and services purchased in the United States. Economists refer to this phenomenon as A) the wealth effect. B) the barrier effect. C) the open-economy effect. D) the Gross Domestic Product (GDP) effect. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 35) If the price level increases, A) the buying power of your bank saving account falls. B) the buying power of your bank saving accounts rises. C) there is no effect on buying power. D) the economy tends to grow faster. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 36) One impact of a rise in the U.S. dollar's value is that A) imports become cheaper for the U.S. consumer. B) exports will increase sharply. C) U.S. goods will become cheaper overseas. D) U.S. goods are cheaper domestically. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 37) An individual holds $1,000 in a non-interest-earning checking account, and the overall price level rises significantly. Other things being constant, we would expect A) the individual's real wealth to decrease and consumption to decline. B) the individual's stock of real wealth to decrease but real national income to increase. C) no change in the individual's real wealth but a decline in real national product. D) the individual's wealth to increase. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 32 Copyright © 2021 Pearson Education, Inc.

38) A lower domestic price level should A) increase net exports. B) decrease desired investment. C) decrease real wealth and consumption. D) none of these Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 39) According to the interest rate effect, a decrease in the price level will A) decrease the real value of money balances, which causes total planned real expenditures to increase. B) cause interest rates to fall, which generates an increase in borrowing, so that total planned real expenditures increase. C) lead to a decrease in net exports, which causes total planned real expenditures to decrease. D) increase the real value of money balances, which causes interest rates to increase, thereby reducing total planned expenditures. Answer: B Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 40) What happens when the price level falls? A) Total planned real spending remains constant. B) Total planned real spending increases. C) Total planned real spending also falls. D) Planned real spending on goods increases but planned real spending on services falls. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 41) When the U.S. price level falls, the open economy effect indicates that A) U.S. imports will rise. B) U.S. residents will move away from domestic goods and buy more foreign goods. C) U.S. exports will increase. D) foreigners will buy fewer U.S. goods. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 33 Copyright © 2021 Pearson Education, Inc.

42) The aggregate demand curve differs from an individual demand curve in that A) the aggregate demand curve may not slope down while an individual demand curve must always slope down. B) the aggregate demand curve looks at the entire circular flow of income and product, while an individual demand curve looks at one good, holding everything else constant. C) prices change along an individual demand curve but prices are held constant along an aggregate demand curve. D) the aggregate demand curve slopes up while an individual demand curve slopes down. Answer: B Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 43) How does aggregate demand (AD) curve differ from an individual demand curve (D)? A) AD is generally vertical while D is usually downward sloping. B) D represents the price-quantity relationship for a single good or service while AD looks at the entire economic system. C) Look for D in macroeconomic analyses and for AD in microeconomics. D) AD is generally a downward-sloping curve while D usually slopes upward. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 44) Aggregate demand is A) the horizontal summation of all demand curves for a product. B) the sum of all planned expenditures for the economy. C) the total quantity of all goods sold in an economy in a year. D) the horizontal summation of all demand curves for state, local, and federal governments and business firms. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

45) The total of all planned expenditures in the entire economy is the definition of A) aggregate supply. B) production possibilities curve. C) aggregate demand. D) net domestic product. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 46) The open economy effect suggests that A) a decrease in domestic price level will cause foreign residents to buy fewer domestic goods, increasing net exports. B) a decrease in domestic price level will cause foreign residents to buy more domestic goods, increasing net exports. C) a rise in domestic price level will cause foreign residents to buy more domestic goods. D) a rise in domestic price level will cause domestic residents to buy fewer imported goods. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 47) The interest rate effect suggests that A) an increase in the price level decreases the interest rate, which causes businesses and consumers to reduce desired spending. B) an increase in the price level increases the interest rate, which causes businesses and consumers to reduce desired spending. C) a decrease in the price level decreases the interest rate, which causes businesses and consumers to reduce desired spending. D) an increase in the price level increases the money supply, which causes businesses and consumers to increase desired spending. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

48) The aggregate demand curve gives the A) planned purchases for all goods and services in the economy, holding other things such as the price level constant. B) planned purchase rates for all goods and services in the economy at various price levels. C) demand for goods and services by the government at various price levels. D) amount of all goods everyone wants to buy at various income levels. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 49) The total of all planned expenditures in the entire economy is A) the open economy effect. B) LRAS. C) aggregate supply. D) aggregate demand. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 50) The various quantities of all final commodities demanded at various price levels, ceteris paribus, is the A) LRAS. B) production possibilities curve. C) aggregate demand curve. D) aggregate supply curve. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 51) The aggregate demand curve gives A) the total amount of real domestic output that will be purchased at each price level. B) the total amount of nominal domestic income that will be purchased at each price level. C) the total value of nominal GDP in an economy for a year, holding income and technology constant. D) the total value of output produced by workers in both foreign and domestic markets at each price level. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

52) All of the following are components of aggregate demand EXCEPT A) consumption spending. B) government purchases. C) the level of technology. D) net foreign spending on domestic production. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 53) The aggregate demand curve A) is vertical at the full-employment level of output. B) is horizontal at the full-employment level of output. C) is downward sloping. D) is upward sloping. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 54) The aggregate demand curve has A) no relationship between the price level and real GDP. B) a negative relationship between the price level and real GDP. C) a positive relationship between the price level and real GDP. D) a positive relationship between the price level and nominal GDP. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 55) Which of the following explains why the aggregate demand curve is downward sloping? A) the interest rate effect B) the real-balance effect C) the open economy effect D) all of these Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

56) Suppose that along the aggregate demand curve, real GDP equals $15 trillion when the GDP deflator is 90. If the GDP deflator were 95, real GDP along the aggregate demand curve would equal A) less than $15 trillion. B) $15 trillion. C) more than $15 trillion but less than $15.8 trillion. D) more than $15 trillion. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 57) Other things being equal, along an aggregate demand curve, a higher price level is associated with A) a higher real GDP. B) a lower real GDP. C) a lower nominal GDP. D) higher income levels. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 58) Other things being equal, the lower planned real expenditures along an aggregate demand curve are, the A) more the production possibilities cure shifts to the left. B) lower the price level. C) higher the price level. D) lower the level of endowments. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

59) When the price level increases, total planned real expenditures on goods and services falls. All of the following are responsible EXCEPT A) the substitution effect. B) the real-balance effect. C) the interest rate effect. D) the open economy effect. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 60) Which of the following is a factor that determines the shape of the aggregate demand curve? A) the real-balance effect B) the nominal-balance effect C) the price level effect D) the wage effect Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 61) According to the real-balance effect, an increase in the price level will A) leave total planned real expenditures unchanged since the price level of all goods has increased. B) decrease total planned real expenditures because of an increase in interest rates. C) lead to a corresponding increase in total planned real expenditures since businesses are now earning higher profits. D) decrease total planned real expenditures as a result of a decrease in the real value of money balances. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

62) The change in total planned real expenditures resulting from a change in the real value of money balances when the price level changes, all other things held constant, is A) the real-balance effect. B) the interest rate effect. C) the open economy effect. D) demand side inflation. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 63) The real-balance effect refers to A) the real interest rate. B) the production of real goods and services as opposed to financial instruments. C) the prices of goods and services. D) the real value of cash balances that a person is holding. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 64) If the GDP deflator decreases from 100 to 90 when you had $4,000, then A) the $4000 will buy 10 percent less of the goods and services produced by society. B) the $4000 will buy 10 percent more of the goods and services produced by society. C) the value of the $4000 decreases. D) the value of the $4000 remains constant. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 65) The wealth effect is another term for the A) substitution effect. B) indirect effect. C) real-balance effect. D) interest rate effect. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

66) Holding nominal money balances constant, a decrease in the price level A) causes the real value of the money balances to increase, in turn increasing total planned real expenditures. B) causes the real value of the money balances to decrease, in turn decreasing total planned real expenditures. C) causes the real value of the money balances to increase, thereby increasing the interest rate. D) generates a reduction in the value of the money balances, leading to higher interest rates and a decrease in total planned real expenditures. Answer: A Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 67) An indirect effect of an increase in the price level works through A) people substituting out of domestic goods and into foreign goods as exchange rates rise. B) changes in trade balances as domestic goods become more expensive, causing interest rates to move in the opposite direction from the change in the exchange rate. C) interest rates as people save more as the higher prices make their money balances less attractive. D) interest rates as people borrow to maintain their money balances, bidding up interest rates and reducing total planned real expenditures. Answer: D Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 68) The interest rate effect is part of the reason A) the short-run aggregate supply curve is upward sloping. B) the long-run aggregate supply curve is vertical. C) the aggregate demand curve is upward sloping. D) the aggregate demand curve is downward sloping. Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

69) Which of the following statements is TRUE about the interest rate effect? A) The interest rate effect is why the aggregate demand curve is upward sloping. B) A lower price level lowers the interest rate, which causes businesses and consumers to increase their desired spending. C) A higher price level lowers the interest rate, which causes business and consumers to increase their desired spending. D) Expenditures will change as a result of a change in the real value of money balances when there is a change in the price level. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 70) Higher interest rates A) reduce total planned real expenditures because they increase the cost of borrowing funds. B) reduce total planned real expenditures because they reduce the income of bankers and other creditors. C) increase total planned real expenditures because they increase the incomes of all people in the economy. D) increase total planned real expenditures because they lower the costs of building new plants and equipment. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 71) If the price level increases, then A) the exchange rate will increase, causing U.S. goods to become cheaper and increasing total planned real expenditures. B) imports increase but exports do not change. Therefore, there is no effect on total planned real expenditures. C) foreign residents buy fewer U.S. goods, leaving more goods for U.S. residents and an increase in total planned real production by firms. D) domestic goods are more expensive relative to foreign goods, which reduces total planed real expenditures. Answer: D Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

72) The open economy effect refers to the fact that A) the position and shape of the long run aggregate supply curve is partially due to the fact that we import goods. B) the aggregate supply curve shifts when the economy grows. C) the slope of the aggregate demand curve is partially explained by the reduction in the desire to buy fewer U.S. goods by U.S. residents and foreign residents as a result of a higher price level. D) the immigration policies of the United States are disruptive to labor markets. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 73) A shift away from expenditures on domestic goods and a shift toward expenditures on foreign goods when the domestic price level increases is known as A) the real-balance effect. B) the interest rate effect. C) the open economy effect. D) demand side inflation. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 74) Suppose a country has no trade with other countries and people can borrow as many funds as they want at the current interest rate. An increase in the price level will generate A) a decrease in total planned real expenditures because of the real-balance effect. B) a decrease in total planned real expenditures because of the open-economy effect and the indirect effect. C) a decrease in total planned real expenditures because the real-balance effect will be stronger than the indirect effect and the open-economy effect. D) a decrease in total planned real expenditures because the indirect effect will be stronger than the real-balance effect. Answer: A Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

75) A fall in the price level A) increases the real value of money balances, which causes borrowing to decrease, leading to a decrease in investment and total planned real expenditures. B) causes exports to rise and imports to fall, leading to an increase in total planned real expenditures. C) leads to an increase in total planned real expenditures because of the indirect effect. D) causes total planned real expenditures to increase as long as the fall is less than the fall in the price level in other countries. Answer: B Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 76) The aggregate demand curve A) is like individual demand curves in that prices of other goods are held constant. B) is like individual demand curves in that income is constant. C) differs from individual demand curves in that the aggregate demand curve is not downward sloping. D) differs from individual demand curves in that the aggregate demand curve looks at the entire circular flow of income and product while the individual demand curve looks at only one good. Answer: D Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 77) Which of the following is NOT true about the aggregate demand curve? A) The production possibilities curve determines the slope of the aggregate demand curve. B) The aggregate demand curve shows total planned real expenditures at different price levels. C) Changes in the economic conditions in other countries will lead to a shift of the aggregate demand curve. D) The aggregate demand curve considers the entire circular flow of income. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

78) Which of the following is TRUE about how the aggregate demand curve differs from the individual's demand curve? A) The individual's demand curve shows the relationship between price and quantity demanded while the aggregate demand curve is not influenced by price. B) For the individual's demand curve equilibrium is determined by the intersection of supply and demand while for the aggregate demand curve equilibrium is determined by the real balance effect. C) The individual's demand curve is just for an individual while the aggregate demand curve looks at the entire circular flow of income. D) The individual's demand curve will shift when there is a change in taxes while the aggregate demand curve will not. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 79) What determines the total value of aggregate demand for U.S. real GDP? A) the spending decisions of consumers, firms, and governments B) the Congressional Budget Office C) the Federal Reserve Board D) Wall Street Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 80) Total planned expenditures for domestically produced goods and services consist of A) government spending, business spending, and import spending only. B) consumer spending, business spending, and net export spending only C) consumer spending, business spending, government spending, and net export spending. D) consumer spending, business spending, government spending, and import spending. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

81) Which one of the following is NOT a component of aggregate demand? A) goods exported to other countries B) consumption spending C) investment expenditures D) government purchases Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 82) The total of all planned real expenditures in the economy is called A) aggregate demand. B) aggregate spending. C) aggregate GDP. D) aggregate consumption. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 83) The aggregate demand curve shows the relationship between planned purchases of A) all final goods and services and interest rates. B) all final goods and services and the price level. C) all final goods and services and nominal GDP. D) all final goods and services and total planned production. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 84) The aggregate demand curve shows A) a direct relationship between changes in the price level and changes in real GDP. B) real GDP does not change as the price level changes. C) an inverse relationship between the price level and real GDP. D) an inverse relationship between changes in the price level and changes in nominal GDP. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

85) Which of the following is NOT an explanation for the shape of the aggregate demand curve? A) real balance effect B) interest rate effect C) open economy effect D) investment effect Answer: D Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 86) The downward slope of the aggregate demand curve shows that A) an increase in aggregate demand reduces the long-run aggregate supply. B) an increase in aggregate demand increases the long-run aggregate supply. C) a higher price level will cause planned purchase rates for final goods and services to be higher. D) a lower price level will cause planned purchase rates for final goods and services to be higher. Answer: D Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 87) What is one implication of the real-balance effect? A) The part of your wealth that you hold in the form of cash loses some of its value as the price level rises. B) When the price level rises, people have an incentive to work harder in order to earn a higher income. C) When the price level falls, most consumers reallocate their spending so as to have an equal balance between necessities and luxuries. D) Aggregate demand and aggregate supply can never reach long-run equilibrium. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 88) The open economy effect and interest rate effect are two of the reasons why A) higher price levels increase long-run aggregate supply. B) the aggregate demand curve slopes downward. C) capital formation does not contribute to economic growth in poor countries. D) growth of the labor force does not contribute to economic growth in wealthy countries. Answer: B Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 47 Copyright © 2021 Pearson Education, Inc.

89) The aggregate demand curve shows the A) total amount of planned expenditures on goods and services at each possible price level. B) total amount of nominal goods that the participants in the economy want to purchase. C) total amount of real goods that foreigners want to purchase. D) amount of goods producers will produce as production costs fall. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 90) The aggregate demand curve is A) downward sloping. B) vertical. C) horizontal. D) U shaped. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 91) The aggregate demand curve is A) horizontal if full employment exists in the economy. B) vertical if full employment exists in the economy. C) downward sloping because of the real-balance, interest rate, and open economy effects. D) downward sloping because more goods are produced as per unit cost of producing each item falls. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 92) The real-balance effect indicates that at higher price levels A) the real value of money holdings fall, resulting in decreased spending. B) the real value of money holdings increase, resulting in increased saving. C) the purchasing power of money will increase. D) the value of the dollar will increase. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

93) Which of the following will occur when an economy's price level increases? A) Aggregate demand will increase. B) The purchasing power of money will increase. C) The purchasing power of money will decrease. D) The real value of wealth will increase. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 94) The interest rate effect shows that if the price level increases, A) consumers and businesses will increase their spending to buy the same amount of goods as before to make up for the higher interest rates. B) consumers and businesses will borrow more to replenish their real money balances, which pushes up interest rates and causes spending to decrease. C) U.S. exports and imports will both decrease. D) the real value of financial assets will increase. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 95) A decrease in U.S. prices relative to prices in Europe A) will decrease European exports to the United States. B) will increase U.S. imports from Europe. C) will decrease U.S. exports to Europe. D) will not affect U.S. trade with Europe. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 96) An increase in U.S. prices relative to prices in foreign countries will A) increase total planned spending on U.S. goods and services. B) increase U.S. imports and decrease U.S. exports. C) decrease U.S. imports and increase U.S. exports. D) decrease both U.S. exports and imports. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

97) When the price level declines A) the interest rate rises, and consumers borrow fewer funds, which causes a movement up the aggregate demand curve. B) the interest rate falls, and consumers borrow more funds, which causes a movement down along the aggregate demand curve. C) the interest rate is not affected, so there is no movement along the aggregate demand curve. D) interest rates fall, and consumers borrow more funds, which causes the aggregate demand curve to shift to the left. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 98) When the price level falls A) imports increase, and exports decrease, which causes a movement up along the aggregate demand curve. B) there is no impact on imports or exports, so there is no associated movement along the aggregate demand curve. C) imports decrease and exports increase, which cause a movement down along the aggregate demand curve. D) imports decrease and exports increase, which cause a movement up along the aggregate demand curve. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 99) The curve that displays total planned real spending on goods and services at each price level by households, businesses, the government, and foreign residents is called A) the aggregate supply curve. B) the aggregate demand curve. C) the price level curve. D) the employment curve. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

100) Which of the following cause the aggregate demand curve to slope downward and to the right? A) the prices of key goods B) the interest rate effect C) military expenditures of the government D) the demand-shock effect Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 101) When a higher price level generates an increase in the interest rate that induces consumers to borrow less and buy less, this chain of events is referred to as A) the real-balance effect. B) the interest rate effect. C) the open economy effect. D) the price level effect. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 102) Total planned real expenditures measured along the aggregate demand curve are made up of A) consumption spending, investment spending, government spending, and net export spending. B) consumption spending, income, government spending, and net export spending. C) consumption spending, saving, investment spending, and government spending. D) consumption spending, factor payments, investment spending, and net export spending. Answer: A Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 103) What is measured on the vertical axis of the aggregate demand graph? A) nominal income B) real GDP per year C) the price level D) unemployment Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

104) What is measured on the horizontal axis on the aggregate demand graph? A) nominal income B) real GDP per year C) the price level D) unemployment Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 105) When expenditures change due to changes in the real value of money caused by variations in the price level, this is known as the A) interest rate effect. B) real-balance effect. C) open economy effect. D) aggregate balances effect. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 106) When total planned real expenditures change due to changes in the cost of borrowing that result from variations in the price level, this is known as the A) interest rate effect. B) real-balance effect. C) open economy effect. D) aggregate balances effect. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 107) When total planned real expenditures change due to the changes in net exports, this is known as the A) interest rate effect. B) real-balance effect. C) open economy effect. D) aggregate balances effect. Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 52 Copyright © 2021 Pearson Education, Inc.

108) If your income stays the same and the price level increases, you will buy fewer goods and services due to the A) interest rate effect. B) real-balance effect. C) open economy effect. D) aggregate balances effect. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 109) If the dollar appreciates and foreign goods become less expensive, the total planned expenditures on domestic goods and services will A) fall due to the open economy effect. B) fall due to the interest rate effect. C) increase due to the open economy effect. D) increase due to the interest rate effect. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 110) Which of the following would cause aggregate demand to decrease? A) The government increases taxes on both business and personal income. B) A drop in the foreign exchange value of the dollar C) The Fed increases the amount of money in circulation. D) Businesses and households believe that the economy is headed for good times, so they begin to feel increased security about their jobs. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 111) An aggregate demand curve A) shifts to the right when the price level increases and to the left when the price level falls. B) shifts to the right when any non-price-level factor increases total planned real spending. C) shifts to the right when population decreases and shifts to the left when population increases. D) does not shift, unlike individual or market demand curves. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

112) Which of the following statements is correct? I. When economists derive the aggregate demand curve, they are looking at the effect of the price level on one commodity only. II. Any non-price-level change that increases total planned real spending on domestic goods shifts the AD curve to the right. A) I only B) II only C) Both I and II D) Neither I nor II Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 113) Decreases in interest rates have made it less costly to finance purchases of new houses. What impact will this have on U.S. aggregate demand? A) None. A nation's aggregate demand is not affected by changes in interest rates. B) U.S. aggregate demand will remain unchanged. C) U.S. aggregate demand will decrease. D) The U.S. aggregate demand curve will shift to the right. Answer: D Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 114) An aggregate demand curve A) shifts to the right when a non-price level change increases total planned real expenditures. B) shifts to the right when a non-price level change decreases total planned real expenditures. C) shifts to the right when the price level falls. D) does not shift to the right or to the left. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

115) An increase in total planned real expenditures that is caused by a factor other than the price level will lead to the A) aggregate supply curve shifting to the right. B) aggregate demand curve shifting to the right. C) aggregate supply curve shifting to the left. D) aggregate demand curve shifting to the left. Answer: B Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 116) An increase in the money supply will cause which of the following to occur? A) a rightward shift of the aggregate supply curve B) a leftward shift of the aggregate demand curve C) a leftward shift of the aggregate supply curve D) a rightward shift of the aggregate demand curve Answer: D Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 117) The aggregate demand curve would shift to the right as a result of A) a drop in the price level. B) tax increases. C) a decrease in the U.S. real interest rate. D) a decrease in the amount of money in circulation. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 118) Which of the following will cause a leftward shift in the aggregate demand curve? A) a reduction in the money supply B) an increase in taxes C) a reduction in government spending D) all of these Answer: D Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

119) Which one of the following would NOT increase aggregate demand? A) an increase in long-run aggregate supply B) a reduction in real interest rates C) tax decreases D) an increase in the amount of money in circulation Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 120) All of the following would cause the aggregate demand curve to shift EXCEPT A) a rise in real interest rates. B) an increase in taxes. C) improvements in economic conditions in other countries. D) a decrease in the price level. Answer: D Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 121) Which of the following will NOT shift the aggregate demand curve? A) a change in the domestic marginal tax rates B) a change in government expenditures C) a change in the domestic price level D) depreciation in the value of the national currency Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 122) The aggregate demand curve will shift to the left if A) people are more optimistic about their future. B) a reduction in the price level pushes down borrowing costs. C) government expenditures increase. D) the nation's exports decrease. Answer: D Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

123) A weakening in consumer confidence causes a A) shift of the aggregate demand curve to the right. B) shift of the aggregate demand curve to the left. C) movement up along the aggregate demand curve. D) movement down along the aggregate demand curve. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 124) Which of the following will NOT shift the aggregate demand curve? A) a change in the price level B) a change in tax rates C) a change in the amount of money in circulation D) a change in real interest rates Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 125) An increase in the amount of money in circulation would cause a A) shift of the aggregate demand curve to the right. B) shift of the aggregate demand curve to the left. C) movement up the aggregate demand curve. D) movement down the aggregate demand curve. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 126) An increase in the U.S. price level causes a A) shift of the U.S. aggregate demand curve to the right. B) shift of the U.S. aggregate demand curve to the left. C) movement up the U.S. aggregate demand curve. D) movement down the U.S. aggregate demand curve. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

127) Which of the following would likely result in a shift of the aggregate demand curve to the right? A) a tax cut B) a decrease in job security C) a rise in the real interest rate D) a decrease in the quantity of money in circulation Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 128) An increase in aggregate demand is shown by A) a rightward shift in the aggregate demand curve. B) a leftward shift in the aggregate demand curve. C) a movement up along the aggregate demand curve. D) the movement down along the aggregate demand curve. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 129) Which of the following would likely result in a decrease in aggregate demand? A) tax increases B) a reduction in the real interest rate C) increased job and future income security D) a rise in the quantity of money in circulation Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

130) Other things being equal, appreciation of the dollar A) increases aggregate demand in the United States, and may increase aggregate supply by reducing the prices of imported resources. B) increases aggregate demand in the United States, and may decrease aggregate supply by reducing the prices of imported resources. C) decreases aggregate demand in the United States, and may increase aggregate supply by reducing the prices of imported resources. D) decreases aggregate demand in the United States, and may decrease aggregate supply by increasing the prices of imported resources. Answer: C Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 131) Other things being equal, a depreciation of the dollar A) increases aggregate demand in the United States, and may increase aggregate supply by reducing the prices of imported resources. B) increases aggregate demand in the United States, and may decrease aggregate supply by increasing the prices of imported resources. C) decreases aggregate demand in the United States, and may increase aggregate supply by reducing the prices of imported resources. D) decreases aggregate demand in the United States, and may decrease aggregate supply by increasing the prices of imported resources. Answer: B Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 132) When investors buy more capital goods because the interest rates have fallen, the aggregate demand curve A) shifts right. B) shifts left. C) does not shift. D) stays the same. Answer: A Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

133) In the above figure, a movement from point B to point C could be explained by A) an increase in the price level. B) a decrease in the quantity of money in circulation. C) increased government spending. D) the real-balance effect. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 134) In the above figure, a movement from point C to point B could be explained by A) an increase in the price level. B) an increase in the quantity of money in circulation. C) increased government taxation. D) the real-balance effect. Answer: C Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

135) In the above figure, a movement from point A to point B could be explained by A) an increase in the price level. B) an increase in the quantity of money in circulation. C) a decrease in the price level. D) a decrease in government spending. Answer: A Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 136) Which of the following would cause an increase in aggregate demand (AD)? A) a decrease in price levels B) an increase in interest rates C) a decrease in taxes D) a rise in the foreign exchange value of the dollar Answer: C Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 137) What is the aggregate demand curve and what does it represent? Answer: The aggregate demand curve shows total planned real spending on all goods and services in the economy at various price levels, other things held constant. It represents the components of real Gross Domestic Product (GDP), including consumption spending, investment expenditures, government purchases, and net foreign demand for domestic production. Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 138) "The aggregate demand curve slopes down for the same reason that the individual demand curve for a good slopes down." Do you agree or disagree with this statement? Why? Answer: Disagree. The aggregate demand curve does not use price, but uses the price level, and quantity demanded is not for a specific good, but for the total expenditures on real goods and services. As the relative price of a good falls, individuals will substitute toward that good. There are economy-wide reasons that cause the aggregate demand curve to slope downwards. For example, the lower aggregate price level will cause a reduction in the interest rate and an increase in the overall demand for goods. In addition, the lower price level will cause real money balances to increase, and so increased planned spending. Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

139) What is the interest rate effect of an increase in the price level? Answer: Higher price levels indirectly increase the interest rate. The higher interest rate cause people to reduce desired real spending due to the higher cost of borrowing. Hence, the higher price level leads to a reduction in total planned real spending. Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 140) What information is provided by the aggregate demand curve? Answer: The aggregate demand curve relates total planned real expenditures to each price level. The price level is measured by the GDP deflator. The lower the price level, the higher total planned real expenditures, other things being equal. Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 141) What is the real-balance effect of an increase in the price level? Answer: The real-balance effect is the change in the real value of the money balances when the price level changes, all other things constant. An increase in the price level means that the purchasing power of money balances is reduced and thus falling planned real expenditures. Diff: 2 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 142) What are the three forces that cause the aggregate demand curve to slope down? Explain. Answer: The three forces are the real-balance effect, the interest rate effect, and the openeconomy effect. An increase in the price level causes the purchasing power of money balances to fall, interest rates to increase and borrowing to fall, and imports to increase and exports to decrease. Each of these cause total planned real expenditures to decrease. Diff: 3 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 143) What causes the aggregate demand curve to shift? Answer: Anything that causes total planned real expenditures on domestic goods to increase or decrease, other than changes in the price level, causes the curve to shift. These include changes in the exchange rate, changes in economic conditions in other countries, changes in the real interest rate (not associated with price level changes), and a change in the amount of money in circulation. Diff: 1 Topic: 10.2 Total Expenditures and Aggregate Demand Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 62 Copyright © 2021 Pearson Education, Inc.

10.3 Long-Run Equilibrium and the Price Level 1) The shape of the aggregate demand curve does NOT tell us anything about how the total dollar value of spending will ultimately be divided between output and prices. For this we need A) information about the standard of living in the country. B) information that only the Consumers' Price Index can provide. C) an aggregate supply curve. D) to know how far from the origin the aggregate demand curve is. Answer: C Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 2) To find an economy's long-run equilibrium price level, locate the point where ________ and ________ cross and look to the left. A) demand; supply B) aggregate demand; short-run aggregate supply C) aggregate demand; price level D) long-run aggregate supply; aggregate demand Answer: D Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 3) Suppose total planned expenditures equal $100 billion when the value of the price level is 100. If the price level drops to 90, total planned real expenditures will equal A) $100 billion. B) less than $100 billion. C) more than $100 billion. D) None of these: Cannot be determined without additional information. Answer: C Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Application of knowledge

4) If you have $1,000 and the Gross Domestic Product (GDP) deflator increases from 100 to 110, then A) the $1,000 will buy 10 percent less of the goods and services produced by society. B) the $1,000 will buy 10 percent more of the goods and services produced by society. C) the value of your $1,000 increases. D) you will be able to buy fewer goods, but the real value of those goods will increase. Answer: A Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Application of knowledge 5) A persistently declining price level resulting from economic growth and unchanged aggregate demand is called A) demand-side deflation. B) supply-side deflation. C) ozian deflation. D) secular deflation. Answer: D Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 6) How is economic growth graphically depicted? A) The aggregate demand curve shifts to the left. B) Aggregate demand shifts to the right. C) Short-run aggregate supply shifts left. D) The long-run aggregate supply curve shifts right. Answer: D Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 7) Which of the following will result in secular deflation? A) a one-time rightward shift of the aggregate demand curve B) continuous rightward shifts of the aggregate demand curve C) a one-time rightward shift of the long-run aggregate supply curve D) continuous rightward shifts of the long-run aggregate supply curve Answer: D Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

8) Secular deflation occurs when A) there is no economic growth and aggregate demand falls. B) aggregate demand increases at the same time there is no economic growth. C) aggregate demand remains unchanged while economic growth increases long-run aggregate supply. D) both aggregate demand and aggregate supply are shifting left. Answer: C Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 9) An increase in the amount of physical capital will cause A) an increase in both aggregate demand and real GDP, but have no effect on the price level. B) aggregate demand and aggregate supply to increase by the same amounts, causing real GDP to increase and the price level to remain constant. C) an increase in both aggregate supply and real GDP, but have no effect on the price level. D) an increase in both aggregate supply and real GDP and a reduction in the price level. Answer: D Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 10) The U. S. has experienced inflation every year since 1959 due to A) a sustained decrease in aggregate demand. B) a sustained increase in aggregate demand accompanied by an even larger decrease in LRAS. C) a sustained decrease in aggregate supply. D) a sustained increase in aggregate supply accompanied by an even larger increase in aggregate demand. Answer: D Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 11) Supply-side inflation is caused by A) a decrease in aggregate supply and no change in aggregate demand. B) a decrease in aggregate demand and no change in aggregate supply. C) an increase in aggregate supply and no change in aggregate demand. D) an increase in aggregate demand and no change in aggregate supply. Answer: A Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 65 Copyright © 2021 Pearson Education, Inc.

12) If the economy grows steadily over several years and at the same time maintains the aggregate demand curve in its present position, then the economy will experience which of the following? A) inflation B) a stable price level C) secular deflation D) The price level cannot be determined without more information. Answer: C Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 13) Suppose the central bank implements expansionary monetary policy where the money supply increases. Which of the following will tend to occur in the long run as a result of this monetary policy action? A) Output and the price level will both increase. B) Output will increase with no change in the price level. C) Price level will increase with no change in output. D) Neither the price level nor output will change. Answer: C Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 14) When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply curve, A) there will be no price level change. B) there will be pressures that will lead to a shift of either the aggregate demand or the long run aggregate supply curves. C) total planned real expenditures will exceed actual real GDP, and the price level will increase. D) total planned real expenditure will be lower than actual real GDP, and the price level will increase. Answer: C Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

15) When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply curve A) there will be no price level change. B) there will be pressures that will lead to a shift of either the aggregate demand or the long run aggregate supply curves. C) actual real GDP would be less than total planned real expenditures, and the price level will rise. D) actual real GDP would exceed total planned real expenditures, and the price level will fall. Answer: C Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 16) Economic growth will be associated with a constant price level when A) the increase in aggregate demand exactly equals the increase in long-run aggregate supply. B) the increase in aggregate demand is more than the increase in long-run aggregate supply. C) the increase in aggregate demand is less than the increase in long-run aggregate supply. D) the increase in aggregate demand is accompanied by a reduction in short-run aggregate supply. Answer: A Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 17) Over the last twenty years, real GDP in the U.S. economy has increased and there has been inflation. This indicates that A) aggregate demand has increased while aggregate supply has been constant. B) aggregate demand has been constant while aggregate supply has increased. C) aggregate demand has increased more than aggregate supply. D) aggregate demand has increased less than aggregate supply. Answer: C Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

18) Economic growth takes place A) only when both aggregate demand and aggregate supply increase. B) when aggregate supply increases. C) when aggregate demand decreases. D) only if the price level is constant or rising. Answer: B Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 19) The U.S. economy has had persistent inflation in recent decades. A possible explanation for the inflation is that A) there have been decreases in the growth rate while aggregate demand has remained unchanged. B) there have been increases in the growth rate while aggregate demand has remained unchanged. C) there have been decreases in aggregate demand while aggregate supply has remained unchanged. D) growth in aggregate demand has been greater than growth in aggregate supply. Answer: D Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 20) In the long run, a decrease in government spending, other things equal, generates A) a lower real GDP in the long run. B) a higher real GDP in the short run. C) a lower price level. D) both a higher real GDP and a lower price level. Answer: C Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

21) Refer to the above figure. If the price level is 80, A) the total planned real expenditures by individuals, businesses, and the government are less than total planned production by firms. B) the total planned real expenditures by individuals, businesses, and the government exceed total planned production by firms. C) the economy will have economic growth and the new equilibrium price level will be 80. D) the aggregate demand curve will automatically shift leading to a stable equilibrium. Answer: B Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 22) The intersection of aggregate demand and long-run aggregate supply identifies the price level at which total planned A) real expenditures equal actual nominal GDP. B) real expenditures equal total planned production. C) export spending equals total planned import spending. D) government spending equals total planned tax revenues. Answer: B Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

23) What would happen in an economy if total planned production exceeded total planned real expenditures? A) Inventories would be depleted, and firms would tend to lower prices. B) Inventories would accumulate, and firms would tend to lower prices. C) Inventories would be depleted, and firms would tend to raise prices. D) Inventories would accumulate, and firms would tend to raise prices. Answer: B Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 24) If the current price level is lower than the equilibrium price level, then it must be TRUE that total planned A) government spending is less than total planned tax revenues. B) government spending exceeds total planned tax revenues. C) real expenditures are less than total planned production. D) real expenditures exceed total planned production. Answer: D Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

25) Consider the above figure. At a price level of 150, A) total planned production exceeds total planned real expenditures. B) total planned real expenditures exceed total planned real production. C) inventories of unsold goods decline. D) the price level would rise. Answer: A Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

26) Consider the above figure. At a price level of 120, A) total planned real expenditures exceed total planned production. B) total planned production exceeds total planned expenditures. C) prices would fall. D) inventories would begin to accumulate. Answer: A Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

27) In the above figure, the long-run equilibrium price level is A) 150. B) 130. C) 110. D) not displayed. Answer: B Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Application of knowledge

28) In the above figure, the long-run equilibrium real GDP is A) $10 trillion. B) $11 trillion. C) $12 trillion D) not displayed. Answer: B Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Application of knowledge 29) In the above figure, if the price level is 110, A) total planned production exceeds total expenditures. B) total expenditures exceed total planned expenditures. C) total planned production equals total expenditures. D) total planned production is less than total expenditures. Answer: D Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Application of knowledge 30) If consumers' confidence in the economy rises, A) aggregate demand will shift leftward and the price level will rise. B) aggregate demand will shift leftward and the price level will fall. C) aggregate demand will shift rightward and the price level will rise. D) aggregate demand will shift rightward and the price level will fall. Answer: C Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 31) A persistent decline in the price level resulting from economic growth in the presence of stable aggregate demand is known as A) demand-side deflation. B) the interest rate effect. C) secular deflation. D) the real balance effect. Answer: C Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking

32) If aggregate demand is stable and there is economic growth, the economy will experience A) secular degeneration. B) secular deflation. C) secular decline. D) secular depreciation. Answer: B Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 33) A rightward shift of long-run aggregate supply without any change in aggregate demand A) will leave real GDP unchanged. B) results in a lower price level. C) increases the price level without any change in real GDP. D) increases the price level along with an increase in real GDP. Answer: B Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 34) An economy experiences real growth over time with stable aggregate demand. This would likely result in A) increasing prices. B) decreasing prices. C) secular inflation. D) increased unemployment. Answer: B Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 35) Which of the following is consistent with secular deflation? A) a persistently decreasing price level caused by several periods of economic growth with stable AD B) a persistently increasing price level caused by several periods of economic growth with decreasing AD C) a persistently decreasing price level caused by increases in government expenditures D) a persistently decreasing price level caused by money being withdrawn from the economy Answer: A Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 73 Copyright © 2021 Pearson Education, Inc.

36) If persistent inflation was due to declines in long-run aggregate supply, what pattern would be observed? A) Increases in the price level would occur simultaneously with decreases in real GDP. B) Increases in the price level would occur simultaneously with increases in real GDP. C) Only prices of goods would increase; prices of services would remain constant. D) Only prices of services would increase; prices of goods would remain constant. Answer: A Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 37) In an economy in which aggregate demand is stable and a period of sustained and significant productivity growth occurs, there will be A) secular deflation. B) secular inflation. C) a constant price level. D) a shift of aggregate supply to the left. Answer: A Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 38) What could cause a decrease in the price level and simultaneously an increase in GDP similar to the 1920s in the United States? A) an increase in interest rates B) a decrease in consumer confidence C) an increase in productivity D) a decrease in interest rates Answer: C Diff: 3 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 39) Long-run equilibrium will occur at the price level at which A) the long-run aggregate demand and short-run aggregate supply curves intersect. B) the aggregate demand and short-run aggregate supply curves intersect. C) the aggregate demand and long-run aggregate supply curves intersect. D) the short-run aggregate supply and long-run aggregate supply curves intersect. Answer: C Diff: 1 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 74 Copyright © 2021 Pearson Education, Inc.

40) How can the long-run equilibrium level of real Gross Domestic Product (GDP) increase without the price level changing? Answer: Since the long-run aggregate supply curve is vertical, the only way real Gross Domestic Product (GDP) can increase without the price level changing is if aggregate demand increases and long-run aggregate supply increases. For the latter to happen, either the endowment of inputs must increase or technology must change. Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 41) Explain how an economy can experience long-run economic growth and deflation at the same time. Answer: If aggregate demand remains relatively constant during the growth periods, than as the LRAS supply curve shifts right, the new equilibrium point of AD and the LRAS curve will be lower, indicating deflation. Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 42) How can a country experience economic growth and stable prices? Answer: A country can experience economic growth and stable prices if aggregate supply and aggregate demand increase by the same amount. The new equilibrium then is at the same price level, but real GDP is higher. Diff: 2 Topic: 10.3 Long-Run Equilibrium and the Price Level Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 10.4 Causes of Inflation 1) What has been TRUE about inflation in the United States since 1960? A) Negative inflation, or deflection, has occurred half of the time. B) The nation has experienced persistent deflation. C) The annual rate of inflation has varies around zero percent. D) Inflation rates have been consistently positive. Answer: D Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

2) Supply-side inflation could be caused by which of the following? A) an increase in aggregate demand B) a decrease in aggregate demand C) an increase in long-run aggregate supply D) a decrease in long-run aggregate supply Answer: D Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 3) If there are steady decreases in aggregate supply, the economy will experience A) a slow decrease in price levels. B) demand-side inflation. C) an expansionary gap. D) supply-side inflation. Answer: D Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 4) What has caused persistent inflation in the United States? A) The nation's long-run aggregate supply curve has shifted to the left. B) supply-side inflation C) a decrease in labor productivity D) none of these Answer: D Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 5) Secular inflation in the United States since 1960 has been most likely be the result of A) persistent leftward shifts of the long-run aggregate supply curve. B) persistent rightward shifts of the long-run aggregate supply curve. C) persistent rightward shifts of the aggregate demand curve. D) persistent leftward shifts of the aggregate demand curve. Answer: C Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 76 Copyright © 2021 Pearson Education, Inc.

6) Whenever the general level of prices rises because of continual increases in aggregate demand, we say that the economy is experiencing A) supply-side inflation. B) cost push inflation. C) demand-side inflation. D) aggregate supply shock. Answer: C Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 7) Demand-side inflation occurs when A) increases in aggregate demand are not matched by increases in aggregate supply. B) increases in aggregate supply outstrip increases in aggregate demand. C) aggregate demand falls more rapidly than aggregate supply. D) long-run aggregate demand rises faster than short-run aggregate supply. Answer: A Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 8) Over the past 40 years, which of the following has the U.S. economy experienced? A) persistent deflation B) stable prices and so zero inflation rate C) persistent inflation D) secular deflation Answer: C Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

9) Which of the following factors could cause the economy to experience supply-side inflation? A) increased security about jobs and future income B) government laws which say that the average work week must be reduced by one hour every year C) increase in the number of immigrants allowed into the country D) development of new technology to increase productivity Answer: B Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 10) Supply side inflation can be caused by A) a persistent increase in aggregate supply while aggregate demand remains unchanged. B) a persistent decrease in aggregate supply while aggregate demand remains unchanged. C) a persistent decrease in aggregate supply while aggregate demand has significant decreases. D) a persistent increase in aggregate demand while aggregate supply remains unchanged. Answer: B Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 11) Which of the following is the main cause of the persistent inflation that we have experienced in the United States? A) supply-side inflationary factors B) demand-side inflationary factors C) a combination of supply- and demand-side inflationary factors D) supply-side secularity factors Answer: B Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

12) A reduction the amount of oil (a resource) will tend to cause which of the following? A) a reduction in output and a reduction in the price level B) a reduction in output with no change in the price level C) a reduction in output and an increase in the price level D) an increase in the price level and no change in output if accompanied by an increase in the money supply Answer: C Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 13) If there is persistent inflation, A) long-run aggregate supply is growing at a faster rate than aggregate demand. B) long-run aggregate supply is growing at a slower rate than aggregate demand. C) there is an excess of total planned expenditures. D) long-run aggregate supply is constant. Answer: B Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 14) Secular deflation A) has been a serious problem during the last three decades in the United States. B) although present, has not been a problem during the last three decades in the United States. C) has not been present in the United States since 1960. D) cannot exist in a capitalistic economy. Answer: C Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

15) Which of the following is the most likely explanation for inflation in the United States? A) increases in aggregate supply B) decreases in aggregate supply C) increases in aggregate demand D) decreases in aggregate demand Answer: C Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 16) In the long run, persistent inflation in the United States is caused by A) leftward shifts in both the long-run aggregate supply curve and in the aggregate demand curve. B) rightward shifts in the long-run aggregate supply curve and the leftward shift of the aggregate demand curve. C) a faster rightward shift of the aggregate demand curve than the rightward shift of the long-run aggregate supply curve. D) leftward shifts in the aggregate demand curve while the position of the long-run supply curve is unchanged. Answer: C Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 17) For supply-side inflation to occur in the long run, A) the aggregate demand curve has to shift to the left. B) the aggregate demand curve has to shift to the right. C) the long-run aggregate supply curve has to shift to the right. D) the long-run aggregate supply curve has to shift to the left. Answer: D Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

18) Which of the following can cause supply-side inflation? A) an increase in human capital B) increases in the money supply C) tax cuts D) none of these Answer: D Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 19) Suppose that an economy is initially producing at the full-employment level of output. Now suppose there is a reduction in the money supply. Other things being equal we can expect A) supply-side inflation. B) demand-side inflation. C) cost-pull inflation. D) deflation. Answer: D Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 20) What will be the result in a growing economy if increases in aggregate demand outpace rightward shifts of the long-run aggregate supply curve? A) secular deflation B) inflation accompanied by declines in real GDP C) inflation accompanied by increases in real GDP D) a decline in consumption spending Answer: C Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

21) Refer to the above figure. Suppose the economy's initial equilibrium is represented by the intersection of LRAS1 and AD1. Suppose there is a persistent reduction in labor force participation, which reduces total planned production at any given price level. The resulting change in the economy's long-run equilibrium position would be represented by a A) movement from A to C. B) movement from A to B. C) movement from B to C. D) movement from C to A. Answer: A Diff: 3 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 22) Refer to the above figure. A movement from B to C would be NOT be the result of A) an increase in foreign income levels. B) an increase in government spending. C) an increase in worker productivity. D) an increase in consumption spending. Answer: C Diff: 3 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

23) Refer to the above figure. A movement from B to D would be a result of A) an increase in the quantity of money in circulation. B) an increase in labor productivity. C) an increase in government expenditures. D) an increase in the marginal income tax rate. Answer: B Diff: 3 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 24) Refer to the above figure. Suppose the economy's initial equilibrium is represented by the intersection of LRAS2 and AD2. Now there is an increase in labor productivity which increases total planned production at any given price level and aggregate demand remains stable. The resulting change in the economy's long-run equilibrium position would be represented by a A) movement from B to D. B) movement from C to D. C) movement from C to B. D) movement from A to B. Answer: A Diff: 3 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 25) When the economy is in long-run equilibrium, the price level adjusts so as to equate which two values with one another? A) import and export spending B) the inflation rate and the unemployment rate C) government spending and tax revenues D) total planned real expenditures and total planned production Answer: D Diff: 1 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

26) What pattern would you observe in an economy in which aggregate demand is increasing but in which long-run aggregate supply remained the same? A) secular deflation B) inflation accompanied by no change in real GDP C) inflation accompanied by declines in real GDP D) a decline in consumption spending Answer: B Diff: 3 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 27) Steadily improving improvements in technology, other things being equal, will result in A) no change in the price level and steadily increasing output. B) persistent deflation. C) steadily rising price level (inflation) and steadily increasing output. D) a steadily falling price level with no change in output. Answer: B Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 28) When the aggregate demand curve shifts ________ the long-run aggregate supply shifts rightward, the result will be inflation. A) rightward at the same rate as B) rightward at a slower rate than C) leftward at a faster rate than D) leftward at the same rate as Answer: B Diff: 3 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

29) What would likely happen to the long-run aggregate supply curve if the U.S. federal government decreases marginal tax rates on wages? A) The LRAS curve would shift rightward. B) The LRAS curve would shift leftward. C) The LRAS curve would remain stable while the AD curve would shift leftward. D) The LRAS curve would remain stable while the AD curve would shift rightward. Answer: A Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 30) Which of the following would unambiguously generate deflation? A) a decrease in aggregate demand accompanied by an increase in aggregate supply B) an increase in aggregate demand accompanied by an increase in aggregate supply C) a decrease in aggregate demand accompanied by a decrease in aggregate supply D) an increase in aggregate demand accompanied by a decrease in aggregate supply Answer: A Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 31) If long-run economic growth is NOT accompanied by a change in aggregate demand, the result will be A) persistent inflation. B) secular deflation. C) devaluation of the dollar. D) appreciation of the dollar. Answer: B Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 32) What causes demand-side inflation? What causes supply-side inflation? Answer: Demand-side inflation is caused by an increase in aggregate demand while long-run aggregate supply is constant. Supply-side inflation is caused by a reduction in short-run aggregate supply. Diff: 3 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 85 Copyright © 2021 Pearson Education, Inc.

33) What are three causes of supply-side inflation? Answer: Shifting the LRAS to the left can be caused by any of the following factors: a reduction in the labor force, a reduction in the labor force participation rate, higher marginal taxes on businesses, and government programs which act as incentives for unemployed workers to not go back to work. Diff: 2 Topic: 10.4 Causes of Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 11 Classical and Keynesian Macro Analyses 11.1 The Classical Model 1) Who among the following was a classical economist? A) Adam Smith B) Jean-Baptiste Say C) David Ricardo D) all of these Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 2) All of the following were classical economists EXCEPT A) Adam Smith. B) Jean-Baptiste Say C) David Ricardo. D) Milton Friedman. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 3) Which of the following is NOT an assumption of the classical model? A) Wages and prices are fixed. B) People are motivated by the own self-interest. C) Pure competition exists. D) Buyers react to changes in relative prices. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

4) The idea that supply creates its own demand is known as A) the law of diminishing returns. B) Murphy's law. C) Keynes' law. D) Say's law. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 5) In the classical model, an increase in aggregate demand will cause A) an increase in actual output, or Gross Domestic Product (GDP). B) a decrease in actual output, or Gross Domestic Product (GDP). C) an increase in price level. D) a decrease in price level. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 6) Classical economists assumed that A) prices were flexible. B) individuals did not suffer from money illusion. C) wages were flexible. D) all of these Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 7) Which of the following is NOT a major assumption of the classical model? A) People are motivated by self-interest. B) People can be fooled by money illusion. C) Prices are flexible. D) Wages are flexible. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

8) The first systematic attempt to explain the determinants of the price level and national levels of income, employment, consumption and real Gross Domestic Product (GDP) was made by ________ economists. A) Keynesian B) supply-side C) monetarist D) classical Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 9) Classical economists wrote from the 1770s to the A) 1850s. B) 1890s. C) 1930s. D) 1960s. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 10) "Supply creates its own demand" is known as A) Smith's law. B) Say's law. C) the circular flow. D) the Ricardian dilemma. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 11) Say's law says that A) consumption is greater than supply. B) desired expenditures always equal actual expenditures. C) people produce the goods they consume. D) people consume the goods they produce. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

12) Say's law argues that I. overproduction is typical in a market economy. II. supply creates its own demand. A) I only B) II only C) Both I and II D) Neither I nor II Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 13) Say's law states that A) supply creates its own demand. B) supply and demand are never equal. C) demand may be greater than supply. D) supply will usually be greater than demand. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 14) The classical model uses the assumption that A) all wages and prices are flexible. B) monopoly is widespread in the economy. C) interest rates are not flexible. D) economic markets are fragile and have no tendency to move towards an equilibrium. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 15) According to the classical model, the income generated by production is A) enough to meet the needs of everyone in society. B) enough to purchase all the goods and services produced. C) fully spent on savings. D) always insufficient to purchase all the goods and services produced. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

16) The implication of Say's law is that A) Gross Domestic Product is the same whether we use the expenditure approach or the income approach. B) a barter economy is the most efficient economy. C) increased consumption today leads to increased production tomorrow. D) overproduction in a market economy is not possible. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 17) All the following are assumptions of the classical model EXCEPT A) pure competition exists. B) buyers and sellers react to nominal money prices rather than to relative prices. C) people are motivated by self-interest. D) wages and prices are flexible. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18) Say's law explains A) how long-term real Gross Domestic Product (GDP) stability is achieved in the classical model. B) how long-run real Gross Domestic Product (GDP) stability is achieved in the Keynesian model. C) how the economy can go into recession. D) why economies experience business cycles. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 19) If a consumer buys less gasoline because gas prices decreased by 10 percent, even though all other prices have also decreased by 10 percent, then A) the consumer is paying too close attention to changes in relative prices. B) wages and prices are too flexible. C) the consumer has been fooled by money illusion. D) inflation is not a problem in the economy. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Application of knowledge 5 Copyright © 2021 Pearson Education, Inc.

20) Which of the following is an example of money illusion? A) An individual is willing to work more hours when the nominal wage rises by 10 percent and the overall price level rises by 5 percent. B) An individual is willing to work more hours when the nominal wage rises by 10 percent and the overall price level rises by 20 percent. C) An individual will neither increase nor decrease the number of hours she is willing to work when the nominal wage rises by 10 percent and the overall price level rises by 10 percent. D) none of these Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 21) According to the circular flow of income and output, saving causes A) total output to fall. B) consumption expenditures and total output to fall. C) consumption expenditures to fall short of total output. D) investment spending to fall. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 22) One key assumption of the classical model is A) government spending plays a major role. B) money illusion cannot fool workers. C) wages are sticky. D) prices are sticky. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 23) Classical economists tend to A) see unemployment as a persistent economic problem. B) believe in Keynesian economics. C) reject the equality of savings and investment. D) support Say's law. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

24) In the classical model, an increase in the unemployment rate A) will persist when the reduction in output is caused by a reduction in aggregate demand. B) will result in an increase in the price level if the reduction in output is caused by a change in aggregate demand. C) will likely be temporary. D) is a signal of demand-pull inflation. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 25) According to classical economists, A) Say's law is not valid. B) unemployment will not be a serious problem in a market economy. C) wage levels are always "sticky." D) demand stimulus is needed to produce full employment. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 26) In the classical model, aggregate demand and aggregate supply will A) not exist. B) intersect at less than full employment. C) intersect at the point of full employment. D) not intersect. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 27) An individual who is suffering from money illusion is more concerned with A) relative prices than with nominal prices. B) relative prices than with real prices. C) nominal prices than with relative prices. D) real prices than with nominal prices. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

28) An individual who suffers from money illusion will A) feel that the same percentage increase in prices and income improves his economic position. B) concentrate on relative prices. C) never be fooled by the impact of price changes on the purchasing power of income. D) only be concerned about the prices of a few goods. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 29) Suppose Moni thinks a 100 percent increase in her hourly wage is an incentive to work more hours while the price level also increases by 100 percent. Moni is said to be suffering from A) money illusion. B) rationality. C) irrationality. D) the effects of competition. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 30) The classical model assumes that A) imperfect competition predominates in most markets. B) people have money illusion. C) wages and prices are flexible. D) wages are flexible but prices are not. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 31) All of the following are assumptions of the classical model EXCEPT A) inflexible wages. B) absence of money illusion. C) pure competition. D) self-interest of economic actors. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

32) One tenet of classical economics is that A) the role of the government should be limited, since the market will always be self-correcting. B) the government should intervene whenever necessary to avoid any unemployment. C) wages and prices are "sticky downward." D) the government should set a minimum wage slightly above the natural market equilibrium rate. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 33) Which of the following statements is correct? I. If other factors are held constant, the level of employment in the economy determines real Gross Domestic Product (GDP). II. According to classical economists, only voluntary unemployment exists in the long run. A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 34) Which of the following statements about the classical model of the economy is FALSE? A) Savings and investment will always be equal. B) Wages and prices are flexible. C) The economy will always move toward, or be at, full employment. D) Individuals pursue the public interest, not their own self-interest. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

35) If you feel you are better off because you receive a 5 percent raise even when the price level also increases by 5 percent, then you are a victim of the A) real income effect. B) money income effect. C) money illusion. D) purchasing power effect. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Application of knowledge 36) Which of the following is NOT an assumption of the classical model? A) Wages and prices are flexible. B) People are motivated by self-interest. C) Money illusion exists. D) Pure competition exists. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 37) A classical model of the economy predicts A) full employment in the long run. B) a negative unemployment rate whenever the economy is in equilibrium. C) the same unemployment rates as the Keynesian model. D) cyclical changes in the unemployment rate. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 38) A key assumption in the classical model is A) sticky wages. B) pure competition. C) sticky prices. D) the government's ability to stabilize the economy. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

39) According to the classical model, more saving leads to more investment because A) the people who save are the same people who invest. B) the interest rate adjusts to keep investment equal to saving. C) saving and investment are two sides of the same activity. D) the interest rate is set by the federal government. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 40) At higher rates of interest A) households save less and businesses invest more. B) households save less and businesses invest less. C) households save more and businesses invest less. D) households save more and businesses invest more. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 41) The equilibrating force in the credit market in the classical model is A) the interest rate. B) the price level. C) full employment. D) fiscal policy. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 42) Classical economists argued that A) there would always be an excess of saving over investment. B) workers had money illusion. C) excess savings would create unemployment. D) a flexible interest rate would make saving equal to investment. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

43) According to classical economists, a decrease in the rate of interest will A) increase unemployment. B) increase consumer saving. C) increase investment. D) increase the inflation rate. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 44) Individuals will increase their saving as A) the interest rate falls. B) business investment falls. C) the rate of inflation increases. D) the interest rate increases. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 45) In the classical model, desired saving A) exceeds investment. B) is inversely related to real income. C) is equal to desired investment. D) is less than desired investment. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 46) The classical economists argued that planned saving and planned investment will always be equal because of changes in A) the level of real disposable income. B) the interest rate. C) the price level. D) wages. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

47) According to classical theory, desired saving always equals investment due to changes in A) prices. B) wages. C) the interest rate. D) taxes. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 48) In economics, investment is defined as A) the spending by businesses on capital goods and inventories. B) the spending by households on human capital and durable goods. C) disposable income minus consumption. D) disposable income plus consumption. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 49) With respect to unemployment, the classical model states that A) unemployment of any kind cannot exist. B) only voluntary unemployment exists. C) unemployment fluctuates with the interest rate. D) involuntary unemployment will always exceed voluntary unemployment. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 50) According to classical theory, full employment in the labor market occurs A) whenever aggregate demand is less than aggregate supply. B) at a wage rate at which quantity demanded equals quantity supplied. C) only when the economy has just experienced a demand shock. D) only when actual expenditures are greater than desired expenditures. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

51) In the classical model, what occurs if a wage of $20/hour results in unemployed workers? A) The workers will go on strike to demand that more jobs be created. B) Producers will quickly create more jobs and hire the unemployed workers, so unemployment is short-lived. C) The wage rate will drop, more workers will be hired, and the unemployment rate falls. D) The government will step in and order firms to hire more workers. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 52) According to classical theory, total employment and real Gross Domestic Product (GDP) are A) unrelated. B) positively related. C) inversely related. D) negatively related. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 53) In the classical model, the aggregate supply curve is A) upward sloping. B) downward sloping. C) horizontal. D) vertical. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 54) In the classical model, real Gross Domestic Product (GDP) per year is A) due to supply conditions plus the extent of government intervention in the economy. B) determined by supply and demand conditions together. C) supply determined. D) demand determined. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

55) Suppose an economy originally in long-run equilibrium experiences a decrease in aggregate demand. According to the classical model A) real Gross Domestic Product (GDP) will not change, but the price level will fall. B) real Gross Domestic Product (GDP) will fall, and then the price level will fall also. C) the price level will not change, but real Gross Domestic Product (GDP) will fall. D) real Gross Domestic Product (GDP) will fall, wages will fall, but the prices of goods and services will stay the same. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 56) In the classical model, a shift to the right in aggregate demand would result in A) a permanent increase in unemployment. B) a permanent increase in real incomes. C) an increase in the price level. D) a permanent shift past full employment. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 57) According to the classical theory, an inward shift in aggregate demand would reduce A) real Gross Domestic Product (GDP) and the price level. B) the price level but have no effect on real Gross Domestic Product (GDP). C) real income but have no impact on the price Gross Domestic Product (GDP). D) the price level but increase real Gross Domestic Product (GDP). Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 58) According to classical theory, a shift in aggregate demand will affect A) the price level only. B) real Gross Domestic Product (GDP) only. C) the level of employment only. D) both real Gross Domestic Product (GDP) and the level of employment. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

59) According to the classical model, an increase in aggregate demand would A) lead the economy to recession. B) lead the economy to a deflationary cycle. C) cause an adjustment to a higher price level. D) raise real Gross Domestic Product (GDP) but leave the price level unchanged. Answer: C Diff: 3 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 60) In the classical model, the aggregate supply curve is A) upward sloping in the short run but vertical in the long run. B) always vertical. C) the same as the aggregate supply curve in the Keynesian model. D) flat at low levels of output and then eventually slopes upward as output increases. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 61) According to the classical theory, the aggregate supply curve is A) downward sloping. B) horizontal. C) upward sloping. D) vertical. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 62) According to classical theory, any changes in aggregate demand will A) lead to changes in the price level. B) lead to changes in real Gross Domestic Product (GDP), but not in the price level. C) lead to changes in both real Gross Domestic Product (GDP) and the price level. D) have no affect on prices or real Gross Domestic Product (GDP). Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

63) According to Say's law, A) desired expenditures are always less than actual production. B) desired production are always more than actual production. C) desired expenditures are always equal to actual expenditures. D) desired expenditures cannot be compared with actual expenditures. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 64) Say's law implies that A) consumers' willingness to spend is unrelated to the production of goods and services. B) producing goods and services generates the means and the willingness to purchase other goods and services. C) prices and wages are sticky upwards. D) wages and prices are inflexible. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 65) In a classical model. A) equilibrium real GDP is supply determined. B) equilibrium real GDP is determined by the government. C) equilibrium real GDP is determined by both aggregate supply and aggregate demand. D) equilibrium real GDP is neither determined by aggregate supply nor by aggregate demand. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 66) The condition of fully flexible wages and prices was assumed by A) the classical economists. B) the Keynesian economists. C) modern economists. D) no economists. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

67) The approach to understanding the determination of real GDP and the price level that emphasizes flexible wages and prices and competitive markets is A) the classical model. B) the Keynesian model. C) Adam Smith's Law. D) Murphy's Law. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 68) The classical economists assumed that A) monopoly was widespread in the economy. B) government intervention in the economic system was necessary and helpful. C) wages and prices were sticky in going downward. D) wages and prices were flexible. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 69) According to the classical economists, an economy producing $10 million in goods and services A) may be producing too much since the needs of people may not be this great. B) simultaneously generates the income necessary to purchase $10 million in goods and services. C) is supplying $10 million in goods and services, but could be demanding more or less than $10 million in goods and services for a very long period of time. D) could experience a permanent surplus if no one has estimated the demand for goods and services in the economy. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 70) According to the classical economists, actual real GDP A) always equals actual aggregate income. B) sometimes equals actual aggregate income. C) never equals actual aggregate income. D) is not related to aggregate income. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18 Copyright © 2021 Pearson Education, Inc.

71) "Supply creates its own demand" is known as A) Keynes' Rule. B) Murphy's law C) Smith's law. D) Say's law. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 72) The concept that producing goods and services generates the means and the willingness to purchase other goods and services is A) the Keynesian approach. B) money illusion. C) Say's law. D) secular deflation. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 73) Say's law states that A) desired expenditures will equal actual expenditures. B) people produce only the goods they want. C) demand is always less than supply. D) overproduction is never possible because of limited resources. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 74) Which of the following statements is NOT true about Say's law? A) Desired expenditures will equal actual expenditures. B) Surpluses will be eliminated by falling prices and shortages will be eliminated by increasing prices. C) People produce more goods than they want for their own use only if they seek to trade them for other goods. D) Markets would be regularly hit by severe shortages and surpluses. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

75) Say's law implies that A) surpluses never occur. B) surpluses or shortages are possible, but only for a short time. C) shortages is a persistent phenomenon. D) shortages never occur. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 76) Which of the following is NOT true according to Say's law? A) Supply creates its own demand. B) No overproduction is possible in a market economy in the long run. C) Desired expenditures will always be higher than actual expenditures. D) Producing goods and services generates the means and the willingness to purchase other goods and services. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 77) An assumption of the classical model is that A) money illusion is widespread. B) people make decisions based on nominal prices rather than real prices. C) prices are flexible while wages are inflexible. D) people are motivated by self-interest. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 78) Which of the following is NOT an assumption of the classical model? A) Wages and prices are flexible. B) Inflation will lead to money illusion. C) People are motivated by self-interest. D) Pure competition exists. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

79) Which of the following is NOT an assumption of the classical model? A) Buyers and sellers react to changes in relative prices. B) Households want to maximize economic well-being. C) No single buyer or seller of a commodity can affect its price. D) Wages and prices will move freely in the upward direction but not the downward direction. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 80) Given the assumptions of the classical model, A) the economy will often experience recessions and expansions. B) expansion will be the normal condition, but recessions will often be severe and require government intervention. C) the macroeconomy is erratic, and problems will often be increased over time. D) the market is a self-correcting mechanism. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 81) Jacob buys less soda when the price of soda rises 10 percent, while the prices of all other goods also rise 10 percent. Jacob is A) suffering from money illusion. B) worrying too much about a coming recession. C) behaving in accordance with classical economic theory. D) paying too much attention to changes in relative prices. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Application of knowledge 82) Joe's increase in wages has been identical to the increase in the price level. Joe thinks that he is better off and has increased his expenditures. Joe's behavior is consistent with A) Say's law. B) the classical model. C) a vertical aggregate supply curve. D) money illusion. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Application of knowledge 21 Copyright © 2021 Pearson Education, Inc.

83) Money illusion A) is a basic condition that all classical economists assume people have. B) is when people think they are better off when their income increases even though prices have increased by the same amount. C) is when people are motivated by self-interest. D) could not exist if the economy did not have competitive markets. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 84) Saving represents A) a source of funds for business investment. B) a normal part of the circular flow of income and output. C) an injection to the circular flow of income and output. D) a counter-example to Say's law that the classical economists never considered. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 85) Leakages in the circular flow model are A) caused by people not acting rational. B) possible when unemployment exists. C) reflected in the vertical long-run aggregate supply curve. D) caused by people saving instead of spending. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 86) In an economy with no government and no international trade, consumption expenditures will be less than the total value of goods and services when A) investment is zero. B) saving is zero. C) people save some of their income. D) people barter rather than use money in making exchanges. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

87) Saving is NOT a problem in the classical model because A) the classical economists assume that saving was beneficial to people for retirement. B) saving would be spent by consumers eventually. C) interest rates are flexible, and savings were channeled into investment. D) savers and investors are the same people. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 88) Which of the following statements is TRUE? A) There is a direct relationship between investment and the interest rate. B) There is an inverse relationship between investment and the interest rate. C) There is no relationship between investment and the interest rate. D) Investment is always less than savings. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 89) At higher rates of interest A) households save less because it is more expensive to save. B) households save more because they get a greater return on their savings. C) businesses demand more investment because future profitability is likely to be greater. D) businesses demand more investment because there are more funds available to invest. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 90) Regarding unemployment, the classical model implies that A) unemployment always exists. B) unemployment cannot exist. C) voluntary unemployment is zero, but involuntary unemployment often is fairly high. D) only voluntary unemployment exists. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

91) In the classical model, A) unemployment will never exist since workers will be willing to accept lower wages and will then be able to find work. B) unemployment will never exist because employers will be willing to pay the wage rate demanded by the workers. C) wages will go up but never go down. D) full employment will never be reached. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 92) Higher unemployment tends to be associated with A) the classical model. B) higher real GDP. C) higher nominal GDP. D) lower real GDP. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 93) In the classical model, high unemployment due to a change in aggregate demand A) can persist for an indefinite period of time. B) will return to its normal level quickly as wages adjust. C) will persist if due to a supply shock but not if due to a demand shock. D) never exists because unemployment can never deviate from its normal level. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 94) The aggregate supply curve in the classical model is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

95) Which of the following statements is TRUE about the long-run and short-run aggregate supply curve in the classical model? A) The long-run aggregate supply curve is vertical, and the short-run curve is horizontal. B) The long-run aggregate supply curve is not defined, and the short run curve is vertical. C) The long-run and short-run curves start out horizontal and eventually become vertical. D) The long-run curve is vertical, and there is no short-run curve since all adjustments occur quickly. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 96) The classical model makes little distinction between the long run and short run because A) the model has not been fully developed yet. B) the classical economists knew that we are always operating in the short run. C) current changes influence the long run, so it is not possible to plan for the future. D) wages and prices adjust so fast that the economy is quickly moving towards the long run. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 97) In the classical model, the aggregate supply curve A) is horizontal. B) is positively sloped. C) is consistent with the natural rate of unemployment. D) is not related to the employment rate. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 98) In the classical model, an increase in aggregate demand will lead to an increase in wage rates while a decrease in aggregate demand will A) leave wages unchanged since workers will not take a cut in pay. B) decrease wages. C) increase wages since business will be desperate for labor. D) change the price of capital. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 25 Copyright © 2021 Pearson Education, Inc.

99) Which of the following is NOT an assumption of the classical model? A) pure competition B) Wages and prices are flexible. C) People are motivated by self-interest. D) wage rigidity Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 100) In the classical model, a change in aggregate demand A) causes a change in long-run real GDP but not in the price level. B) causes a change in the price level but not in the long-run real GDP. C) causes changes in both the long-run real GDP and in the price level. D) has no effect on either real GDP or the price level. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 101) An economy in long-run equilibrium experiences an increase in aggregate demand. According to the classical model, A) the price level will rise first, then real GDP will increase. B) the price level and real GDP will increase at the same time. C) the price level will increase, but real GDP will not change. D) the price level will increase, but real GDP will decrease. Answer: C Diff: 3 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 102) In the classical model, A) the level of real GDP per year does not depend on the level of aggregate demand. B) the level of GDP is demand determined. C) changes in aggregate supply affect the price level, not real GDP. D) the level of GDP determines prices independent of demand. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

103) In the classical model, A) a decrease in aggregate demand will lead to a decrease in the price level and a decrease in real GDP. B) changes in aggregate supply leave real GDP unchanged. C) a decrease in aggregate demand will lead to an increase in the price level and a decrease in real GDP. D) changes in aggregate demand affect only the price level, not real GDP. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 104) Which of the following is NOT a key assumption of the classical model? A) There is a single monopoly seller in many markets for goods and services. B) People cannot be fooled by money illusion. C) People are motivated by self-interest. D) Wages and prices are flexible. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 105) Say's law implies that A) wages and prices are not flexible. B) people supply goods and services to the market because they want to consume other goods and services. C) government regulation is needed to prevent shortages from becoming a problem. D) government regulation is needed to prevent surpluses from becoming a problem. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 106) In the classical model, the interest rate will adjust to equate A) consumption spending with real GDP. B) saving with investment. C) the economic growth rate with the growth rate of import spending. D) export spending with import spending. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

107) Why is there NO persistent unemployment in the classical model? A) The wage level adjusts to eliminate unemployment. B) The interest rate adjusts to eliminate unemployment. C) The rate of economic growth is always high enough to allow those who want to work at current wages to find jobs. D) Unionization creates job security for workers. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 108) Which of the following is NOT an assumption of the classical system? A) Pure competition exists. B) People are motivated by self interest. C) Wages and prices are inflexible. D) There is no money illusion. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 109) In the classical model, changes in interest rates will always ensure that A) consumption equals production. B) saving equals investment. C) consumption equals investment. D) consumption equals income. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 110) The concept of Say's law can be summed up by the phrase, A) "Supply creates its own demand." B) "Demand creates its own supply." C) "Supply and demand are equivalent concepts." D) "Supply and demand are irrelevant concepts." Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

111) Full employment in the classical model is maintained by A) flexible interest rates. B) flexible wage rates. C) flexible prices. D) flexible income. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 112) In the classical model, the aggregate supply curve is A) a horizontal line. B) an upward-sloping line. C) a vertical line. D) a combination of horizontal, upward-sloping, and vertical lines. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 113) In the classical model, a rightward shift in the aggregate demand curve will, in the long run, A) increase real GDP and the price level. B) increase real GDP and will not change the price level. C) decrease real GDP and will not change the price level. D) not change real GDP and will increase the price level. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 114) Why is wage and price flexibility an important assumption of the classical model? A) Flexible wages and prices guarantee that there will be no scarcity. B) Flexible wages and prices allow business firms to fool their workers through the money illusion. C) Flexible wages and prices allow business firms to fool their customers through the money illusion. D) Flexible wages and prices allow markets to reach equilibrium. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

115) Which one of the following statements is NOT true? A) The classical model assumes that people suffer from money illusion. B) The classical model assumes that people are motivated by self-interest. C) The classical model assumes that pure competition exists. D) The classical model assumes that no single seller of a commodity can affect its price. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 116) What is TRUE when the credit market is in equilibrium? A) Desired saving equals desired investment. B) Desired employment equals the number of jobs available. C) Desired consumption spending equals the total of saving plus investment. D) The legal minimum wage equals the actual wage. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 117) What is TRUE of the aggregate supply curve in the classical model? A) The aggregate supply curve is downward sloping. B) The aggregate supply curve is horizontal. C) The aggregate supply curve is vertical. D) The aggregate supply curve is not determined by the level of employment. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 118) Long-run aggregate supply curve in the classical model A) is the level of real GDP corresponding to 100 percent labor force participation. B) is the level of real GDP corresponding to the natural rate of unemployment. C) is a downward-sloping line. D) is determined by the capital stock of the economy, not the labor force. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

119) In the classical model, what is the result of an increase in aggregate demand? A) Real GDP increases, and the price level remains constant. B) Real GDP decreases, and the price level remains constant. C) The price level increases, and real GDP remains constant. D) The price level decreases, and real GDP remains constant. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 120) Which one of the following is TRUE? A) The intersection of aggregate demand and aggregate supply identifies an equilibrium interest rate and an equilibrium wage level. B) The intersection of aggregate demand and aggregate supply identifies an equilibrium interest rate and an equilibrium level of exports. C) The intersection of aggregate demand and aggregate supply identifies an equilibrium level of employment and an equilibrium level of investment. D) The intersection of aggregate demand and aggregate supply identifies an equilibrium price level and an equilibrium level of real GDP. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 121) In the classical model, how do shifts in aggregate demand affect real GDP? A) Real GDP will remain unchanged. B) Increases in aggregate demand increase real GDP. C) Increases in aggregate demand decrease real GDP. D) Decreases in aggregate demand increase real GDP. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 122) Which of the following is NOT an assumption of the classical model? A) Government intervention is necessary for economic stability. B) No one buyer or seller of a good or service can affect the price of the good or service. C) People are motivated by self-interest. D) People are not fooled by the money illusion. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 31 Copyright © 2021 Pearson Education, Inc.

123) According to the classical model, desired saving is A) a function of real GDP. B) equal to desired investment. C) identical to the demand for saving at each level of real GDP. D) affected by the money illusion at low income levels. Answer: B Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 124) According to the classical model, investment A) is a function of real GDP. B) is a function of the nominal GDP. C) is inversely related to the interest rate. D) is influenced by the money illusion at low income levels. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 125) The classical model indicates that at the equilibrium interest rate, saving is A) equal to investment. B) greater than investment. C) unnecessary for investment. D) less than investment. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 126) If your income and the price level both double, and you think you now have more real income, you are suffering from A) diminishing marginal expectations. B) leakages. C) injections. D) money illusion. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

127) Long-run unemployment in the classical model is considered to be impossible because A) the government will intervene to aid the unemployed. B) job placement and training programs are rampant in the United States. C) flexible prices and wages keep workers fully employed. D) the labor supply is horizontal. Answer: C Diff: 3 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 128) The idea that "supply creates its own demand" is attributed to which of the following economists? A) Adam Smith B) David Ricardo C) J. B. Say D) John Maynard Keynes Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 129) Which of the following is NOT an assumption of the classical model? A) Absence of money illusion B) Wages and prices are flexible. C) Government spending is necessary to achieve economic stability. D) People are motivated by self-interest. Answer: C Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 130) According to Say's law, A) supply creates its own demand. B) demand creates supply. C) changes in supply create supply-side inflation. D) changes in demand create demand-side inflation. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

131) According to the classical model, A) long-term unemployment is unavoidable. B) unemployment is a temporary phenomenon. C) unemployment only exists during periods of war. D) the natural rate of unemployment is zero. Answer: B Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 132) According to the classical model, prices and wages A) are flexible. B) must be set by government. C) move downward easily, but are "sticky" upward. D) move upward easily, but are "sticky" downward. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 133) According to classical economists, the credit market reaches an equilibrium when A) planned investment equals government expenditures. B) desired investment equals planned investment. C) desired investment equals planned changes in aggregate supply. D) desired investment equals desired saving. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 134) According to classical economists, when aggregate demand decreases A) unemployment is reduced, the price level increases, and equilibrium real GDP is reached. B) unemployment is reduced, the price level decreases, and equilibrium real GDP is reached. C) unemployment temporarily increases, the price level increases, and equilibrium real GDP is reached. D) unemployment temporarily increases, the price level decreases, and equilibrium real GDP is reached. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

135) A congressman states, "If a government attempts to increase employment through increased government spending, all we will end up with is a higher price level." This congressman assumes that the A) aggregate demand curve is a horizontal line. B) aggregate demand curve is a vertical line. C) aggregate supply curve is a horizontal line. D) aggregate supply curve is a vertical line. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 136) Q: How many economists does it take to screw in a light bulb? A: None. If the light bulb really needed changing, market forces would have already caused it to happen. This joke represents the view of A) classical economists. B) Keynesian economists. C) economists who conclude that money illusion is widespread. D) economists who conclude that wages and prices are inflexible. Answer: A Diff: 3 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 137) Classical economists suggest that unemployment is a short-lived phenomenon because A) wages adjust quickly to equilibrate quantity of labor demanded with quantity of labor supplied. B) wages remain unchanged when the quantity of labor demanded exceeds the quantity of labor supplied. C) wages remain unchanged when the quantity of labor supplied exceeds the quantity of labor demanded. D) wages tend to rise slowly when the quantity of labor demanded equals the quantity of labor supplied. Answer: A Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

138) Which statement best characterizes the classical economists' view of saving and investment? A) Saving equals investment. B) Saving exceeds investment. C) Saving is less than investment. D) Saving and investment are not related to one another. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 139) In the classical view, if desired saving exceeds desired investment, A) government spending must fall. B) government spending must rise. C) the interest rate would decline. D) the interest rate would increase. Answer: C Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 140) In the classical view, flexible wage rates would assure A) low inflation. B) high rates of unemployment. C) high secular inflation rates. D) full employment. Answer: D Diff: 1 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 141) In the classical model, what happens to the level of real GDP if aggregate demand increases? A) Real GDP increases. B) Real GDP decreases. C) Real GDP would increase at first, then decrease. D) Real GDP would remain the same, at equilibrium. Answer: D Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

142) "Supply creates its own demand" implies that A) the very act of supplying a particular level of goods and services necessarily equals the level of goods and services demanded. B) the very act of demanding a particular level of goods and services necessarily equals the level of goods and services supplied. C) the government will buy up any surplus of goods and services in a country to avoid economic problems. D) the very act of supplying a particular level of goods and services will not necessarily equal the level of goods and services demanded. Answer: A Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 143) What is Say's law and what does it mean? Answer: Say's law is: Supply creates its own demand. It means that a general glut or overproduction is not possible. The very process of producing specific goods is proof that other goods are desired. The income received from selling one's goods is used to purchase other goods. While some goods may have a surplus, others will have a shortage, and these would be corrected by price changes. There will not be an excess quantity supplied of all goods. Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 144) Saving is a leakage from the circular flow. Why didn't the classical economists think saving might cause consumption expenditures to fall short of total output? Answer: The classical economists believed that each dollar saved would be invested by firms so that the leakage of saving would be exactly matched by an injection of investment spending. The interest rate would adjust to ensure that saving equaled investment. Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 145) "In the classical model, the equilibrium level of real Gross Domestic Product (GDP) is completely supply-determined." Do you agree or disagree? Why? Answer: Agree. The long-run aggregate supply curve is vertical, so the equilibrium level of real Gross Domestic Product (GDP) is determined by the location of the aggregate supply curve. Shifts in aggregate demand affect only the price level. Diff: 3 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

146) Why did the classical economists think that large-scale unemployment was not possible in a market economy? Answer: The classical economists accepted Say's law, which indicated that desired expenditures will equal actual expenditures. The act of producing indicates one wants to buy other goods. A surplus or shortage in one market would soon be corrected because prices and wages were assumed to be flexible, and they assumed people could not be fooled by money illusion. They also assumed pure competition and that people were motivated by self-interest. Combining all these ideas, they concluded that full employment would be the norm. Diff: 3 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 147) "The level of employment in an economy determines its real GDP, other things held constant." Do you agree or disagree? Why? What assumptions are necessary for your conclusion based on the classical model? Answer: Agree. Production requires workers so the more workers that are employed the greater total production. This assumes that workers who are employed actually work and are productive. Diff: 2 Topic: 11.1 The Classical Model Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve 1) According to the Keynesian model, the short-run aggregate supply (SRAS) curve is horizontal when A) real Gross Domestic Product (GDP) is at full capacity but prices are not flexible. B) there are no unemployed resources and wages do not change when prices change. C) prices react to an aggregate demand shock but real Gross Domestic Product (GDP) does not. D) there are unemployed resources and prices do not fall when aggregate demand falls. Answer: D Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 2) The Keynesian model is basically A) a long-run theory. B) a short-run theory. C) a combination of long- and short-run theories. D) not a theory about the economy. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 38 Copyright © 2021 Pearson Education, Inc.

3) According to Keynes, involuntary unemployment is possible because of A) free exchanges in markets. B) long-term labor contracts. C) government interference in the market economy. D) flexible wages. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 4) A decrease in aggregate demand will cause A) prices to fall according to classical economists, and unemployment to increase according to Keynes. B) prices to fall and unemployment to increase according to both classical economists and Keynes. C) aggregate supply to fall according to classical economists, and prices to fall according to Keynes. D) aggregate supply to fall according to Keynes, and unemployment to increase according to classical economists. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 5) Involuntary unemployment A) occurs when the wage rate is below the equilibrium wage rate. B) exists when there is an excess quantity of labor supplied. C) will increase as the wage rate falls. D) exists when there is a shortage of labor. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

6) If a shift in aggregate demand only affects real Gross Domestic Product (GDP), then the shortrun aggregate supply (SRAS) curve must be A) vertical. B) upward sloping. C) horizontal. D) downward sloping. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 7) The Keynesian short-run aggregate supply (SRAS) curve is A) upward sloping. B) vertical. C) horizontal. D) downward sloping. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

8) The above figure presents the view of the economy according to A) Keynesian economics. B) classical economics. C) microanalysis. D) Ricardian economics. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

9) Refer to the above figure. Suppose the current aggregate demand is represented by AD2. If aggregate demand falls to line AD3, then A) the new equilibrium will be at j. B) the new equilibrium will be at k. C) the new equilibrium real Gross Domestic Product (GDP) will be x. D) a new price level will be established at a. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Application of knowledge 10) Keynes argued that I. Capitalism did not always lead to full employment. II. Nominal prices were more important than relative prices. A) I only B) II only C) Both I and II D) Neither I nor II Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 11) The original Keynesian economic theory states that A) the short-run aggregate supply (SRAS) curve is always vertical. B) many prices would not decline even when aggregate demand decreases. C) wages tend to fall more quickly than the overall price level. D) the economy naturally self-regulates so as to reach full employment quickly. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 12) Keynes argued that an economy could be in equilibrium when the economy was A) operating at maximum potential capacity. B) operating with some unutilized productive capacity. C) trying to operate at some output level beyond its potential capacity. D) operating either at full productive capacity or at less than full capacity. Answer: D Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 41 Copyright © 2021 Pearson Education, Inc.

13) Keynes and his followers believed that A) capitalism was one economic system that guaranteed full employment. B) wages and prices in the short run were flexible. C) the economy could not operate at any level of real Gross Domestic Product (GDP) less than full capacity. D) there was no guarantee that a capitalist economy would reach a full employment equilibrium. Answer: D Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 14) A key component of the Keynesian model is that A) prices are sticky. B) prices are flexible. C) wages are flexible. D) people are not fooled by money illusion. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 15) According to Keynes, once a system attains an economy-wide equilibrium A) there may or may not be excess productive capacity. B) planned consumption will be zero. C) planned investment will be zero. D) the economy will be at full productive capacity. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 16) The Keynesian portion of the short-run aggregate supply (SRAS) curve A) is horizontal. B) is vertical. C) slopes upward. D) slopes downward. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

17) The simple Keynesian model assumes that A) gross private domestic investment exceeds net investment by the capital consumption allowance. B) prices, especially the price of wages, are "sticky downward." C) there will never be any excess capacity in the short run. D) aggregate demand will always equal aggregate supply. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18) The Keynesian portion of the short-run aggregate supply (SRAS) curve implies A) an upward slope. B) the price level does not change. C) a downward slope. D) flexible prices and wages. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 19) The Keynesian short-run aggregate supply (SRAS) curve A) shows that real Gross Domestic Product (GDP) will increase only if the price level increases. B) assumes a full-employment level of real Gross Domestic Product (GDP). C) is horizontal. D) does not reflect any changes in nominal Gross Domestic Product (GDP). Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 20) In an economic downturn, sticky wages and prices reduce the economy's speed of adjustment because A) businesses are unable to adjust quickly to changes in aggregate demand. B) they cause deflation. C) hyperinflation will likely occur. D) union workers would likely quit and look for work elsewhere. Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

21) Keynes suggested that the short-run aggregate supply (SRAS) curve A) is vertical. B) is horizontal. C) slopes downward. D) slopes upward. Answer: B Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 22) Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product (GDP) to be "too low," then an appropriate policy action would be to A) do nothing, because the economy is self-adjusting. B) raise government spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product (GDP) with little or no inflationary consequences. C) increase taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product (GDP) with little or no inflationary consequences. D) reduce the money stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 23) The short-run aggregate supply (SRAS) curve represents the relationship between A) the price level and the real Gross Domestic Product (GDP) without full adjustment or full information. B) the price level and the real Gross Domestic Product (GDP) without full adjustment but with full information. C) the price level and the nominal Gross Domestic Product (GDP). D) the decisions of producers and the decisions of consumers. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

24) In the short run, an increase in the price level induces firms to expand production because A) prices of inputs are held constant, so the higher prices for firms' products imply that it is profitable to expand production. B) each firm must keep its production level up to the level of its rivals, and some firms will expand production as the price level increases. C) higher prices allow firms to hire more inputs by offering higher prices for inputs, which increases productivity and profits. D) they can increase profits by increasing maintenance costs. Answer: A Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 25) The relationship between the price level and the real Gross Domestic Product (GDP) without full adjustment or full information is represented by A) the long-run aggregate supply curve. B) the short-run aggregate supply curve. C) the aggregate demand curve. D) the distance between the long-run aggregate supply curve and the short-run aggregate supply curve. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 26) According to Keynes, the classical model could not explain A) a recession or depression. B) periods of rising unemployment. C) a long-term economic decline. D) periods of rising interest rates. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

27) In the simple Keynesian portion of the short-run aggregate supply curve, A) equilibrium real GDP is demand-determined. B) equilibrium real GDP is supply-determined. C) equilibrium real GDP is neither determined by aggregate supply nor by aggregate demand. D) equilibrium real GDP is determined by both aggregate supply and aggregate demand. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 28) The short-run aggregate supply curve is horizontal when A) prices are inflexible and the economy is at full employment. B) there are unemployed resources and prices do not increase when aggregate demand increases. C) there are unemployed resources and prices do not decrease when aggregate supply increases. D) there are no unemployed resources and prices do not increase when aggregate demand or supply increases. Answer: B Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

29) Refer to the above figure. The classical aggregate supply curve is represented by ________ and the simple Keynesian (short-run) aggregate supply curve is represented by ________. A) curve 2; curve 1 B) curve 2; curve 3 C) curve 3; curve 4 D) curve 2; curve 4 Answer: D Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 30) Real GDP is ________ determined in the classical model and ________ determined in the Keynesian model. A) supply; supply B) supply; demand C) demand; supply D) demand; demand Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

31) In the Keynesian model, to understand the determination of income and employment it is necessary to understand A) how aggregate supply is determined. B) how aggregate demand is determined. C) how long-run aggregate supply is determined. D) how interest rates are determined. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 32) According to Keynes, wages are inflexible because A) of the minimum wage set by government. B) of long-term contracts. C) workers do not behave in their own self-interest. D) workers are not rational. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 33) Which of the following is a TRUE statement? A) A decrease in aggregate demand was not possible according to the classical economists but was possible according to Keynes. B) A decrease in aggregate demand has no short-run effects according to the classical economists but had significant effects according to Keynes. C) Classical economists believed real GDP adjusted more than prices when aggregate demand fell, while Keynes argued that prices adjusted more than output. D) Classical economists believed price adjusted more than output when aggregate demand fell, while Keynes argued real GDP adjusted more than prices. Answer: D Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

34) The simplified Keynesian model A) holds the price level constant. B) holds real GDP constant. C) assumes investment and saving are always equal. D) assumes unemployment is unrelated to real GDP. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 35) According to Keynes A) the short-run aggregate supply curve is vertical. B) nominal wages are sticky. C) money illusion does not exist. D) markets are perfectly competitive. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 36) The approach to understanding the determination of real GDP and the price level that emphasizes incomplete adjustment in the prices of many goods is A) the classical model. B) the Keynesian model. C) Say's law. D) the aggregate demand model. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 37) To explain the existence of excess capacity, Keynes argued that A) prices and wages are flexible, and eventually markets would go back to equilibrium. B) the long-run average cost curve should not occur at the full employment level. C) the aggregate demand curve can be manipulated by advertising. D) prices and wages are inflexible in the downward direction. Answer: D Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

38) Which of the following is a basic difference between the classical model and the Keynesian model in which the Keynesian short-run aggregate supply curve exists? A) The classical model assumes that the long run aggregate supply curve is vertical, while the Keynesian model assumes the long run aggregate supply curve is horizontal. B) The classical model assumes that the position of the long run aggregate supply curve is determined by full employment, while the Keynesian model assumes that the long run aggregate supply curve will be to the left of full employment. C) The classical model assumes that the level of real GDP is supply determined, while the Keynesian model assumes that it is demand determined. D) The classical model uses real GDP, while the Keynesian model uses nominal GDP. Answer: C Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 39) The Keynesian short-run aggregate supply curve is horizontal because A) it represents the full employment level of real GDP. B) it reflects the absence of money illusion. C) it reflects wage and price inflexibility. D) it represents Say's law. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 40) In the Keynesian model in which the Keynesian short-run aggregate supply curve exists, A) the short-run aggregate supply curve determines real GDP. B) the aggregate demand curve determines the price level. C) unemployment cannot persist for long periods of time. D) aggregate demand determines real GDP per year. Answer: D Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

41) Q: How many economists does it take to change a light bulb? A: All. Because then you will generate employment, more consumption, moving the aggregate demand curve to the right. This joke represents the view of A) classical economists. B) Keynesian economists. C) economists who contend that money illusion never occurs. D) economists who conclude that wages and prices are very flexible. Answer: B Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 42) Which one of the following statements is TRUE? A) The classical model cannot explain periods of prolonged unemployment. B) The Keynesian model cannot explain periods of prolonged unemployment. C) The Keynesian model assumes complete flexibility of wages and prices. D) The Keynesian model shows that the level of real GDP is supply-determined. Answer: A Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 43) Keynes argued that because of sticky prices and wages A) the short-run aggregate supply curve could be horizontal. B) the short-run aggregate supply curve is probably vertical. C) the long-run aggregate supply curve slopes downward. D) the aggregate demand curve is vertical. Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 44) In the Keynesian model which includes the Keynesian short-run aggregate supply curve, A) an increase in aggregate demand would causes the price level to rise, but does not change the level of real GDP. B) an increase in aggregate demand causes real GDP to rise without changing the price level. C) an increase in aggregate demand changes neither the price level nor the level of real GDP. D) an increase in aggregate demand causes real GDP and the price level to decrease. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 51 Copyright © 2021 Pearson Education, Inc.

45) If the economy is operating at a point at which short-run aggregate supply is horizontal, then A) real GDP cannot expand. B) real GDP cannot contract. C) increases in aggregate demand do not increase the price level. D) then increases in aggregate demand do not increase real GDP. Answer: C Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 46) Why is persistent unemployment a possibility in the Keynesian model but NOT in the classical model? A) The Keynesian model assumes that people work for motives other than those of earning an income for themselves and supporting a family. B) The Keynesian model assumes that nominal wages are inflexible downward. C) The Keynesian model assumes that the level of real GDP is inflexible. D) The Keynesian model assumes that workers can lose their jobs to foreign competition during economic downturns. Answer: B Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 47) The Keynesian short-run aggregate supply curve A) is horizontal. B) is vertical. C) is downward sloping. D) is upward sloping. Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

48) Which one of the following statements is TRUE? A) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that domestic workers are harmed by imports. B) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that there is no correlation between the level of real GDP and the employment level. C) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that increases in aggregate demand can boost output in the short term. D) The shape of the Keynesian short-run aggregate supply curve is based on the conclusion that increases in aggregate demand will increase the price level, but will leave real GDP unaffected in the short term. Answer: C Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 49) Which one of the following statements is TRUE? A) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the classical model. B) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the Keynesian model. C) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with the idea that increases in aggregate demand will increase the price level but will leave real GDP unchanged. D) The actual behavior of prices and real GDP during the decade of the 1930s is consistent with a vertical short-run aggregate supply curve. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 50) The short-run aggregate supply curve is horizontal if A) resources were fully utilized. B) there are unutilized resources in the economy. C) resources are perfectly adaptable between production processes. D) there are high inflation rates. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

51) The Keynesian contention that the short-run aggregate supply curve is horizontal is based on the assumption that there are A) sticky prices. B) flexible prices. C) real prices. D) upward-sloping prices. Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 52) The short-run aggregate supply curve is a relationship between A) unemployment and real GDP. B) inflation and time. C) real GDP and price level. D) capital goods and consumer goods. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 53) The Keynesian short-run aggregate supply curve is demonstrated graphically as a(n) A) vertical line. B) horizontal line. C) upward-sloping curve. D) downward-sloping curve. Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 54) Keynesian economists argue that A) equilibrium real GDP is demand-determined. B) equilibrium real GDP is supply-determined. C) equilibrium real GDP can be reached only in a theoretical economy. D) reaching equilibrium real GDP always results in inflation. Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

55) Keynesian economists argue that A) prices and wages are flexible. B) prices and wages must be set by government. C) prices and wages are subject to downward "stickiness." D) prices and wages depend on minimum wage law. Answer: C Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 56) Keynesian economists argue that A) the natural rate of unemployment is below the actual rate. B) unemployment is a long-lasting phenomenon in the economy. C) unemployment only exists during periods of war in the economy. D) the natural rate of unemployment is zero. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 57) John Maynard Keynes developed his economic theories in the A) 1890s. B) 1900s. C) 1930s. D) 2000s. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

58) Refer to the above figure. Which of the graphs is consistent with the Keynesian short-run aggregate supply curve? A) Graph A B) Graph B C) Graph C D) Graph D Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 59) Refer to the above figure. Which of the graphs is consistent with the long-run aggregate supply curve? A) Graph A B) Graph B C) Graph C D) Graph D Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 60) The horizontal short-run aggregate supply curve A) assumes that wages and all other input prices are constant. B) shows that real GDP can be increased only when prices increase. C) assumes that there is full employment in the economy. D) assumes that opportunity cost is constant. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

61) According to Keynes, the "stickiness" of wage rates could best be explained by A) minimum wage laws. B) unions and long-term labor contracts. C) short-term labor contracts. D) government interference. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 62) According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand increases, A) real GDP will rise and price level will remain constant. B) real GDP will fall and price level will remain constant. C) real GDP will rise and price level will rise. D) real GDP will rise and price level will fall. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 63) According to Keynesian economics, if there are unutilized resources in the economy and aggregate demand decreases, A) real GDP will rise and price level will remain constant. B) real GDP will fall and price level will remain constant. C) real GDP will rise and price level will rise. D) real GDP will rise and price level will fall. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 64) Keynesian economists would likely argue that the classical model is which of the following? A) a long-run theory B) a short-run theory C) both a long-run and short-run theory D) a sticky price theory Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

65) Some economists believe that a positive aggregate demand shock to an economy with large amounts of excess capacity and unemployment does NOT necessarily cause an increase in prices. Economists who adhere to this belief are followers of A) classical economics. B) Say's laws of economics. C) Keynesian economics. D) supply-side economics. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 66) What is the underlying assumption of the original, simplified Keynesian model? A) The relevant range of the short-run aggregate supply curve (SRAS) is vertical. B) The relevant range of the aggregate supply curve (AS) is vertical. C) The relevant range of the short-run aggregate supply curve (SRAS) is horizontal. D) The relevant range of the long-run aggregate supply curve (LRAS) is horizontal. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 67) How does the original, simplified Keynesian model compare with modern Keynesian analysis? A) The original Keynesian model assumed price flexibility whereas the modern analysis does not. B) In both cases, the short-run aggregate supply curve (SRAS) is horizontal. C) Modern analysis shows an upward-sloping SRAS to reflect some price flexibility. The original Keynesian model's SRAS is horizontal and assumes sticky prices. D) all of these Answer: C Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

68) The Keynesian short-run aggregate supply curve in the simplified Keynesian model is unrealistic because A) a vertical curve does not make economic sense. B) prices and wages will never decrease. C) the classical model is better in explaining how the economy operates. D) some price adjustments do take place in the short run. Answer: D Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 69) The horizontal portion of the short-run aggregate supply curve in which there is excessive unemployment and unused capacity in the economy A) is Say's law. B) is the classical short-run aggregate supply curve. C) is the Keynesian short-run aggregate supply curve. D) exists when prices are flexible. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 70) The short-run aggregate supply curve in modern Keynesian analysis is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

71) The short-run aggregate supply curve is positively sloped because A) real interest rates rather than nominal rates are used. B) some price adjustments take place in the short-run. C) no price adjustments take place in the short-run. D) complete price adjustments take place in the short-run. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 72) The short-run aggregate supply curve in modern Keynesian analysis represents the relationship between A) the nominal amount of goods and services in the economy and the price level. B) the real output of goods and services in the economy and the price level when people have fully adjusted their behavior. C) the real output of goods and services in the economy and the price level when people have not fully adjusted their behavior. D) the nominal output of goods and services and the real output of goods and services. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 73) Along a short-run aggregate supply curve, which of the following is (are) held constant? A) real GDP B) aggregate demand C) input prices D) relative prices of goods and services Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

74) The full-employment rate of output can A) be surpassed in the long run only if input prices are flexible. B) not be surpassed in either the short run or the long run. C) be surpassed only when firms are not yet producing at full capacity. D) be surpassed only in the short run. Answer: D Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 75) In the short run, real GDP can increase beyond a level consistent with the long-run growth path if A) labor productivity improves. B) the price level decreases accordingly. C) we measure in nominal terms instead of real terms. D) there is an increase in marginal tax rates. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 76) Which of the following is NOT a reason why real GDP can be expanded beyond a level consistent with its long-run growth path in modern Keynesian analysis? A) In the short run, existing workers can work more hours. B) Prices and wages are flexible, allowing for needed adjustments. C) The existing capital stock can be used more intensively. D) Higher prices induce firms to hire more workers. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

77) If short-run aggregate supply is upward sloping, the assumption is that A) prices are perfectly sticky. B) prices are set by government mandate. C) prices are constant. D) prices adjust gradually. Answer: D Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 78) An upward-sloping short-run aggregate supply curve suggests that A) real GDP is determined by aggregate supply. B) prices and wages are completely inflexible. C) prices and wages are completely flexible. D) prices and wages adjust in part to short-run demand changes. Answer: D Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 79) In the modern Keynesian model, over much of its range the short-run aggregate supply (SRAS) curve is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

80) The short-run aggregate supply curve in modern Keynesian analysis A) is a horizontal line the same as in the Keynesian model. B) is a vertical line the same as in the classical model. C) is an upward-sloping curve. D) is a negatively sloped curve. Answer: C Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 81) There is a distinction between the long-run aggregate supply (LRAS) curve and the short-run aggregate supply (SRAS) curve. In the long run A) technology is fixed, but not in the short run. B) the price level is constant in the long run, but fluctuates in the short run. C) the aggregate supply curve is horizontal, while in the short run it is upward sloping. D) all adjustments to changes in the price level have been made, but in the short run all changes in the price level do not occur. Answer: D Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 82) If the price level kept increasing, the short-run aggregate supply (SRAS) curve would get steeper because A) all the unemployed would eventually be hired. B) there are limits to how long workers can work long hours and capital can go without proper maintenance. C) the rate at which capacity can be expanded increases indefinitely. D) the long-run aggregate supply curve is horizontal. Answer: B Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

83) In the short run, if the price level rises, then the overall economy can temporarily produce beyond its nominal capacity. One reason for this is that A) workers can be switched from counted to uncounted production. B) existing capital equipment can be used more intensively. C) wage rates rise almost simultaneously with the price level. D) the unemployment rate usually rises dramatically along with the price level. Answer: B Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 84) The long-run aggregate supply curve is vertical at $200 million, but the short-run aggregate supply curve intersects the aggregate demand curve at $220 million. From this, we know that A) the economy is operating below full capacity in the short run, and will have to adjust by hiring more workers, thus reducing unemployment. B) the price level is too high. The only way long-run equilibrium can be restored is to lower the price level. C) adjustments will have to occur so that the long-run aggregate supply equals $220 million. D) adjustments will have to occur so that the short-run aggregate supply intersects the aggregate demand curve at $200 million. Answer: D Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

85) Identify the 3 curves in the above figure. A) (1) is long-run aggregate supply, (2) is short-run aggregate supply, (3) is aggregate demand. B) (1) is aggregate demand, (2) is short-run aggregate supply, (3) is long-run aggregate supply. C) (1) is short-run aggregate supply, (2) is long-run aggregate supply, (3) is aggregate demand. D) (1) is long-run aggregate supply, (2) is aggregate demand, (3) is short-run aggregate supply. Answer: A Diff: 1 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 86) Which point or points on the above figure illustrate a short-run equilibrium? A) Point A B) Point B C) Point C D) Points A and C Answer: B Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

87) According to the above figure, what will the price level be in the new long-run equilibrium? A) 115 B) 110 C) 100 D) Less than 100 Answer: A Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Application of knowledge 88) Using a graph, analyze the Great Depression from a Keynesian perspective. What happened to unemployment? Answer: In the below figure, the equilibrium before the depression was at a price level of 100 and real GDP of $1 trillion. The depression was caused by a reduction in aggregate demand to AD1933. Because prices were not flexible, real GDP fell to $700 billion. The reduced output would be associated with a large increase in unemployment.

Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

89) What is the major difference between the classical model and the Keynesian model? Explain. Answer: The major difference is the shape of the aggregate supply curve. The classical view is that it is vertical, while the Keynesian view is that it is horizontal, or at least almost so. The differences in shape are due to differences in assumptions about the flexibility of prices. Classical economists assumed prices and wages were flexible and would quickly adjust to bring about a new full-employment equilibrium, while the Keynesian model assumes prices are not flexible. Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 90) For several years, the U.S. unemployment rate has been below the European unemployment rate. Offer a Keynesian explanation for this. Answer: The aggregate supply curve in Europe is closer to horizontal than is the case in the United States. The labor market is less flexible in Europe due to higher unemployment benefits that reduce the incentive to work, and due to higher costs to firms for hiring workers. Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 91) What shape did the short-run aggregate supply curve have during the 1930s, according to Keynes? Explain. Answer: Keynes argued the short-run aggregate supply curve was horizontal during the 1930s. There was substantial unemployment and excess capacity during the depression, so that shifts in aggregate demand would affect total output without affecting the price level. Keynes argued that prices and wages were inflexible, especially downward, and could not be relied upon to bring about a full-employment equilibrium. Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 92) "According to Keynes, the economy is essentially a self-regulating system." Do you agree or disagree? Why? Answer: Disagree. The inflexibility of prices meant that changes in aggregate demand would affect output and employment rather than the price level. Involuntary unemployment was likely when aggregate demand decreased because the wage level would not adjust to bring about a new, full-employment equilibrium. Hence, the economy is not a self-regulating system according to Keynes. Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

93) What is the shape of the modern short-run aggregate supply (SRAS) curve? Why? Answer: The short-run aggregate supply curve is initially horizontal, then upward sloping. If the price level increases in the short run, some costs for firms stay constant. The higher product price leads to higher profits, and the firms expand production. Hence, aggregate output can increase in the short run. Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 94) Compare the effects of an increase in aggregate demand when the price level is fixed versus when it can change. Answer:

The above figure shows the effects. An increase in aggregate demand from AD1 to AD2 causes real Gross Domestic Product (GDP) to increase, but the size of the increase is greater for AS1 than for AS2. When the price level can change, some of the impact of the increase in aggregate demand falls on the price level instead of output, whereas all of the impact is on output when the price level is fixed. Diff: 2 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

95) Suppose the economy in the diagram below is in long-run equilibrium. If government spending decreases and causes a movement from point A to point B in the diagram below, what are the short-run effects? Explain fully. Answer:

In the above figure, point A is the original equilibrium, with a price level of 100 and total planned expenditures on final goods and services equal to $14 trillion. A decrease in government spending causes the aggregate demand curve to shift to the left. In the short run, total planned expenditures and equilibrium real Gross Domestic Product (GDP) falls to $13.5 trillion. The price level falls to 90 and unemployment increases. Diff: 3 Topic: 11.2 Keynesian Economics and the Keynesian Short-Run Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 11.3 Shifts in the Aggregate Supply Curve 1) Economic growth due to labor force expansion or capital investments will result in I. A leftward shift of short-run aggregate supply. II. A rightward shift in long-run aggregate supply. A) I only B) II only C) Both I and II D) Neither I nor II Answer: B Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 69 Copyright © 2021 Pearson Education, Inc.

2) Which of the following will cause an increase in aggregate supply? A) an increase in aggregate demand B) an increase in the price level C) an increase in marginal tax rates D) a decrease in input prices Answer: D Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

3) Refer to the above figure. Assume that B is the current long-run aggregate supply (LRAS) curve and that E is the current short-run aggregate supply (SRAS) curve. If a new discovery of large oil fields in Florida led to an increase in the nation's productive capacities, then we could expect the LRAS curve and the SRAS curve to A) remain B and E. B) move to A and D. C) move to C and F. D) move to A and F. Answer: C Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

4) Refer to the above figure. Assume that B is the current long-run aggregate supply (LRAS) curve and E is the current short-run aggregate supply (SRAS) curve. If a 90-day embargo of oil from the Middle East to the United States were announced, and if after that 90-day period oil prices were expected to return to normal pre-embargo prices, then you would expect A) the LRAS and the SRAS to remain at B and E, respectively. B) the LRAS to remain at B, but the SRAS to shift to D. C) the LRAS to remain at B, but the SRAS to shift to F. D) the LRAS to shift to C, and the SRAS to shift to F. Answer: B Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 5) Which of the following is NOT an event that causes BOTH the short-run aggregate supply (SRAS) curve and the long-run aggregate supply (LRAS) curve to shift? A) a change in an economy's endowments of the factors of production B) technological changes C) a change in an economy's labor supply D) a temporary change in the price of a key input Answer: D Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 6) Which of the following will NOT shift the short-run aggregate supply (SRAS) curve? A) a change in the wage rate B) technological progress C) a reduction in energy prices D) a change in the consumer spending Answer: D Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

7) Which of the following causes a rightward shift of the short-run aggregate supply (SRAS) curve? A) an increase in the wage rate B) a decrease in firms' production with more inputs C) a reduction in the price of a raw material D) an increase in the overall price level Answer: C Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 8) All of the following will shift the short-run aggregate supply (SRAS) curve EXCEPT A) a change in the price level. B) a change in the price of labor. C) a change in the prices of raw materials. D) technological progress. Answer: A Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 9) As real GDP per year increases along the short-run aggregate supply (SRAS) curve, the SRAS curve A) becomes increasingly steep. B) begins to level out. C) shifts inward. D) does not change. Answer: A Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

10) Both the long-run and short-run aggregate supply curves will shift when A) the government increases defense spending. B) an event occurs which is expected to last only a short period of time. C) they are both upward sloping. D) the endowments of the factors of production change. Answer: D Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 11) Which of the following would increase aggregate supply? A) increased training and education B) a reduction in input prices C) a discovery of new raw materials D) all of these Answer: D Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 12) The discovery of new oil deposits will cause A) the long-run aggregate supply curve to shift to the right and the short-run aggregate supply curve to shift to the left. B) the long-run aggregate supply curve to shift to the right, but not the short-run aggregate supply. C) the short-run aggregate supply curve to shift to the right, but not the long-run aggregate supply curve. D) both the long-run and the short-run aggregate supply curves to shift to the right. Answer: D Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

13) A major hurricane causes production problems in Gulf Coast region of the United States. This would cause A) the short-run aggregate supply curve to shift to the left, but there would be no effect on the long-run aggregate supply curve. B) the short-run aggregate supply curve to shift to the left, and the long-run aggregate supply curve would shift to the right. C) both the short-run and the long-run aggregate supply curves to shift to the right in equal amounts. D) both the short-run and the long-run aggregate supply curves to shift to the left, but the longrun aggregate supply curve would shift more than the short-run curve. Answer: A Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 14) The short-run aggregate supply curve would shift and the long-run aggregate supply curve would remain fixed if A) there was a temporary shock to aggregate demand. B) there was a temporary shock that influenced the supply side. C) there was a permanent increase in aggregate demand along with a permanent decrease in aggregate supply. D) there was a permanent increase in aggregate demand. Answer: B Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 15) The short-run aggregate supply curve would shift and the long-run aggregate supply curve would remain fixed if A) bad weather that affects transportation for two days. B) there was an increase in immigration. C) the retirement age increased by two years. D) tough new environmental laws were passed. Answer: A Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

16) A reduction in nominal wages will cause which of the following? A) a movement along the short-run aggregate supply curve B) a shift of both the short-run and long-run aggregate supply curves C) a rightward shift in the short-run aggregate supply curve D) a leftward shift in the short-run aggregate supply curve Answer: C Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 17) A permanent reduction in international trade barriers would A) decrease long-run aggregate supply. B) increase long-run aggregate supply. C) decrease aggregate demand. D) increase aggregate demand. Answer: B Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 18) A short-lived increase in oil prices caused by destruction of oil-producing and oil-refining facilities by a large hurricane will A) shift the SRAS curve to the right. B) shift the LRAS curve to the right. C) shift the SRAS curve to the left. D) shift the AD curve to the right. Answer: C Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

19) If there is a change in the U.S. endowment of factors of production, then there would be A) a shift in just LRAS. B) a shift in both LRAS and SRAS. C) shifts in just SRAS. D) a movement along the SRAS curve. Answer: B Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 20) All items below will decrease short-run aggregate supply EXCEPT A) a decrease in the marginal tax rates. B) an increase in the prices of inputs. C) a decrease in training and education. D) a decrease in labor supply. Answer: A Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 21) Which of the following decreases aggregate supply? A) discoveries of new natural resources B) an increase in competition C) an increase in educational attainment D) a decrease in labor supply Answer: D Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 22) A temporary embargo on oil from Saudi Arabia going in to the United States would A) shift both the short-run and long-run aggregate supply curves to the left. B) shift only the long-run aggregate supply curve to the left. C) shift the long-run aggregate supply curve to the right. D) shift only the short-run aggregate supply curve to the left. Answer: D Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Application of knowledge 76 Copyright © 2021 Pearson Education, Inc.

23) A new discovery of large volumes of previously unknown oil deposits in Texas would A) shift the short-run and long-run aggregate supply curves to the right. B) shift only the short-run aggregate supply curve to the right. C) shift only the long-run aggregate supply curve to the right. D) not affect either the short-run or long-run aggregate supply curves. Answer: A Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 24) Consider a nation in which most workers are unionized. If all the nation's unions band together and succeed in boosting wages established by long-term labor contracts, then A) there is a leftward shift in just LRAS. B) there is a leftward shift in both LRAS and SRAS. C) there is a rightward shift in just SRAS. D) there is a rightward movement along the SRAS curve. Answer: B Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 25) All of the following will cause the aggregate supply curve to shift to the right EXCEPT A) discoveries of raw materials. B) a reduction in input prices. C) an increase in marginal tax rates. D) a reduction in international trade barriers. Answer: C Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

26) A temporary increase in the price of oil would A) increase both short-run and long-run aggregate supply. B) increase short-run aggregate supply and decrease long-run aggregate supply. C) decrease short-run aggregate supply and leave long-run aggregate supply unchanged. D) decrease both short-run and long-run aggregate supply. Answer: C Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 27) Which of the following will NOT shift the Keynesian short-run aggregate supply curve? A) a change in technology B) a change in profit expectations C) a change in input prices D) a change in the price level Answer: D Diff: 1 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 28) Which of the following will shift the Keynesian short-run aggregate supply curve downward and to the right? A) a rise in the price level B) a fall in the price level C) a decrease in input costs D) an increase in input costs Answer: C Diff: 2 Topic: 11.3 Shifts in the Aggregate Supply Curve Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

11.4 Consequences of Changes in Aggregate Demand

1) Refer to the above figure. An increase in aggregate demand between real Gross Domestic Product (GDP) levels Y0 and Y1 A) would most likely result in some inflation. B) would not increase output since the economy is already working at full capacity. C) would have no effect on the price level. D) would cause price levels to fall. Answer: A Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 2) Refer to the above figure. An increase in aggregate demand beyond real Gross Domestic Product (GDP) level Y1 would result in A) higher real GDP but not a higher price level. B) a lower price level but no change in real GDP. C) a higher price level but no change in real GDP. D) a lower price level and an increases in real GDP. Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

3) The gap that exists when equilibrium real Gross Domestic Product (GDP) is less than full employment real Gross Domestic Product (GDP) is called a(n) A) employment gap. B) inflationary gap. C) recessionary gap. D) supply gap. Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 4) Economic growth will NOT result in deflation if aggregate demand shifts A) outward to the right at the same speed as aggregate supply. B) inward to the left at the same speed as aggregate supply. C) outward to the right as aggregate supply shifts inward to the left. D) inward to the left as aggregate supply shifts outward to the right. Answer: A Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 5) An unexpected event that causes the aggregate demand curve to shift inward or outward is an A) aggregate demand shock. B) aggregate supply shock. C) aggregate supply increase. D) aggregate supply decrease. Answer: A Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

6) If the economy is near full capacity, the effect of a negative aggregate demand shock is to A) increase the level of aggregate demand. B) cause the price level to fall. C) increase the firm's cost of producing at every level of output. D) increase the level of employment. Answer: B Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 7) One possible result of a fall in aggregate demand coupled with a stable short-run aggregate supply is A) a recession. B) an increase in employment levels. C) an economic expansion. D) a rise in the stock market. Answer: A Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 8) If the equilibrium level of real Gross Domestic Product (GDP) is less than the fullemployment real Gross Domestic Product (GDP) consistent with the position of the economy's long-run aggregate supply (LRAS) curve, then the difference between full-employment real Gross Domestic Product (GDP) and current equilibrium real Gross Domestic Product (GDP) is A) an aggregate demand shock. B) an aggregate supply shock. C) a recessionary gap. D) an inflationary gap. Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

9) If the equilibrium level of real Gross Domestic Product (GDP) is greater than the fullemployment real Gross Domestic Product (GDP) consistent with the position of the economy's long-run aggregate supply (LRAS) curve, then the difference between full-employment real Gross Domestic Product (GDP) and current equilibrium real Gross Domestic Product (GDP) is A) an aggregate demand shock. B) the level of output consistent with natural unemployment. C) a recessionary gap. D) an inflationary gap. Answer: D Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

10) In the above figure, the inflationary gap can correctly be identified as A) the difference between 125 and 120. B) the difference between 12.2 trillion and 12 trillion. C) LRAS minus SRAS. D) AD1. Answer: B Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Application of knowledge

11) In the above figure, an increase in aggregate demand has resulted in A) a decline in the price level. B) economic growth. C) an inflationary gap. D) a recessionary gap. Answer: C Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 12) The reason that it is possible for the economy in the above figure to be at E2 rather than at E1 is that A) in the long run there is always less than full employment. B) in the short run the economy can produce more than it can in a long-run full-adjustment situation. C) AD always shifts outward and never shifts inward. D) the economy must be in a recession. Answer: B Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 13) In the above figure, the economy would most likely move from AD1 to AD2 because of A) an aggregate supply shock. B) an aggregate demand shock. C) a recession. D) a depression. Answer: B Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

14) A short-run equilibrium occurs A) at the intersection of the long-run aggregate supply curve and the aggregate demand curve. B) at the intersection of the short-run aggregate supply curve and the long-run aggregate supply curve. C) at the intersection of the short-run aggregate supply curve and the aggregate demand curve. D) at the real GDP associated with full employment. Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 15) Assume equilibrium real GDP per year is equal to full-employment real GDP. Which of the following will cause a recessionary gap? A) an increase in aggregate demand B) a reduction in aggregate demand C) a discovery of a new raw material D) a temporary reduction in the price of oil Answer: B Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 16) In the Keynesian model, an aggregate demand shock A) will cause the aggregate demand curve to shift, leading to a change in the price level and real GDP. B) will cause the aggregate demand curve to shift, leading to a change in the price level but not real GDP. C) will cause the aggregate demand curve to shift, leading to a change in real GDP but not the price level. D) will not lead to a shift of the aggregate demand curve. Answer: A Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

17) The three curves in the above figure are A) (1) the long-run aggregate supply curve, (2) the aggregate demand curve, and (3) the shortrun aggregate supply curve. B) (1) the long-run aggregate supply curve, (2) the short-run aggregate supply curve, and (3) the aggregate demand curve. C) (1) the short-run aggregate supply curve, (2) the aggregate demand curve, and (3) the longrun aggregate supply curve. D) (1) the aggregate supply curve, (2) the short-run aggregate demand curve, and (3) the longrun aggregate demand curve. Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 18) Refer to the above figure. Which point or points represent(s) a short-run equilibrium? A) A only B) B only C) C only D) both A and B Answer: C Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

19) Refer to the above figure. Which point or points represent(s) a long-run equilibrium? A) A only B) B only C) C only D) both A and B Answer: A Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 20) Refer to the above figure. Suppose the economy is now at point B. In the long run, the price level will most likely be A) higher than 45. B) 45. C) 40. D) 20. Answer: D Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 21) Refer to the above figure. Suppose the original long-run equilibrium was at point B. What could have caused the move to the current equilibrium? A) Decreases in the price level caused short-run aggregate supply to fall. B) Input prices must have increased, causing long-run aggregate supply to increase. C) Aggregate demand must have decreased. D) A temporary reduction in production due to bad weather. Answer: C Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

22) Suppose that the current price level is 110, real GDP is $100 billion, and long-run aggregate supply is $95 billion. We can conclude that A) the price level will fall until long-run aggregate supply shifts to $100 billion. B) the price level will fall and input prices will rise until real GDP pulls long-run aggregate supply up to $100 billion. C) input prices will rise until real GDP is $95 billion. D) aggregate demand will increase until both short-run and long-run aggregate supply equal $100 billion. Answer: C Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 23) Holding the level of prices fixed implies that a given decrease in aggregate demand A) will have a smaller effect on real GDP than would be the case if prices were more flexible. B) will have a larger effect on real GDP than would be the case if prices were more flexible. C) has the same effect on real GDP as when prices are more flexible. D) has a smaller effect on nominal GDP than when prices are more flexible. Answer: B Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 24) Suppose we observe rising nominal GDP, a rising price level, and constant unemployment as a result of an increase in aggregate demand. We would conclude that the aggregate supply curve is A) upward sloping. B) downward sloping. C) vertical. D) horizontal. Answer: C Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

25) If aggregate demand and nominal GDP increase while the price level is constant, we would conclude that A) the economy is already at full employment. B) the aggregate supply curve is upward sloping. C) the aggregate supply curve is horizontal. D) the aggregate demand curve is vertical. Answer: C Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 26) If we observe an increase in real GDP and an increase in the price level after an increase in aggregate demand, we can conclude that A) the aggregate supply curve is upward sloping. B) the aggregate supply curve is horizontal. C) the aggregate supply curve is vertical. D) the economy is now at full employment. Answer: A Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 27) A change in tastes for U.S. produced goods will A) shift both the aggregate demand curve and the long-run aggregate supply curve. B) shift the aggregate demand curve. C) shift the short-run aggregate supply curve. D) shift the long-run aggregate supply curve. Answer: B Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

28) Assume equilibrium real GDP per year is equal to full-employment real GDP. If aggregate demand falls, then A) the price level will increase in the short run and decrease in the long run. B) there will be an expansionary gap. C) there will be a recessionary gap. D) long-run aggregate supply will eventually decrease too. Answer: C Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 29) The short-run and long-run aggregate supply curves remain stable, and a decrease in aggregate demand occurs. What is the result in the short run? A) An increase in the price level and real GDP will occur. B) A period of expansion and a rise in the unemployment rate could occur. C) A period of recession and a rise in the unemployment rate could occur. D) The price level will fall but real GDP will remain the same. Answer: C Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 30) An inflationary gap occurs when A) aggregate demand falls, but other things remain constant. B) short-run aggregate supply falls, but other things remain constant. C) the short-run equilibrium level of real GDP is greater than long-run aggregate supply. D) the short-run equilibrium level of real GDP is less than long-run aggregate supply. Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

31) The gap that exists when equilibrium real GDP is less than full-employment real GDP is A) the short-run aggregate supply curve. B) money illusion. C) a recessionary gap. D) an inflationary gap. Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 32) The gap that exists when equilibrium real GDP is greater than the level of real GDP shown by the position of the long-run aggregate supply curve is A) the short-run aggregate supply curve. B) money illusion. C) a recessionary gap. D) an inflationary gap. Answer: D Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

33) Refer to the above figure. Suppose the economy had been at point A and now is at B. What could have caused the movement to B? A) Unusually good weather causes the wheat crop to be larger than normal. B) Government spending increased causing aggregate demand to increase. C) Winter storms cause factories in the north to be shut down for several weeks. D) Both the labor force and the population increased. Answer: B Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 34) A recessionary gap occurs when A) aggregate demand rises, but other things remain constant. B) short-run aggregate supply falls, but other things remain constant. C) the short-run equilibrium level of real GDP is greater than the level consistent with the longrun aggregate supply curve. D) the short-run equilibrium level of real GDP is less than the level consistent with the long-run aggregate supply curve. Answer: D Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

35) An example of an aggregate supply shock is A) inflation caused by a surge in demand. B) the reduction of oil supply by the OPEC nations in the early 1970s. C) the decrease in the labor force due to the baby-boomer generation reaching working age. D) the increase in ice-cream sales every summer. Answer: B Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 36) A recessionary gap is the amount by which A) total planned real expenditures exceed total planned production in the long run. B) the short-run equilibrium level nominal GDP is above the short-run real GDP. C) the short-run equilibrium level nominal GDP is below the short-run real GDP. D) the short-run equilibrium level of real GDP is below the full-employment level of real GDP. Answer: D Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 37) An inflationary gap is the amount by which A) total planned production exceeds total planned real expenditures in the long run. B) the short-run equilibrium level of nominal GDP is above the short-run level of real GDP. C) the short-run equilibrium level of nominal GDP is below the short-run level of real GDP. D) the short-run equilibrium level of real GDP is above the full-employment level of real GDP. Answer: D Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

38) If the U.S. government were to relax its restrictions on offshore oil well drilling in Alaska, the result to aggregate supply would be to A) cause a shift in the SRAS to the left. B) cause a shift in the LRAS to the left. C) cause no long-term shifts in aggregate supply. D) cause a shift in both LRAS and SRAS to the right. Answer: D Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 39) In the short run, if aggregate demand shifts to the left while the position of the short-run aggregate supply curve does NOT change, then A) the level of economic activity rises. B) a recessionary gap occurs. C) there is no change in real GDP and the price level. D) an inflationary gap occurs. Answer: B Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

40) In the above figure, what are the long-run equilibrium price level and real GDP? A) 130 and $12 trillion B) 130 and $11.5 trillion C) 120 and $11.5 trillion D) 120 and $12 trillion Answer: A Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Application of knowledge 41) In the above figure, if the relevant aggregate demand curve is AD2, what are the short-run equilibrium price level and real GDP? A) 130 and $12 trillion B) 130 and $11.5 trillion C) 120 and $11.5 trillion D) 120 and $12 trillion Answer: C Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Application of knowledge

42) In the above figure, if the relevant aggregate demand curve is AD2, what type of gap exists and how large is it? A) inflationary gap of $500 billion B) inflationary gap of $1 trillion C) recessionary gap of $1 trillion D) recessionary gap of $500 billion Answer: D Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 43) In the above figure, what could cause the shift of aggregate demand from AD1 to AD2? A) depletion of raw materials B) an increase in input prices C) a decrease in consumer confidence D) an increase in international trade barriers Answer: C Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 44) If the equilibrium level of real GDP per year is greater than the full-employment level of GDP, then A) a recessionary gap occurs. B) the economy is at full employment with no price changes. C) the economy expands the level of real GDP. D) an inflationary gap occurs. Answer: D Diff: 1 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

45) Which of the following actions would cause the aggregate demand curve to shift to the left? A) an increase in consumer spending caused by a cut in the personal income tax rate B) an increase in government spending caused by increased spending on highways and bridge construction C) a decrease net export spending caused by an appreciation of the home currency D) an increase in exports caused by an increase in economic activity in the European Union Answer: C Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 46) A recessionary gap results when A) aggregate demand is below the level consistent with full employment. B) aggregate demand is above the level consistent with full employment. C) aggregate supply and aggregate demand are not in short-run equilibrium. D) aggregate supply decreases. Answer: A Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 47) If the full-employment level of real GDP is greater than the equilibrium level of real GDP, the nation would be experiencing A) an inflationary gap. B) a recessionary gap. C) demand-pull inflation. D) rising prices. Answer: B Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

48) Consider the above figure. If the aggregate demand fell from AD1 to AD2, our nation would be experiencing A) an inflationary gap. B) a recessionary gap. C) overemployment. D) rising prices. Answer: B Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 49) Consider the above figure. If the aggregate demand curve rose from AD1 to AD3, our nation would be experiencing A) an inflationary gap. B) a recessionary gap. C) unemployment. D) falling prices. Answer: A Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

50) Consider the above figure. If the aggregate demand went from AD2 to AD3, our nation would have gone from A) a recessionary gap to an inflationary gap. B) a recessionary gap to full-employment real GDP. C) an inflationary gap to full-employment GDP. D) full-employment real GDP to an inflationary gap. Answer: A Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 51) According to modern Keynesian analysis, an increase in aggregate demand leads to a higher price level because the A) aggregate demand curve is upward sloping. B) short-run aggregate supply curve is upward sloping. C) aggregate demand curve is horizontal. D) short-run aggregate supply curve is vertical. Answer: B Diff: 2 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 52) Suppose aggregate demand is increasing over time. Would the modern Keynesian model assume that the price level would always be constant? Explain. Answer: No. Eventually full employment would be reached and firms would be producing at full capacity. The price level would adjust as prices would increase. That is, the short-run aggregate supply curve cannot be horizontal at all possible values of real Gross Domestic Product (GDP). Diff: 3 Topic: 11.4 Consequences of Changes in Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

11.5 Explaining Short-Run Variations in Inflation 1) Inflation that is caused solely by an increase in aggregate demand is called A) demand-push inflation. B) demand-pull inflation. C) cost-push inflation. D) cost-pull inflation. Answer: B Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 2) The significant increases in oil prices during the late 2000s was an example of A) an aggregate demand shock that increased the price level and increased the rate of growth of real Gross Domestic Product (GDP). B) an aggregate demand shock that reduced the price level and reduced the rate of growth of real Gross Domestic Product (GDP). C) an aggregate supply shock that increased the price level and reduced the rate of growth of real Gross Domestic Product (GDP). D) an aggregate supply shock that reduced the price level and increased the rate of growth of real Gross Domestic Product (GDP). Answer: C Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 3) Suppose that last year $1 U.S. exchanged for 1.2 euros. If this year $1 exchanges for 1.1 euros, then we can conclude that A) the dollar is weaker this year than it was last year and this will cause the United States' shortrun aggregate supply (SRAS) curve to shift to the left. B) the dollar is weaker this year than it was last year and this will cause the United States' shortrun aggregate supply (SRAS) to shift to the right. C) the dollar is stronger this year than it was last year and this will cause the United States' shortrun aggregate supply (SRAS) curve to shift to the left. D) the dollar is stronger this year than it was last year and this will cause the United States' shortrun aggregate supply (SRAS) curve to shift to the right. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 99 Copyright © 2021 Pearson Education, Inc.

4) If the U.S. dollar becomes stronger in international foreign exchange markets, imported goods become less expensive. One immediate result of this is that A) net exports decrease. B) net exports increase. C) domestic employment rises. D) real Gross Domestic Product (GDP) increases. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 5) A stronger U.S. dollar leads to ________ in SRAS and ________ in AD simultaneously. A) a leftward shift; a rightward shift B) a rightward shift; a leftward shift C) a rightward shift; a rightward shift D) a leftward shift; a leftward shift Answer: B Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 6) If the U.S. dollar becomes weaker in international markets, the net effects will include A) a decrease in short-run aggregate supply (SRAS) and an increase in aggregate demand. B) an increase in short-run aggregate supply (SRAS) and a decrease in aggregate demand. C) a decrease in both short run aggregate supply (SRAS) and aggregate demand. D) an increase in both short run aggregate supply (SRAS) and aggregate demand. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

7) Demand-pull inflation is A) inflation caused by increases in aggregate demand that generate an even larger increase in aggregate supply. B) inflation caused by increases in aggregate demand that are not matched by increases in aggregate supply. C) inflation caused by reductions in short-run aggregate supply. D) inflation caused by reductions in long-run aggregate supply. Answer: B Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 8) Cost-push inflation is A) inflation caused by increases in aggregate demand that generate an even larger increase in aggregate supply. B) inflation caused by increases in aggregate demand that are not matched by increases in aggregate supply. C) inflation caused by decreases in aggregate supply that generate an even larger decrease in aggregate demand. D) inflation caused by decreases in aggregate supply that are not matched by decreases in aggregate demand. Answer: D Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 9) Which of the following can cause inflation? A) increases in short-run aggregate supply B) increases in long-run aggregate supply C) decreases in short-run aggregate supply D) decreases in aggregate demand Answer: C Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

10) The inflation associated with the oil price shocks in the 1970s after OPEC restricted the supply of oil is an example of A) cost-push inflation due to a supply shock. B) cost-push inflation due to a demand shock. C) demand-pull inflation due to a demand shock. D) demand-pull inflation due to a supply shock. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Application of knowledge 11) After some tornadoes in Alabama, unemployment is low as there is a great deal of construction work and businesses run at full capacity. This suggests that A) the economy is operating above the full-employment level and will eventually adjust back to long-run aggregate supply. B) living standards are falling as employment and economic activity are too high. C) the economy is operating below its long-run level and living standards are less than they would have been without the hurricane. D) the hurricane is beneficial since it is increasing employment and replacing less efficient capital with newer and more efficient capital. Answer: A Diff: 3 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 12) A Stronger U.S. dollar in world exchange markets means that A) a dollar buys fewer units of foreign currency than it could before. B) a dollar buys more units of foreign currency than it could before. C) a dollar buys the same amount of foreign currency than it could before, with gold backing up the value of the dollar. D) foreigners buy the same amount of U.S. dollars as they have. Answer: B Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

13) A weaker U.S. dollar leads to higher input prices for U.S. firms because A) U.S. workers are willing to work for less pay because of the weaker U.S. dollar. B) U.S. producers of intermediate goods raise prices in order to benefit from the weaker dollar. C) both imports of raw materials and intermediate goods are higher in prices. D) both exports of raw materials and intermediate goods are higher in prices. Answer: C Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 14) One effect of a stronger dollar is A) an increase in U.S. exports and a reduction in U.S. imports. B) a reduction in U.S. exports and an increase in U.S. imports. C) an increase in net exports. D) an increase in both imports and exports. The effect on net exports is uncertain. Answer: B Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 15) The net effect of a stronger dollar on real GDP is A) an increase in real GDP. B) a decrease in real GDP. C) an increase in the price level. D) dependent on whether the increase in aggregate supply is more or less than the decrease in aggregate demand. Answer: D Diff: 3 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

16) Suppose we observe the price level increasing and real GDP decreasing. An explanation for this is that A) the dollar weakened and the effect on aggregate supply was less than the effect on aggregate demand. B) the dollar weakened and the effect on aggregate supply was greater than the effect on aggregate demand. C) the dollar strengthened and the effect on aggregate supply was less than the effect on aggregate demand. D) the dollar strengthened and the effect on aggregate supply was greater than the effect on aggregate demand. Answer: B Diff: 3 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 17) Equilibrium real GDP rises after the dollar strengthened. From this, we can conclude that A) the increase in aggregate demand was greater than the decrease in aggregate supply. B) the decrease in aggregate demand was less than the increase in aggregate supply. C) the decrease in aggregate demand was more than the increase in aggregate supply. D) the increase in aggregate demand was less than the decrease in aggregate supply. Answer: B Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

18) Refer to the above figure. Suppose the economy is at E. A stronger dollar leads to a lower real GDP. Which of the aggregate supply curves must be the relevant curve after the change in the value of the dollar? A) 1 B) 2 C) 4 D) 5 Answer: B Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 19) Refer to the above figure. Suppose the economy is at E originally, when the dollar increases in value. Which aggregate supply curve applies if the value of real GDP increases? A) 1 B) 2 C) 4 D) 5 Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

20) Refer to the above figure. Suppose we are at E* and the dollar weakens. Which aggregate supply curve must apply if the price level increases? A) 3 only B) 4 only C) 5 only D) 4 or 5 Answer: D Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 21) Suppose the Chinese yuan increases in its value relative to the U.S. dollar. In the U.S. economy, A) the price level will increase and real GDP will fall if the increase in aggregate demand is less than the decrease in aggregate supply. B) the price level will increase and real GDP will fall if the decrease in aggregate demand is more than the increase in aggregate supply. C) the price level will fall and real GDP will increase if the increase in aggregate supply is greater than the decrease in aggregate demand. D) the price level will fall and real GDP will decrease if the decrease in aggregate demand is less than the increase in aggregate supply. Answer: A Diff: 3 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 22) Cost-push inflation occurs A) when the aggregate supply curve shifts to the left, while aggregate demand remains stable. B) when the aggregate supply curve shifts to the right, while aggregate demand remains stable. C) when the aggregate demand curve shifts to the left, while aggregate supply remains stable. D) when the aggregate demand curve shifts to the right, while aggregate supply remains stable. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

23) Demand-pull inflation occurs A) when the aggregate supply curve shifts to the left, while aggregate demand remains stable. B) when the aggregate supply curve shifts to the right, while aggregate demand remains stable. C) when the aggregate demand curve shifts to the left, while aggregate supply remains stable. D) when the aggregate demand curve shifts to the right, while aggregate supply remains stable. Answer: D Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 24) If the price level should increase in the near term due to decreases in the short-run aggregate supply, the result would be A) demand-pull inflation. B) demand-pull recession. C) cost-push inflation. D) cost-pull expansion. Answer: C Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 25) Suppose the government increases government spending. Which of the following will tend to occur as a result of this policy in a Keynesian model? A) an inflationary gap B) demand-pull inflation C) a movement along the short-run aggregate supply curve D) all of these Answer: D Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

26) Other things being equal, if energy prices rise in a country, then there would be A) cost-push inflation. B) demand-pull inflation. C) cost-push deflation. D) more production and a lower price level. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 27) An increase in aggregate demand will tend to cause which of the following? A) a deflationary gap B) a recessionary gap C) cost-push inflation D) none of these Answer: D Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 28) Inflation caused by continually decreasing short-run aggregate supply is A) cost-pull inflation. B) cost-push inflation. C) demand-pull inflation. D) demand-push inflation. Answer: B Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

29) Oil prices increased significantly in 2008. According to the Keynesian model, this increase in oil prices should have caused which of the following to occur? A) demand-pull inflation B) demand-push inflation C) cost-push inflation D) cost-pull inflation Answer: C Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 30) Cost-push inflation can be shown on an aggregate supply aggregate demand diagram as A) a rightward shift of the aggregate supply curve with no change in aggregate demand. B) a rightward shift in the aggregate demand curve with no change in aggregate supply. C) a leftward shift in the aggregate demand curve with no change in aggregate supply. D) a leftward shift in the aggregate supply curve with no change in aggregate demand. Answer: D Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 31) Demand-pull inflation is caused by A) aggregate demand increasing along a horizontal aggregate supply curve. B) aggregate demand decreasing along a horizontal aggregate supply curve. C) aggregate demand decreasing along an upward-sloping or a vertical aggregate supply curve. D) aggregate demand increasing along an upward-sloping or a vertical aggregate supply curve. Answer: D Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

32) In the original Austin Powers, Dr. Evil is cryogenically frozen for thirty years (from the late 1960s to the late 1990s). Upon his return he hatches a plan to extort one million dollars from various world governments. His henchmen are unimpressed. What type(s) of inflation have made Dr. Evil's proposed blackmail amount seem too small? A) cost-push inflation B) demand-pull inflation C) both cost-price and price-pull inflation D) both cost-push and demand-pull inflation Answer: D Diff: 3 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 33) Natural disasters like severe earthquakes are devastating to the economy as well as to the individuals harmed due to A) supply shocks. B) demand shocks. C) demand-pull inflation. D) demand-pull deflation. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 34) Suppose the U.S. dollar gains strength against the euro (and against other major currencies). This strengthening of the dollar will cause which of the following to occur? A) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the right. B) The aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the right. C) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the left. D) the aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the left. Answer: B Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

35) Suppose the U.S. dollar weakens against the euro (and against other major currencies). This weakening of the dollar will cause which of the following to occur? A) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the right. B) The aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the right. C) The aggregate demand curve will shift to the right and the short-run aggregate supply will shift to the left. D) The aggregate demand curve will shift to the left and the short-run aggregate supply will shift to the left. Answer: C Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 36) The exchange rate last month was $1= 1 Swiss francs. This month it is $1 = 1.15 Swiss francs. We can say that the value of the dollar A) decreased, causing net exports to increase and aggregate demand to rise. B) decreased, causing net exports to decrease and aggregate demand to fall. C) increased, causing net exports to decrease and aggregate demand to fall. D) increased, causing net exports to decrease and aggregate demand to rise. Answer: C Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 37) The exchange rate last year was $1 = 1.1 euros. This year it is $1 = 0.95 euros. We can say that the value of the dollar A) decreased, causing net exports to increase and aggregate demand to rise. B) decreased, causing net exports to decrease and aggregate demand to fall. C) increased; causing net exports to decrease and aggregate demand to fall. D) increased; causing net exports to decrease and aggregate demand to rise. Answer: A Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

38) A depreciation of the U.S. dollar ________ the price of U.S. imports, and ________ the price of U.S. exports. A) decreases, decreases B) increases, increases C) increases, decreases D) decreases, increases Answer: C Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 39) Suppose the U.S. dollar weakens against the euro and other major currencies. We know with certainty that this weakening of the dollar will cause which of the following to occur? A) a recessionary gap B) an inflationary gap C) a deflationary gap D) none of these Answer: D Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 40) Suppose the euro appreciates against the dollar. This causes U.S. exports to become less expensive for consumers in the European Union, which would likely cause the U.S. A) aggregate supply to shift leftward. B) aggregate supply to shift rightward. C) aggregate demand to shift leftward. D) aggregate demand to shift rightward. Answer: D Diff: 2 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

41) Refer to the above figure. If the aggregate demand curve shifts beyond AD5, which of the following would we NOT expect? A) strong demand-pull inflation B) no increase in real Gross Domestic Product (GDP) C) strong and rapid increases in the price level D) increases in real net domestic product Answer: D Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 42) Refer to the above figure. If the aggregate demand curve shifts beyond AD5, then the economy will experience A) demand-pull inflation. B) cost-push inflation. C) structural inflation. D) stagflation. Answer: A Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

43) When the value of the dollar increases, the net effect on the economy A) will be an increase in short-run aggregate supply and a decrease in aggregate demand. B) will be decrease in short-run aggregate supply and an increase in aggregate demand. C) will be an increase in both aggregate demand and aggregate supply. D) will be a decrease in both aggregate demand and aggregate supply. Answer: A Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 44) When the value of the dollar decreases, the net effect on the economy A) will be an increase in short-run aggregate supply and a decrease in aggregate demand. B) will be decrease in short-run aggregate supply and an increase in aggregate demand. C) will be an increase in both aggregate demand and aggregate supply. D) will be a decrease in both aggregate demand and aggregate supply. Answer: B Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 45) What effect does a stronger dollar have on aggregate supply? Why? Answer: A stronger dollar means that U.S. residents can buy foreign goods more cheaply. Since some of the foreign goods will be raw materials and partially processed goods, input prices fall, which causes aggregate supply to increase. Diff: 1 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

46) Using a graph, show the effects of a weaker dollar on the economy. Explain. Answer: The original equilibrium is where AD1 intersects AS1. A weaker dollar causes aggregate supply to decrease, represented by a shift from AS1 to AS2. But the weaker dollar makes imports more expensive and exports cheaper, so aggregate demand increases from AD1 to AD2. The new equilibrium is where AD2 intersects AS2, with an increase in real Gross Domestic Product (GDP) and a rise in the price level. This result is due to the fact that aggregate demand shifted further than aggregate supply. Real Gross Domestic Product (GDP) would have fallen if the shift in aggregate supply had been greater than the shift in aggregate demand.

Diff: 3 Topic: 11.5 Explaining Short-Run Variations in Inflation Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 12 Consumption, Real GDP, and the Multiplier 12.1 Determinants of Planned Consumption and Planned Saving 1) Which of the following is NOT a simplifying assumption in the simple Keynesian model? A) Net investment and gross investment are equal. B) All profits are distributed to the business owners. C) Real disposable income equals government purchases of goods and services. D) There is no foreign trade. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 2) Which of the following represents the relationship between disposable income (DI), consumption (C), and saving (S)? A) DI + C = S B) DI = C + S C) DI = C * S D) DI = C - S Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 3) Which of the following is a simplifying assumption associated with the short-run Keynesian model of equilibrium real Gross Domestic Product (GDP) determination? A) Gross private domestic investment exceeds net private domestic investment. B) Most business profits are distributed to shareholders. C) Businesses pay indirect taxes. D) There is no depreciation. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

4) Which of the following would NOT be considered a consumption good? A) a new sweater B) a tool used to make coffee in a Starbucks restaurant C) a jar of peanut butter in a grocery store D) a bottle of Smart Water Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 5) The terms "saving" and "savings" differ in that A) saving is a stock, and savings are a flow. B) saving always exceeds savings. C) savings are a stock, and saving is a flow. D) savings can be negative, but saving cannot. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 6) When you purchase a pair of wireless earbuds, A) you are buying consumption goods. B) you are buying capital goods. C) you are consuming intermediate goods. D) you are buying physical capital. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 7) The difference between "saving" and "savings" is that A) saving is done by households and savings are done by businesses. B) saving is undertaken as a precaution against unemployment and savings are undertaken to increase investment spending. C) savings are cumulation of past and current saving. D) saving is placed in financial institutions such as banks, while savings are kept at home by people. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

8) Which of the following is a stock variable? A) consumption B) income C) savings D) saving Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 9) Saving is a ________ concept and savings are a ________ concept. A) stock; stock B) flow; flow C) flow; stock D) stock; flow Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 10) At a level of real disposable income of $10,000, suppose consumption is $11,000. Given this information, we know with certainty that saving equals A) $0. B) $11,000. C) -$1,000. D) $1,000. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 11) Which of the following statements is FALSE? A) disposable income - saving = consumption B) consumption + saving = disposable income C) saving = disposable income - consumption D) consumption = saving - disposable income Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

12) Thinking as an economist would, which is TRUE of investment? A) It is the portion of disposable income that is not used for consumption or saving. B) Investment represents spending on capital goods. C) Investment is putting money into stocks and bonds. D) Investment is a stock concept. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 13) The income-expenditure model of real GDP determination is due to the work of A) Adam Smith. B) Milton Friedman. C) John Maynard Keynes. D) Roger Miller. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 14) Which of the following is considered investment? A) Sherri purchases a new van for commuting to and from work. B) Jane purchases a new truck for commuting to and from school. C) Johnny buys a new car for his wife as an anniversary gift. D) Jackson purchases a new car to replace an old car in his food delivery business. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 15) Saving differs from savings in that A) saving is a flow while savings is a stock. B) saving is a stock while savings is a flow. C) saving is both a flow and a stock while savings is a stock. D) saving is a stock while savings is both a flow and a stock. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

16) Consumption expenditures include all of the following EXCEPT A) buying a pizza. B) going to a movie. C) having your house cleaned by a cleaning maid. D) purchasing shares of company stock. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 17) Consumption goods A) include items that a supermarket holds in inventory. B) are only the goods bought by households for immediate satisfaction. C) include spending on machines and buildings so that goods can be produced in the future. D) are goods that are used to make other goods. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 18) Keynes thought that the key to determining the broader economic effects of investment fluctuations A) was to examine how businesses react to flexible prices and wages. B) was to closely regulate the real interest rate. C) was to understand the relationship between how much people earn and their willingness to engage in personal consumption spending. D) was to understand how changes in the money supply influences consumption decisions. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

19) Saving is A) the amount one does not consume in a given period of time while savings is the accumulation of past periods of saving. B) the accumulation of past periods of savings while savings is the amount of disposable income that is not consumed in a given period of time. C) the difference between real GDP and disposable income while savings is the difference between disposable income and consumption spending. D) the difference between disposable income and spending on goods and services while savings is the difference between real GDP and disposable income. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 20) Spending on new goods and services out of a household's current income is A) consumption. B) saving. C) savings. D) investment. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 21) Consumption goods are A) a form of investment. B) goods purchased from savings. C) a form of capital goods. D) goods purchased by households for immediate use. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

22) The difference between a stock and a flow is A) a stock is something measured at one point in time while a flow is something that is expressed per unit of time. B) a stock is something measured at one point in time while a flow is something that is fixed. C) a stock is expressed per unit of time while a flow is measured at one point in time. D) a stock refers to the solid inventory firms have on hand while a flow refers to the liquid inventory firms have on hand. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 23) The difference between savings and saving A) is called money illusion. B) is that savings occurs when consumption does not and saving is used to purchase consumption goods. C) is that savings is a stock concept and saving is a flow concept. D) is that savings is measured in real terms while saving is measured in nominal terms. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 24) Which of the following is a flow variable? A) savings B) wealth C) consumption D) debt Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 25) All of the following are flow variables EXCEPT A) consumption. B) saving. C) investment. D) capital goods. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 7 Copyright © 2021 Pearson Education, Inc.

26) Which of the following statements is TRUE? A) consumption + saving = disposable income B) consumption + saving = personal income C) consumption - investment = disposable income D) consumption - saving = personal income Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 27) Which of the following statements is TRUE? A) investment = disposable income + consumption B) saving = personal income - consumption C) saving = disposable income - consumption D) saving = personal income + consumption Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 28) Investment is A) the purchasing of stocks and mutual funds. B) spending by consumers on items that account for large shares of their budgets. C) spending by businesses on things which can be used to produce goods and services in the future. D) the production of goods for immediate satisfaction. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 29) Spending by businesses on things such as machines and buildings which can be used to produce goods and services in the future is A) investment. B) consumption. C) consumption goods. D) savings. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

30) Expenditures by firms on new machines and buildings that are expected to yield a future stream of income are known as A) consumer durable. B) consumption goods. C) fixed investment. D) inventory investment. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 31) Changes in business inventories are known as A) consumer durable. B) consumption goods. C) fixed investment. D) inventory investment. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 32) Fixed investment is A) when a firm adds to its inventories of goods. B) when a firm accumulates profits. C) dissavings. D) an expenditure by firms on new machines that are expected to produce income in the future. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 33) Investment is A) a flow concept and is made up of fixed investment and inventory investment. B) a flow concept and is made up of fixed investment. C) a stock concept and is made up of fixed investment and inventory investment. D) a stock concept and is made up of fixed investment. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

34) Nonconsumable goods that firms use to make other goods are A) consumption goods. B) capital. C) dissaving. D) savings. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 35) How is investment defined as an economic concept? A) Investment is primarily the market value of all shares of stock held by the public. B) Investment is primarily the market value of all equipment, buildings, and inventories held by corporations, partnerships, and proprietorships. C) Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a future stream of income. D) Investment is primarily the portion of your savings held in an interest-earning account. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 36) Savings are an example of A) a flow concept. B) a stock concept. C) a bounded rationality concept. D) an investment concept. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 37) Saving is an example of A) a flow concept. B) a stock concept. C) a planned investment concept. D) a physical capital concept. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

38) By definition, disposable income is equal to A) consumption plus saving. B) consumption plus investment. C) investment plus saving. D) consumption minus saving. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 39) Investment includes spending on A) capital goods, buildings, and consumer durable goods. B) capital goods, buildings, and changes in business inventories. C) capital goods, consumer durable goods, and changes in business inventories. D) capital goods, buildings, and changes in business savings. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 40) Which formula is correct? A) Yd = S + C B) Yd + S = C C) Yd × S = C D) Yd + C = S Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 41) Your real disposable income is your real income after you have paid A) rent and food expenses. B) taxes less subsidies. C) depreciation expenses. D) consumption expenses. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

42) Keynesian theory is based on the hypothesis that A) saving is influenced primarily by real current disposable income. B) saving is influenced primarily by the interest rate. C) planned savings equal planned investment only at full employment. D) saving is always equal to savings. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 43) Suppose that when disposable income increases by $1,000, consumption spending increases by $750. Given this information, we know that the marginal propensity to consume (MPC) is A) 0.25. B) 0.75. C) 1.33. D) 4. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 44) Suppose that when disposable income increases by $1,000, consumption spending increases by $750. Given this information, we know that the marginal propensity to save (MPS) is A) 0.25. B) 0.75. C) 1.33. D) 4. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 45) Suppose that when disposable income increases by $2,000, consumption spending increases by $1,500. Given this information, we know that the marginal propensity to consume (MPC) is A) 0.25. B) 0.75. C) 1.33. D) 4. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 12 Copyright © 2021 Pearson Education, Inc.

46) Suppose that when disposable income increases by $2,000, consumption spending increases by $1,800. Given this information, we know that the marginal propensity to save (MPS) is A) 0.1. B) 0.2. C) 0.8. D) 0.9. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 47) Which of the following is TRUE? A) MPC = 1+ MPS B) MPC = 1 - MPS C) MPC * MPS = 1 D) MPC / MPS = 1 Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 48) According to Keynesian theory, the most important determinant of saving and consumption is A) the level of real disposable income. B) the stock of liquid assets. C) the returns on stocks and bonds D) the level of consumer indebtedness. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 49) The Keynesian model is based on the idea that A) saving depends only on the interest rate. B) both consumption and saving are positively related to real disposable income. C) consumption is unrelated to the level of real Gross Domestic Product (GDP). D) both consumption and saving are unrelated to the level of real Gross Domestic Product (GDP). Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 13 Copyright © 2021 Pearson Education, Inc.

50) The consumption function shows A) a positive relationship between an individual's stock of wealth and his level of planned consumption. B) a positive relationship between disposable income and planned consumption. C) a negative relationship between planned consumption and aggregate saving. D) a negative relationship between disposable income and planned consumption. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 51) The relationship between planned consumption expenditures and the level of real disposable income is called A) the consumption function. B) the savings function. C) the investment function. D) the aggregate demand function. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 52) According to Keynes, planned consumption A) decreases as disposable income increases. B) is unstable and fluctuates widely with changes in disposable income. C) is positively related to real disposable income. D) is positively related to the interest rate. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 53) The consumption function shows the relationship A) between households' disposable income and their consumption spending. B) between the relative prices of goods and the total amount of household consumption spending. C) between consumption spending and capital gains. D) between government spending and tax collection. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

54) When Monica spends more than her disposable income, Monica is A) saving. B) investing. C) dissaving. D) unemployed. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 55) Along a linear consumption function A) the average propensity to consume rises with a decrease in income. B) the marginal propensity to consume rises with an increase in income. C) the average propensity to consume rises with income, but the marginal propensity to consume falls with an increase in income. D) both the average propensity to consume and the marginal propensity to consume rise with an increase in income. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 56) Dissaving occurs when A) disposable income exceeds consumption. B) consumption exceeds disposable income. C) the marginal propensity to save is greater than 1. D) the marginal propensity to consume is equal to zero. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 57) Saving equals A) disposable income minus taxes. B) disposable income minus consumption spending. C) disposable income minus savings. D) consumption spending minus savings. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

58) According to Keynes, the primary determinant of a person's saving is NOT A) the person's level of income but the desired real income of the person. B) the person's level of savings but the expected interest rate in the near future. C) the interest rate but the level of savings the person has. D) the interest rate but the level of the person's real disposable income. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 59) According to Keynes, an individual's level of saving is primarily determined by A) the interest rate. B) the individual's current level of real disposable income. C) the individual's expectation about the stock market. D) real Gross Domestic Product (GDP) for the economy. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 60) Which of the following theories predicts that current consumption increases when a person receives a higher income or expects an increase in future income? A) the life-cycle theory of consumption B) the permanent income hypothesis C) the Keynesian theory of consumption D) all of these Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 61) According to the permanent income hypothesis, a temporary and relatively small increase in income would A) cause a large increase in consumption. B) cause no change in consumption. C) cause an increase in consumption and saving by the same amount. D) cause a decrease in consumption and saving by the same amount. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

62) According to the permanent income hypothesis, Angie's consumption increases only when A) her average lifetime income increases. B) she saves less when her income also falls. C) her income increases unexpectedly. D) her current income increases. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 63) The life-cycle theory of consumption predicts that when Jason anticipates a higher income in the future, then Jason will A) consume more and save less in the current period. B) consume less and save more in the current period. C) consume less and save less in the current period. D) not change the amount of consumption or saving in the current period. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 64) The consumption function shows how much A) households plan to consume per year at each level of real disposable income. B) households plan to consume per year at each possible interest rate. C) real disposable income people will earn at each income tax bracket. D) households plan to consume per year at each level of savings. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 65) According to Keynes, A) consumption is positively related to the interest rate. B) consumption is directly related to income but saving is inversely related to income. C) both consumption and saving are positively related to real disposable income. D) consumption is directly related to income but saving has no relationship with income. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

66) According to the consumption function, if the level of real disposable income increases, then A) both the levels of consumption and savings will increase. B) the level of consumption will increase but the level of saving will decrease. C) the level of consumption will decrease but the level of saving will increase. D) both the levels of consumption and savings will decrease. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 67) If consumption spending is greater than disposable income, then there is A) dissaving. B) excess thrift. C) positive savings. D) negative net investment. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 68) Suppose real disposable income increases by $500. Given this information, we know that A) consumption will generally increase by exactly $500. B) consumption will generally increase by less than $500. C) consumption will generally increase by more than $500. D) saving will generally increase by exactly $500. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 69) Suppose when real disposable income is $5000, planned real consumption is $4000. When real disposable income increases to $6000, planned real saving increases by $500. The new planned real consumption expenditures is A) $5,000. B) $4,500. C) $6,000. D) $3,500. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

70) According to the above table, if real Gross Domestic Product (GDP) is $25,000, planned saving equals A) $2,000. B) $3,000. C) $4,000. D) $5,000. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 71) According to the above table, the marginal propensity to consume is A) 0.6. B) 0.5. C) 0.75. D) 0.8. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 72) According to the above table, if real Gross Domestic Product (GDP) equals $30,000, what is the average propensity to consume? A) 0.67 B) 0.87 C) 0.8 D) 0.75 Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

73) According to the above table, if real Gross Domestic Product (GDP) equals $25,000, what is the average propensity to save? A) 0.0 B) 0.88 C) 0.56 D) 0.12 Answer: D Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 74) According to the above table, if real Gross Domestic Product (GDP) equals $30,000, planned saving equals A) $2,000. B) $3,000. C) $4,000. D) $5,000. Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 75) The break-even point on the consumption function represents the point where A) consumption equals spending. B) income equals consumption plus spending. C) consumption is zero. D) consumption equals income. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 76) In the graph for the consumption function, the 45-degree line A) contains only a consumption component. B) represents both planned consumption and planned investment. C) shows various combinations where planned consumption equals real disposable income. D) reflects a decreasing APC as real disposable income rises. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

77) When a family's income is low and it is spending more on consumption than it is receiving in income, A) the APC must be increasing. B) the APC must be equal to the ratio of planned consumption expenditure to total saving. C) the MPC must be zero. D) some segment of the consumption function curve lies above the 45-degree line, indicating dissaving. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 78) At the break-even point for the consumption function, A) saving is positive. B) saving is negative. C) saving is zero. D) the marginal propensity to consume equals l. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 79) If saving equals $200 when real disposable income equals $10,000, the break-even income A) is less than $10,000. B) is greater than $10,000. C) is equal to $10,000. D) cannot be determined using the above information. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

80) According to the above figure, planned consumption and income are equal at an income level of A) Y2. B) Y3. C) Y1. D) Y0. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 81) According to the above figure, at an income level of Y1, A) the economy saves an amount equal to BD. B) the marginal propensity to save is falling. C) the average propensity to save is greater than one. D) the economy dissaves an amount equal to BD. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

82) According to the above figure, the average propensity to save (APS) is zero at point A) D. B) F. C) I. D) J. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

83) In the above figure, when disposable income is greater than 600, A) saving is negative. B) the MPC is greater than 1. C) saving is positive. D) the MPS is negative. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 84) In the above figure, the marginal propensity to consume (MPC) equals A) 0.8. B) 0.9. C) 0.75. D) 0.85. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 23 Copyright © 2021 Pearson Education, Inc.

85) In the above figure, a change in autonomous consumption to 100 would cause the consumption function to A) become steeper. B) become flatter. C) shift down. D) shift up. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 86) In the above figure, saving will equal zero when real disposable income equals A) 0. B) 60. C) 600. D) 500. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 87) In the above figure, when real disposable income equals 600, A) there is dissaving. B) consumption is less than disposable income. C) real disposable income exceeds consumption. D) consumption equals real disposable income. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 88) In the above figure, when real disposable income is less than 600, then A) consumption is less than disposable income. B) consumption is more than disposable income. C) consumption is the same as disposable income. D) the MPC will fall. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

89) Along the portion of the consumption function that lies above the 45-degree line, saving is A) positive. B) negative. C) equal to zero. D) equal to consumption. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

90) Refer to the above figure. If the MPC is unchanged and level of autonomous consumption increases, what occurs? A) Line EBD will shift up. B) Line ABC will drop down. C) Line ABC shifts up. D) Line EBD rotates and becomes steeper. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

91) Refer to the above figure. Line ABC is called A) the 45-degree line. B) the consumption function. C) the saving function. D) aggregate supply. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 92) Refer to the above figure. Line EBD is called A) the 45-degree line. B) the consumption function. C) the saving function. D) aggregate demand. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 93) According to the above figure, autonomous consumption equals A) $0. B) $5,000. C) $20,000. D) -$5,000. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 94) Refer to the above figure. If real disposable income is less than $5,000, then saving is A) 0. B) negative. C) positive. D) none of these: cannot be determined with the given information. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

95) Where the consumption function intersects the 45-degree line, A) savings will be negative. B) consumption will equal only autonomous consumption. C) the average propensity to consume is 0.5. D) saving will be zero. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 96) If the marginal propensity to consume is unchanged and autonomous consumption expenditures increase, then A) saving at every level of disposable income increases. B) the break-even disposable income decreases. C) the break-even disposable income increases. D) saving is unaffected. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 97) Autonomous consumption is A) consumption spending that is earned rather than transferred from the government. B) consumption spending that does not depend on the level of income. C) the amount spent on consumption when saving equals zero. D) consumption spending when the marginal propensity to consume is 1. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 98) In economics, the term "autonomous" means A) existing independently. B) non-economic related. C) disposable income. D) excessive spending. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

99) When a household's disposable income falls to zero, what do we expect will happen? A) The household's consumption spending also falls to zero. B) The household will maintain a positive level of saving. C) The household will maintain its previous level of consumption. D) Consumption will fall to the level of autonomous consumption. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 100) If the level of consumption is $120 billion and disposable income is $150 billion, then the A) APC = 0.75 and saving is positive. B) APC = 0.8 and saving is negative. C) APC = 0.8 and saving is positive. D) APC = 0.75 and saving is negative. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 101) If disposable income = $200 billion and the APC = 0.8, then saving A) is $40 billion. B) is $160 billion. C) is $280 billion. D) cannot be determined. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 102) If the marginal propensity to save is 0.4 and disposable income increases from $1,000 to $2,000, saving will increase A) $100. B) $200. C) $300. D) $400. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

103) If the marginal propensity to save is 0.4 and disposable income decreases from $2,000 to $1,000, saving will A) decrease by $400. B) increase by $400. C) decrease by $80. D) increase by $80. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 104) If consumption is $650 when real disposable income is $1,000, the average propensity to consume is A) 0.80. B) 0.65. C) 0.065. D) 0.08. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 105) The average propensity to consume is the A) percentage of total disposable income consumed. B) rate at which real disposable income changes as autonomous consumption changes. C) ratio of changes in planned consumption to changes in real disposable income. D) slope of the consumption function. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 106) Average propensity to consume (APC) equals A) change in planned consumption divided by change in real disposable income. B) planned consumption divided by real disposable income. C) real disposable income divided by planned consumption. D) change in real disposable income divided by change in planned consumption. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

107) As real disposable income decreases, the average propensity to consume (APC) A) is always be below MPC. B) decreases. C) increases. D) remains unchanged. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 108) If the average propensity to consume is 0.80, then the average propensity to save is A) 1.20 B) 0.20. C) 0.80. D) 1.25. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 109) The average propensity to consume (APC) equals A) real disposable income divided by consumption expenditures. B) consumption expenditures divided by real disposable income. C) the change in consumption expenditures divided by the change in real disposable income. D) the change in real disposable income divided by the change in consumption expenditures. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 110) If the average propensity to save (APS) is 0.40, then this means A) people are saving 40 percent of their disposable income. B) people are spending 40 percent of their disposable income. C) people are saving 40 percent of their amount of consumption. D) people are spending 60 percent of their amount of saving. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

111) When the average propensity to save (APS) is 0.35, then this means A) people are spending 35 percent of their disposable income. B) people are spending 65 percent of their disposable income. C) people are saving $0.65 of the last dollar earned. D) people are spending 35 percent of their disposable income and investing the remaining 65 percent. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 112) If the marginal propensity to save (MPS) = 0.25, then A) the MPC = 0.75. B) the APS = 0.25. C) the APC = 0.25. D) consumption equals $750 when income equals $1,000. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 113) The marginal propensity to consume (MPC) can best be defined as the fraction of A) real disposable income that is consumed. B) real disposable income that is not consumed. C) a change in real disposable income that is spent. D) a change in real disposable income that is saved. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 114) The fraction of a change in real disposable income that is spent is referred to as the A) APC. B) MPC. C) MPS. D) APS. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

115) The marginal propensity to consume (MPC) A) shows how much real disposable income changes when consumption falls. B) is greater than 1 only if the marginal propensity to save is greater than 1. C) shows how much of an extra dollar of real disposable income is spent. D) shows the percentage of real disposable income consumed at each level of income. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 116) The marginal propensity to consume explains how much of the next dollar of disposable income A) a household will spend. B) a business will invest. C) the government will spend. D) foreign residents will use to purchase domestic exports. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

117) In the above table, the marginal propensity to consume (MPC) is A) 0.9. B) 0.75. C) 0.8. D) 0.85. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

118) In the above table, saving is positive when real disposable income is greater than A) zero. B) $100. C) $300. D) $500. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 119) In the above table, saving equals zero when real disposable income equals A) $0. B) $200. C) $300. D) $500. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 120) In the above table, the marginal propensity to save is A) 0.8. B) 0.6. C) 0.2. D) 0.4. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 121) The arithmetic value of (1 - MPC) equals A) APC. B) MPS. C) APS. D) NDP. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

122) The ratio of the change in consumption to the change in disposable income is the A) marginal propensity to consume. B) marginal propensity to save. C) average propensity to consume. D) average propensity to save. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 123) The marginal propensity to consume is calculated by A) dividing consumption by income. B) dividing income by consumption. C) dividing the change in income by the change in consumption. D) dividing the change in consumption by the change in income. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 124) If the average propensity to consume is 1.0, the marginal propensity to consume is 0.6, and real disposable income increases by $100, the additional saving is A) $0. B) $40. C) $60. D) $100. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 125) If the MPC is 0.75, then the MPS is A) 0.25. B) 1.39. C) 1.25. D) cannot be determined without more information Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

126) According to the above table, the value of the MPC is A) 0.9. B) 0.1. C) 0.5. D) 0.7. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 127) According to the above table, as the level of real disposable income decreases, A) the marginal propensity to save increases. B) the APS increases. C) the marginal propensity to consume decreases. D) the APS decreases. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 128) According to the above table, the value of MPS is A) 0.9. B) 0.2. C) 0.1. D) increasing as real disposable income rises. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

129) It is conceivable that the APC, APS, MPC, and MPS could simultaneously be A) APC = 1.0; APS = 0.1; MPC = 0.85; MPS = 0.25. B) APC = 0.8; APS = 0.2; MPC = 1.1; MPS = 0.1. C) APC = 1.3; APS = -0.3; MPC = 0.8; MPS = 0.2. D) APC = 1.0; APS = 0; MPC = 0.15; MPS = 0.15. Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 130) What can we say about APC + APS and MPC + MPS? A) Each must sum to 1. B) MPC + MPS = 100% of total income. C) APC + APS = 100% of the change in income. D) MPC + MPS always equals 1, but the sum of APC + APS can vary. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 131) Which of the following would be expected to shift the consumption function down? A) increases in wealth B) expectations of more business profits ahead C) decreases in the nation's population D) increases in real disposable income Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 132) The non-income determinants of consumption include all of the following EXCEPT A) stock of assets owned by household. B) changes in business investment spending. C) the interest rate. D) real wealth. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

133) All of the following shift the consumption function upward EXCEPT A) an increase in wealth. B) a decrease in the rate of interest. C) an increase in income. D) an expectation of better economic conditions. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 134) The consumption function shifts upward when A) real income increases. B) saving increases. C) households' real wealth increases. D) households buy more imports. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 135) The consumption function will shift downward when A) the rate of interest decreases. B) household saving decreases. C) real disposable income increases. D) household wealth decreases. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 136) According to Keynes, the primary determinant of Amy's saving is A) the nominal interest rate. B) the real interest rate. C) the level of Amy's consumption spending. D) the level of Amy's real current income. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

137) Which of the following is correct? A) 1 + MPS = MPC B) 1 - MPS = MPC C) 1 - MPS = MPC + 1 D) 1 - MPS = MPC - 1 Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 138) The consumption function relates A) a household's consumption to its wealth. B) planned household consumption to real disposable income. C) planned household consumption and real interest rates. D) real disposable incomes earned by households with the level of unexpected consumption spending. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 139) How much people plan to consume at various levels of disposable income is known as A) dissaving. B) investment. C) the consumption function. D) aggregate demand. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 140) The relationship between planned real consumption expenditures of households and their current level of real disposable income is A) investment. B) dissaving. C) saving. D) the consumption function. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

141) In the Keynesian model, consumption A) is positively related to the interest rate but negatively related to a temporary change in income. B) is positively related to income but saving is not systematically related to either income or interest rates. C) and saving are negatively related to the real interest rate. D) and saving are positively related to income. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 142) Dissaving occurs when A) the amount of consumption exceeds the amount of saving. B) saving exceeds consumption. C) consumption spending exceeds disposable income. D) people save smaller and smaller amounts. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 143) A situation in which spending exceeds income is A) autonomous consumption. B) positive saving. C) average propensity to save. D) dissaving. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 144) As real disposable income decreases, consumption expenditures A) decrease by the same amount as income. B) decrease by a smaller amount than income. C) increase by a larger amount than income. D) remain constant. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

145) When disposable income equals consumption expenditures, then A) saving is zero. B) saving is greater than income. C) both saving and savings are zero. D) We can't tell what saving is without more information. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 146) At a level of real disposable income of 0, consumption is $1000. Then A) saving equals 0. B) saving equals -$1000. C) savings equal -$1000. D) saving equals $1000. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

147) Refer to the above figure. Line BCD is called A) the saving function. B) the savings function. C) the 45-degree line. D) the consumption function. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

148) Refer to the above figure. Line ACE is called A) the saving function. B) the savings function. C) the 45-degree line. D) the consumption function. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 149) Refer to the above figure. If real disposable income is $30,000, saving is A) $0. B) $4000. C) $5000. D) $6000. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 150) Refer to the above figure. At an income of $10,000, saving is A) 0. B) $13,000. C) $3,000. D) -$3,000. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 151) Refer to the above figure. Autonomous consumption equals A) 0. B) -$5000. C) $5000. D) $25,000. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

152) Refer to the above figure. The marginal propensity to consume and the marginal propensity to save A) are 0.10 and 0.10, respectively. B) are 0.15 and 0.95, respectively. C) are 0.75 and 0.75, respectively. D) depend on the level of income. Answer: D Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

153) Refer to the above figure. The figure represents the consumption function for a consumer. Point A represents A) autonomous consumption. B) positive saving. C) negative consumption. D) zero saving. Answer: A Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

154) Refer to the above figure. The figure represents the consumption function for a consumer. Point B represents A) autonomous consumption. B) positive saving. C) negative saving. D) zero saving. Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 155) Refer to the above figure. The figure represents the consumption function for a consumer. Point C represents A) autonomous consumption. B) positive saving. C) negative saving. D) zero saving. Answer: D Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 156) Refer to the above figure. The figure represents the consumption function for a consumer. Point D represents A) autonomous consumption. B) saving. C) dissaving. D) zero saving. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

157) Refer to the above figure. The figure represents the consumption function for a consumer. The distance between A and B represents A) the amount of autonomous consumption. B) the amount of autonomous saving. C) the amount of total consumption. D) none of these. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 158) Refer to the above figure. The figure represents the consumption function for a consumer. The distance between C and D represents A) the amount of autonomous consumption. B) the amount of saving. C) the amount of dissaving. D) the point where saving equals zero. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

159) Refer to the above figure. The figure represents the saving function for the consumer. Point A represents A) the amount of autonomous consumption. B) a situation in which saving is positive. C) a situation in which saving is negative. D) the point at which saving equals zero. Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 160) Refer to the above figure. The figure represents the saving function for the consumer. Point B represents A) the amount of autonomous consumption. B) a situation in which saving is positive. C) a situation in which saving is negative. D) the point at which saving equals zero. Answer: D Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 161) Refer to the above figure. The figure represents the saving function for the consumer. Point C represents A) the amount of autonomous consumption. B) a situation in which saving is positive. C) a situation in which saving is negative. D) the point at which saving equals zero. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

162) Refer to the above figure. Autonomous consumption is A) only at point A. B) to the left of point B. C) only at point B. D) to the right of point B. Answer: A Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 163) Refer to the above figure. The point at which saving equals zero is A) only at point A. B) to the left of point B. C) only at point B. D) to the right of point B. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 164) Refer to the above figure. Dissaving occurs A) only at point A. B) to the left of point B. C) only at point B. D) to the right of point B. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

165) Refer to the above figure. Saving occurs A) only at point A. B) to the left of point B. C) only at point B. D) to the right of point B. Answer: D Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 166) Along the 45° reference line, A) consumption expenditures equal saving. B) the relationship between consumption and income is represented. C) the average propensity to consume is represented. D) planned real expenditures equal real disposable income. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 167) Planned expenditures equal real disposable income A) at every point on the consumption function. B) at every point on the saving function. C) at every point on the 45-degree line. D) when saving equals zero. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 168) The break-even point refers to A) a zero amount of autonomous consumption. B) the point at which planned real consumption equals real disposable income. C) the maximum amount of dissaving a person can experience. D) a point at which planned real consumption is greater than real disposable income. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

169) Autonomous consumption A) is the same as the break-even point. B) gives the amount a person changes planned consumption for a change in real disposable income. C) is the amount of consumption that does not depend on the level of disposable income. D) is the amount total disposable income less planned consumption. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 170) The part of consumption that does NOT depend upon the level of disposable income is A) autonomous consumption. B) saving. C) savings. D) average propensity to consume. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 171) Average propensity to consume A) is the same as the break-even point. B) gives the amount a person changes planned consumption for a change in real disposable income. C) is the amount of consumption that is independent of the level of disposable income. D) is the proportion of total disposable income that is consumed. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 172) The average propensity to consume is A) real consumption expenditures divided by real disposable income. B) real disposable income divided by real consumption expenditures. C) real consumption expenditures divided by real saving. D) real saving divided by real consumption expenditures. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

173) Marginal propensity to consume A) is the same as the break-even point. B) gives the amount a person changes planned consumption for a change in real disposable income. C) is the amount of consumption that is independent of the level of disposable income. D) is the proportion of total disposable income that is consumed. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 174) The average propensity to consume is A) real consumption/real disposable income. B) real saving/real disposable income. C) change in real consumption/change in real disposable income. D) change in real saving/change in real disposable income. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 175) The marginal propensity to save is A) real consumption/real disposable income. B) real saving/real disposable income. C) change in real consumption/change in real disposable income. D) change in real saving/change in real disposable income. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 176) Which of the following is negative for the "typical" consumer at some level of real disposable income? A) marginal propensity to save B) marginal propensity to consume C) average propensity to save D) average propensity to consume Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

177) The marginal propensity to consume is A) real consumption/real disposable income. B) real saving/real disposable income. C) change in real consumption/change in real disposable income. D) change in real saving/change in real disposable income. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 178) The average propensity to save is A) real consumption/real disposable income. B) real saving/real disposable income. C) change in real consumption/change in real disposable income. D) change in real saving/change in real disposable income. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 179) The equation

is the

A) average propensity to consume. B) average propensity to save. C) marginal propensity to consume. D) marginal propensity to save. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 180) The equation

is the

A) average propensity to consume. B) average propensity to save. C) marginal propensity to consume. D) marginal propensity to save. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

181) The equation

is the

A) average propensity to consume. B) average propensity to save. C) marginal propensity to consume. D) marginal propensity to save. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 182) The equation

is the

A) average propensity to consume. B) average propensity to save. C) marginal propensity to consume. D) marginal propensity to save. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

183) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. What does planned real saving equal when real disposable income equals $1200? A) 0 B) 60 C) 300 D) 1140 Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 51 Copyright © 2021 Pearson Education, Inc.

184) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. What does planned real saving equal when real disposable income equals $600? A) -300 B) -120 C) 0 D) 720 Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 185) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. What is the value of the marginal propensity to consume? A) 0 B) 0.3 C) 0.7 D) 1 Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 186) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. The break-even level of real disposable income is A) 0. B) 6000. C) 1000. D) 1400. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

187) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. What is the value of the average propensity to consume when real disposable income equals $400? A) -0.45 B) 0.69 C) 0.7 D) 1.45 Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 188) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. What is the value of the average propensity to save when real disposable income equals $400? A) -0.45 B) 0.69 C) 0.7 D) 1.45 Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 189) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. What is the value of the average propensity to consume when real disposable income equals $1400? A) 0.09 B) 0.7 C) 0.91 D) 1.1 Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

190) Refer to the above table. The table gives the combinations of real disposable income and real consumption for a college student for a year. What is the value of the average propensity to save equal when real disposable income equals $1400? A) 0.09 B) 0.7 C) 0.91 D) 1.1 Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 191) A decrease in autonomous consumption means that A) the consumption function shifts up. B) the consumption function shifts down. C) the consumption function becomes steeper. D) the consumption function becomes less steep. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 192) If the average propensity to consume is initially 0.85, the marginal propensity to consume is 0.75, and real disposable income increases by $1000, the value of saving A) increases by $150. B) increases by $250. C) decreases by $250. D) decreases by $150. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 193) Suppose autonomous consumption increases. This increase in autonomous consumption will cause which of the following to occur? A) The consumption function shifts up. B) The consumption function shifts down. C) The consumption function becomes steeper. D) The consumption function becomes less steep. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

194) The ownership of stock of assets is A) debt. B) wealth. C) capital investment. D) capital consumption. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 195) The average value of stock shares falls by 10 percent. Other things being equal, we would expect A) an increase in the marginal propensity to consume. B) a decrease in the marginal propensity to consume. C) a shift up of the consumption function. D) a shift down of the consumption function. Answer: D Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 196) Which of the following statements is TRUE? A) APC + APS = 1 B) MPC + APS < 1 C) APC + MPS = 1 D) APC + MPS = MPC + APS Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 197) Another way of stating that investment is independent of real disposable income is to say that it is A) inversely related. B) substitutable. C) complementary. D) autonomous. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 55 Copyright © 2021 Pearson Education, Inc.

198) Which one of the following statements is TRUE? A) In the classical model, the supply of saving is determined by the rate of interest. B) In the classical model, the supply of saving is determined by the level of income. C) In the Keynesian model, the supply of saving is determined by the rate of interest. D) In the Keynesian model, the supply of saving is determined by the level of investment. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 199) The consumption function shows the relationship between A) interest rates and planned real consumption. B) employment and planned real consumption. C) the price level and planned real consumption. D) real disposable income and planned real consumption. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 200) The relationship that tells us how much a person intends to spend at various levels of income is A) the income function. B) the expenditure function. C) the consumption function. D) the autonomous spending function. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 201) The part of consumption that is independent of disposable income is called A) automatic consumption. B) fixed consumption. C) personal consumption. D) autonomous consumption. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

202) Which of the following is TRUE? A) APC + MPS > 1 B) MPC + MPS = 1 -APC C) APC + APS = MPS + MPS D) APC + APS < 1 Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 203) Which of the following is FALSE? A) 1 - MPC = MPS B) 1 + MPS = MPC C) 1 - APS = APC D) MPC + MPS = 1 Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 204) Which of the following is TRUE? A) APC + MPS = 1 B) APC + APS = 1 C) 1 + APC = APS D) APC - APS = 1 Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 205) Which one of the following is TRUE? A) APS = 1 / MPS B) APC = 1 - APS C) MPS + APS = 1 D) APC * APS = 1 Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

206) In the above table, the level of autonomous consumption is A) $0. B) $1,000. C) $5,000. D) $9,000. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 207) In the above table, dissaving occurs at every level of income below A) $10,000. B) $8,000. C) $7,000. D) $5,000. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 208) In the above table, the marginal propensity to consume when disposable income changes from $7,000 to $8,000 is A) 0.8. B) 0.75. C) 0.6. D) 0.5. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 58 Copyright © 2021 Pearson Education, Inc.

209) In the above table, the marginal propensity to save when disposable income changes from $5,000 to $6,000 is A) 0.1. B) 0.2. C) 0.8. D) -0.2. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 210) In the above table, the average propensity to save when disposable income is $5,000 is A) 0.2. B) 0.1. C) 0.0. D) -0.1. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 211) In the above table, the average propensity to consume when income is $9,000 is A) 0.9. B) 0.1. C) 0.0. D) 0.8. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 212) At the point at which planned real consumption spending is equal to real disposable income, A) the consumption function is above the 45-degree line. B) the consumption function is below the 45-degree line. C) the consumption function intersects the 45-degree line. D) the consumption function intersects the savings function. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

213) Which one of the following would shift your consumption function in an upward direction? A) an increase in your wealth B) a decrease in your wealth C) an increase in your real disposable income D) a decrease in your real disposable income Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 214) According to Keynes, the most important determinant of an individual's real saving is A) interest rates. B) the foreign exchange rate. C) the individual's real disposable income. D) the level of investment. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 215) Assuming that Yd = $10,000 and C = $8,000, we would find that the average propensity to consume would be equal to A) 0.2. B) 1.2. C) 1.25. D) 0.8. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 216) Assuming that Yd = $10,000 and C = $12,500, we would find that the average propensity to save equals A) 0.85. B) 1.25. C) -0.25. D) -0.85. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

217) The relationship between planned consumption and real disposable income is referred to as A) the wealth function. B) the saving function. C) the multiplier. D) the consumption function. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

218) Consider the above figure. Autonomous consumption, in this scenario, is equal to A) $30. B) $40. C) $60. D) $80. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 219) Consider the above figure. At an income of $60 we would expect saving to be equal to A) $60. B) $40. C) $10. D) $0. Answer: D Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

220) Consider the above figure. At income level Yd = $30, the APC is equal to A) 1.25. B) 1.67. C) 1.05. D) 0.05. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 221) Consider the above figure. At income level Yd = $110, the APS is equal to A) 0.64. B) 0.32 C) 1.10. D) -0.36. Answer: B Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 222) Consider the above figure. The equation for the consumption function is A) C = 40 + 60Yd. B) C = 40 + 50Yd. C) C = 40 + 0.33Yd. D) C = 40 + 0.1Yd. Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 223) Consider the above figure. The equation for the saving function is A) S = 40 - 0.67Yd. B) S = 40 + 0.33Yd. C) S = -40 + 0.67Yd. D) S = -40 - 0.33Yd. Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 62 Copyright © 2021 Pearson Education, Inc.

224) The consumption function is the relationship between A) real consumption spending and real taxes. B) real consumption spending and investment spending. C) real consumption spending and real disposable income. D) real consumption spending and real saving. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 225) If your real disposable income goes up by $200 per week, and your real consumption spending goes up by $160 per week, you have a marginal propensity to consume of A) 0.2. B) 0.8. C) 1.2. D) 1.0. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 226) If your real disposable income goes up by $200 per week, and your real consumption spending goes up by $160 per week, you have an marginal propensity to save of A) 0.2. B) 0.8. C) 1.2. D) 1.0. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 227) Which of the following changes will shift the consumption function upward? A) an increase in wealth B) a decrease in wealth C) a decrease real disposable income D) an increase in real disposable income Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

228) According to Keynes, real saving and real consumption spending are functions of A) economic expectations. B) an individual's future earning potential. C) current educational attainment. D) current real disposable income. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 229) The consumption function shows the relationship between planned real consumption spending and A) real disposable income. B) planned real saving. C) the average propensity to consume. D) the marginal propensity to consume. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 230) The saving function shows the relationship between planned real saving and A) real wealth. B) real disposable income. C) the average propensity to save. D) the marginal propensity to save. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 231) The relationship between real consumption spending and real disposable income A) is direct. B) is inverse. C) plots a vertical line. D) plots a horizontal line. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

232) If real disposable income increases, the average propensity to consume will A) initially increase, and then decrease. B) remain constant. C) increase. D) decrease. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 233) If real disposable income increases, the average propensity to save will A) initially increase, and then decrease. B) remain constant. C) increase. D) decrease. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 234) Autonomous consumption A) is measured by the slope of the consumption function. B) is the reciprocal of consumption. C) is equal to the minimum savings. D) is measured by the intercept of the consumption function and the Y-axis. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 235) Autonomous consumption is defined as A) the level of real consumption spending that is independent of real disposable income. B) the real consumption spending by the autonomous government. C) the level of real consumption spending that is equal to real disposable income. D) the consumption of foreign-made goods independent of exchange rates. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

236) With reference to the consumption function, the 45-degree line represents A) the planned savings function. B) all points at which planned real saving is equal to real disposable income. C) all points at which planned real saving is equal to planned real consumption spending. D) all points at which real disposable income is equal to real consumption spending. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 237) In the consumption function model, the 45-degree line represents where A) the real disposable income is equal to zero. B) planned real saving is equal to zero. C) planned real consumption spending is equal to zero. D) planned real saving is greater than actual real savings. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 238) The average propensity to consume (APC) is A) the rate at which real consumption spending changes over time. B) the percentage of real disposable income saved. C) the percentage of real disposable income consumed. D) the percentage of additional real disposable income that will go toward additional consumption spending. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 239) The average propensity to save (APS) is A) the rate at which real savings changes over time. B) the percentage of real disposable income saved. C) the difference between the amounts of real disposable income consumed and saved. D) the percentage of additional real disposable income that will go toward real saving. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

240) The marginal propensity to consume (MPC) is A) the rate at which real consumption spending changes over time. B) the percentage of real disposable income saved. C) the percentage of real disposable income consumed. D) the percentage of an additional dollar of real disposable income that will go toward additional real consumption spending. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 241) The marginal propensity to save (MPS) is A) the rate at which real savings changes over time. B) the percentage of real disposable income saved. C) the difference between the amounts of real disposable income consumed and saved. D) the percentage of an additional dollar of real disposable income that will go toward additional real savings. Answer: D Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 242) The slope of the consumption function is the A) MPC. B) APC. C) APS. D) MPS. Answer: A Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 243) The slope of the saving function is the A) MPC. B) APC. C) MPS. D) APS. Answer: C Diff: 3 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

244) Dissaving occurs when A) households deposit unusually large amounts of money into their savings account. B) households reduce their planned monthly saving. C) consumption spending exceeds real disposable income. D) the average saving rate for the nation unexpectedly falls. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

245) Use the above table. The autonomous consumption in this table is A) $140. B) $20. C) $0. D) $50. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 246) Use the above table. Dissaving occurs up to a disposable income level of A) $0. B) $50. C) $100. D) $150. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

247) Use the above table. Which of the following is TRUE if real disposable income is $150? A) APC is less than MPC. B) APC = 0.8. C) APS = 0.2. D) APS is less than MPS. Answer: D Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 248) Use the above table. When real disposable income is $125, A) APC = 0.96. B) APC = 0.80. C) APS = 0.20. D) MPS = 0.96. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 249) Use the above table. We can infer from the table that when real disposable income is $175, A) APC = 0.91. B) APC = 0.80. C) APC = 0.20. D) APC = 0.09. Answer: A Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 250) Use the above table. The MPC is A) 0.91. B) 0.80. C) 0.20. D) 0.09. Answer: B Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

251) Use the above table. The MPS is A) 0.91. B) 0.80. C) 0.20. D) 0.09. Answer: C Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 252) Use the above table. At an income of $50, A) real saving is $20. B) real dissaving is $10. C) real saving is $10. D) real dissaving is $50. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 253) Use the above table. At an income of $150, A) real saving is $20. B) real dissaving is $10. C) real saving is $10. D) real dissaving is $50. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 254) When graphing the consumption function, what purpose is served by the 45-degree line? A) It identifies all the points at which saving and consumption spending are equal. B) It identifies all the points at which real disposable income and planned real consumption spending are equal. C) It identifies all the points at which real planned investment expenditure and real autonomous consumption spending are equal. D) It identifies all the points where real dissaving and saving are equal. Answer: B Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

255) Autonomous consumption is the level of consumption that is A) consistent with the average standard of living. B) observed at the poverty line. C) independent of real income. D) available to someone earning the minimum wage. Answer: C Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 256) At the point at which the consumption function intersects the 45 degree reference line, A) planned real consumption equals real disposable income. B) equilibrium output is supply determined equilibrium output is determined by both. C) planned real saving equals real disposable income. D) planned real consumption of real disposable income equals zero. Answer: A Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 257) Distinguish between saving and savings. How does investment relate to this distinction, if at all? Answer: Saving is a flow concept and savings is a stock concept. Saving is the act of not consuming all of one's income in a year. Savings is a stock of wealth at a point in time. Investment is also a flow concept. For investment to take place, there must be saving. Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 258) According to the Keynesian model, what are the two components of consumption spending? What determines how consumption changes when real disposable income changes? Explain. Answer: Autonomous consumption is the part of consumption that does not depend on disposable income. It is the amount of consumption expenditures a person makes when disposable income is zero. The other part of consumption varies as real disposable income varies. The marginal propensity to consume is the change in consumption expenditures divided by the change in real disposable income. Keynes argued that when people receive an increase in disposable income, they respond by increasing their consumption expenditures, but by a smaller amount. They also increase their saving. Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

259) What is the primary determinant of real saving and real consumption according to Keynes? Explain. Answer: Keynes argued that real consumption and real saving depend primarily on an individual's current real disposable income. As someone's real disposable income rises, Keynes expected the person's real consumption spending and real saving to increase, too. He argued that individuals did not respond to the interest rate in making decisions about real saving. Diff: 1 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 260) Suppose the marginal propensity to consume is 0.75. What does this mean? What do we know about the marginal propensity to save? What do we know about the average propensity to consume? Answer: A marginal propensity to consume of 0.75 means that a consumer will increase real consumption spending $75 for every $100 increase in real disposable income. Since a person either consumes or saves real disposable income, the marginal propensity to save must be 0.25. We do not know what the average propensity to consume is. It depends on the level of real disposable income. Diff: 2 Topic: 12.1 Determinants of Planned Consumption and Planned Saving Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 12.2 Determinants of Investment 1) Compared to consumption spending, investment historically has tended to be A) greater. B) more stable. C) stagnant. D) more variable. Answer: D Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 2) Which of the following would increase the level of planned real investment? A) an increase in the interest rate B) an expectation of higher future profits C) an expectation of higher future costs D) an increase in business taxes Answer: B Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 72 Copyright © 2021 Pearson Education, Inc.

3) Which of the following is NOT included in the flow of investment spending that is part of total planned expenditures in the economy? A) purchases of corporate stock B) spending on capital goods C) inventory investment D) fixed investment Answer: A Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 4) The planned investment function shows that A) real gross investment falls as real Gross Domestic Product (GDP) increases. B) a negative relationship exists between the level of planned investment and the interest rate. C) a positive relationship exists between planned consumption and planned investment. D) at higher levels of planned saving, planned investment increases. Answer: B Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 5) A decrease in the interest rate will cause A) planned investment spending to decrease. B) planned investment spending to increase. C) the investment function to shift up. D) the investment function to shift down. Answer: B Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 6) The investment function is represented by A) an inverse relationship between the interest rate and the value of planned investment. B) the direct relationship between the interest rate and the value of planned investment. C) the direct relationship between planned investment and real GDP (gross domestic product). D) the inverse relationship between planned investment and unplanned investment. Answer: A Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

7) What happens as the interest rate rises? A) The number of profitable investment opportunities declines. B) The opportunity cost of using retained earnings to finance investment spending rises. C) Planned investment spending also rises. D) Planned investment spending remains constant since it depends on profit projections not interest rates. Answer: B Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 8) In the Keynesian model, planned investment is A) negatively related to the interest rate. B) negatively related to the level of income. C) positively related to the wage rate. D) positively related to household consumption. Answer: A Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 9) If business people become more pessimistic about the future, we would expect that A) the investment curve would shift inward to the left. B) the saving function would shift up. C) the consumption function would shift up. D) investment spending would increase. Answer: A Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 10) The investment function would shift outward to the right if A) real disposable income decreased. B) interest rates decreased. C) there was a decrease in business taxes. D) there was more uncertainty about future economic conditions. Answer: C Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

11) A decrease in the interest rate results in A) a smaller opportunity cost of investment and so planned investment spending increases. B) a smaller opportunity cost of investment and so planned investment spending decreases. C) a greater opportunity cost of investment and so planned investment spending decreases. D) a greater opportunity cost of investment and so planned investment spending increases. Answer: A Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 12) Which of the following will cause an inward shift of the investment function? A) innovation that improves production efficiency at every level of output B) an increase in business taxes C) business people becoming optimistic about the future D) a decrease in the interest rate Answer: B Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 13) The planned investment function will shift upward if A) real disposable income decreases. B) the interest rate rises. C) business expectations become more optimistic. D) the existing stock of capital falls. Answer: C Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 14) Technological progress should lead to A) a rightward shift in the investment function. B) a downward movement along the investment function. C) an unchanged investment function. D) less saving. Answer: A Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

15) Which of the following would cause a movement along the investment function? A) technological progress B) an increase in the rate of interest C) optimistic expectations about business conditions D) a decrease in business taxes Answer: B Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 16) For an investment to be considered autonomous, it must A) be negatively related to the interest rate. B) increase as the level of income increases. C) include fixed components. D) be independent of the level of real disposable income. Answer: D Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 17) In Keynesian analysis, the level of investment that does NOT depend on disposable income increases is called A) irrational. B) autonomous. C) unplanned. D) discretionary. Answer: B Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18) Of the following economic variables, which is the least stable over time? A) consumption B) saving C) investment D) net exports Answer: C Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

19) A firm will invest in a project if A) the interest rate exceeds the opportunity cost of the project. B) the firm's level of capital is at the desired level. C) the firm's level of capital is higher than the desired level. D) the rate of return of the project is greater than the opportunity cost of the investment. Answer: D Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 20) Investment spending is A) directly related to the interest rate. B) inversely related to the interest rate. C) directly related to real disposable income. D) inversely related to real disposable income. Answer: B Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 21) Which of the following is a TRUE statement relative to retained earnings and investment? A) Lower interest rates stimulate borrowing for investment, but have no effect on the use of retained earnings for investment spending. B) Lower interest rates stimulate borrowing for investment, but discourage the use of retained earnings for investment. C) Lower interest rates reduce the opportunity cost of retained earnings, stimulating the use of these funds in investment. D) Lower interest rates have no effect on investment spending at all because investment spending is autonomous. Answer: C Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 22) The investment function will shift when there is a change in A) the interest rate. B) firms' profit expectations. C) the cost of borrowing. D) the opportunity cost of retained earnings. Answer: B Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 77 Copyright © 2021 Pearson Education, Inc.

23) Which of the following will NOT lead to a shift in the investment function? A) A firm is more certain about its future profitability. B) A new discovery leads to a technological advancement. C) The government just lowered business taxes. D) The cost of borrowing funds has decreased. Answer: D Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 24) Which one of the following statements is TRUE? A) Over the years, real consumption spending has been more volatile than real investment spending. B) Over the years, real investment spending has been more volatile than real consumption spending. C) Domestic real investment in the United States was highest during the Great Depression. D) In the Keynesian model, changes in the volume of real investment spending are fully explained by changes in the real interest rate. Answer: B Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 25) Changes in real planned investment spending have A) a direct relationship to changes in interest rates. B) an inverse relationship to changes in the interest rate. C) no identifiable relationship to changes in the interest rate. D) a direct relationship to changes in the level of household savings. Answer: B Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

26) Which one of the following statements is TRUE? A) The investment function is positively sloped to reflect the fact that higher interest rates cause more people to invest their funds. B) The investment function is positively sloped to reflect the fact that lower interest rates cause more firms to expand their operations. C) Along a given investment function, higher interest rates result in more investment projects being undertaken. D) Along a given investment function, lower interest rates result in more investment projects being undertaken. Answer: D Diff: 3 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 27) Aging baby-boomers, predisposed to hearing loss because of years of listening to loud music, are now approaching the age range in which hearing loss starts to become apparent. What effect does this have on investment spending within the hearing aid industry? A) There will no longer be an opportunity cost associated with investment spending. B) There will be no change in real investment spending, because hearing aid manufacturers will look only at the interest rate in determining whether to expand production. C) The investment function relating planned real investment spending to the interest rate can be expected to shift rightward. D) The investment function relating planned real investment spending to the interest rate can be expected to shift leftward. Answer: C Diff: 3 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 28) At a given interest rate, the investment function shows A) how many funds people will invest in the stock market. B) how many funds people will earn on their stock market investments. C) how profitable it will be for firms to expand. D) how much businesses will spend on the capital stock. Answer: D Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

29) Based on historical data, which of the following tended to be most unstable over time? A) real consumption spending B) real saving C) real investment spending D) the average propensity to save Answer: C Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 30) One of the primary determinants of planned real investment spending is the A) firm expectation of future business profits. B) rate of real consumption spending. C) rate of real government spending. D) rate of real saving. Answer: A Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 31) What would happen to the planned investment function if business taxes were decreased? A) It would shift to the left. B) It would shift to the right. C) There would be an upward movement along the function. D) There would be no change. Answer: B Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 32) Which would decrease real planned investment demand? A) an increase in new technologies available B) an increase in profit expectations C) an increase in business taxes D) a decrease in nominal interest rates Answer: C Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

33) A decrease in interest rates will A) shift the investment function relating planned investment to the interest rate to the right. B) shift the investment function relating planned investment to the interest rate to the left. C) be a movement along the investment function relating planned investment to the interest rate. D) have no impact on the investment function relating planned investment to the interest rate. Answer: C Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 34) All of the following would cause the investment function relating investment to the interest rate to shift EXCEPT A) a change in the real interest rate. B) a change in producer expectations of future profit. C) a change in planned capital goods expenditure. D) a change in productive technology. Answer: A Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 35) If businesses expect the economic activity to expand A) the planned investment function relating investment to the interest rate will shift to the left. B) the planned investment function relating investment to the interest rate will remain unchanged, but will move downward along the curve. C) the planned investment function relating investment to the interest rate will steepen. D) the planned investment function relating investment to the interest rate will shift to the right. Answer: D Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 36) Real planned investment spending is positively related to all of the following EXCEPT A) real disposable income. B) wealth. C) the interest rate. D) producer expectations of future profit. Answer: C Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

37) The relationship between planned real investment spending and the interest rate is A) inverse. B) direct. C) constant. D) positive. Answer: A Diff: 1 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 38) If we observe that interest rates rise but real investment spending still increases, what must have happened to the function relating investment to the interest rate? A) It shifted to the right. B) It shifted to the left. C) There was a movement up the function relating investment to the interest rate. D) There was a movement down the function relating investment to the interest rate. Answer: A Diff: 2 Topic: 12.2 Determinants of Investment Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 12.3 Determining Equilibrium Real GDP 1) If firms' unplanned inventories are increasing, then in a closed, private economy A) the level of real national income will rise. B) the level of real national income will not change in the foreseeable future. C) actual consumption is greater than planned consumption. D) consumers are saving more than businesses anticipated. Answer: D Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 2) Ignoring the government and foreign sectors, equilibrium real Gross Domestic Product (GDP) is determined by A) the intersection of the planned saving and planned investment schedules. B) the intersection of the planned saving and planned consumption schedules. C) the intersection of the consumption function with the 45-degree line. D) finding the real Gross Domestic Product (GDP) for which real savings are zero. Answer: A Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 82 Copyright © 2021 Pearson Education, Inc.

3) Ignoring the government and foreign sectors, if planned investment spending is $50 billion, planned saving is $70 billion, and real Gross Domestic Product (GDP) is $200 billion, then unplanned inventories will A) decrease $20 billion. B) increase $20 billion. C) increase $80 billion. D) decrease $80 billion. Answer: B Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 4) Ignoring the government and foreign sectors, there is an unplanned decrease in inventories of $80 billion at the current level of real Gross Domestic Product (GDP) of $15 trillion. From this information, we know that A) saving equals $80 billion. B) consumption expenditures equal $15 trillion less saving less $80 billion. C) planned investment is $80 billion more than planned saving. D) planned investment is $80 billion less than planned saving. Answer: C Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 5) A permanent increase in autonomous investment causes A) more than that amount of increase in real Gross Domestic Product (GDP). B) the same amount of increase in real Gross Domestic Product (GDP). C) less than that amount of increase in real Gross Domestic Product (GDP). D) an offsetting change in saving that leaves real Gross Domestic Product (GDP) at the same level. Answer: A Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

6) Using real GDP on the horizontal axis instead of real disposable income implies that a marginal propensity to consume 0.6 generates for every additional $100 of real GDP, there is A) $60 of additional real disposable income. B) $4 of additional saving. C) $40 of additional consumption spending. D) $40 of additional saving and taxes. Answer: D Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 7) The 45-degree reference line indicates all points at which A) planned real consumption expenditures and planned real saving are equal. B) planned real saving and planned real investment are equal. C) planned real consumption expenditures and real GDP are equal. D) planned real saving and planned real saving are equal. Answer: C Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 8) Investment is A) a positive function of real GDP. B) a negative function of real GDP. C) autonomous with respect to real GDP. D) a positive function of interest rates. Answer: C Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 9) The investment function intersects the saving schedule at an interest rate of 3 percent and a level of investment of $1.5 trillion a year. If the consumption curve intersects the 45-degree reference line at $3 trillion, then A) the C + I curve will intersect the 45-degree line at $1.5 trillion. B) the C + I curve will intersect the 45-degree line at $1.8 trillion. C) the equilibrium level of real GDP is $3 trillion. D) the equilibrium level of real GDP is $4.5 trillion. Answer: D Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 84 Copyright © 2021 Pearson Education, Inc.

10) Refer to the above figure. Which variable is autonomous with respect to real GDP? A) real saving B) real investment spending C) real consumption spending D) the sum of real consumption and real saving Answer: B Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 11) Refer to the above figure. If real GDP is $4 trillion, then A) consumption expenditures are too low. B) unplanned inventories will increase. C) unplanned inventories will decrease. D) actual investment spending equals $1 trillion as planned investment spending plus unplanned inventory increases equal $1 trillion. Answer: C Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 12) Refer to the above figure. At real GDP of $3 trillion, actual investment equals A) planned investment of $0.5 trillion. B) planned saving of $1 trillion. C) actual saving of $1 trillion. D) unanticipated inventory adjustments of $0.5 trillion. Answer: D Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 85 Copyright © 2021 Pearson Education, Inc.

13) For a closed economy with no government, we know that at every level of GDP actual investment equals A) planned investment. B) planned saving. C) the difference between planned saving and actual saving. D) the difference between planned investment and actual saving. Answer: D Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 14) Suppose actual investment is greater than planned investment at the current level of output in a given year. Given this information, we know that A) GDP will tend to increase over time. B) firms' stock of inventories must have increased unexpectedly in that year. C) saving must be less than planned investment in that year. D) saving must be equal to planned investment in that year. Answer: B Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 15) In the Keynesian model, whenever planned investment is greater than planned saving, A) the amount of planned investment will decrease, and real GDP will decrease. B) the amount of planned investment will decrease, and real GDP will remain unchanged. C) there will be an unplanned inventory decrease, and GDP will eventually increase. D) there will be an unplanned inventory increase, and GDP will eventually decrease. Answer: C Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 16) In the Keynesian model, whenever planned investment is less than planned saving, A) the amount of planned investment will decrease, and real GDP will decrease. B) the amount of planned investment will decrease, and real GDP will remain unchanged. C) there will be an unplanned inventory decrease, and real GDP will eventually increase. D) there will be an unplanned inventory increase, and real GDP will eventually decrease. Answer: D Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

17) In the Keynesian model, whenever planned saving exceeds planned investment, A) there will be unplanned inventory accumulation. B) there will be unplanned inventory depletion. C) real GDP will not be influenced. D) the interest rate will remain unchanged. Answer: A Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 18) In the Keynesian model, whenever planned saving is more than planned investment, A) there will be unplanned inventory accumulation. B) there will be unplanned inventory depletion. C) real GDP will not be influenced. D) the interest rate will remain unchanged. Answer: A Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 19) Along the 45-degree reference line, A) total planned real expenditures = real GDP. B) total planned real expenditures = planned nominal expenditures. C) total planned nominal expenditures = consumption. D) total planned investment spending = planned real expenditures. Answer: A Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

20) In the above figure, what is autonomous consumption? A) $0.0 trillion B) $1.0 trillion C) $2.0 trillion D) $3.0 trillion Answer: B Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 21) In the above figure, what is the equilibrium level of real consumption spending? A) $0.0 trillion B) $1.0 trillion C) $2.0 trillion D) $3.0 trillion Answer: C Diff: 1 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

22) When graphing the consumption function, we include a 45-degree reference line. What is TRUE at the points at which the consumption function crosses this line? A) Planned real saving is zero. B) Planned real consumption spending is zero. C) Real disposable income is zero. D) Real GDP is zero. Answer: A Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 23) Suppose that there is no government and no international trade. When C + I is less than the level of real GDP, A) unplanned inventories decrease, and real GDP expands. B) unplanned inventories increase, and real GDP contracts. C) unplanned inventories equal zero, and there is no change in the level of real GDP. D) real planned investment spending equals real planned saving. Answer: B Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 24) Autonomous real investment spending is A) the level of investment expenditure required to keep the economy expanding at its current growth rate. B) the level of investment expenditure that is independent of real GDP. C) the level of investment expenditure required to replace capital lost to depreciation. D) the level of investment expenditure that would prevail if interest rates were zero. Answer: B Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 25) When real GDP is in equilibrium with no government and no international trade, A) real planned investment spending equals real planned saving. B) real planned investment equals real planned consumption spending. C) unplanned inventories are increasing. D) unplanned inventories are decreasing. Answer: A Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 89 Copyright © 2021 Pearson Education, Inc.

26) In the above figure, point E represents the level of real GDP at which planned saving equals planned investment. At point A, A) unplanned inventories increase. B) changes in inventories cannot be determined. C) unused industrial capacity exists in the economy. D) unplanned inventories decrease. Answer: D Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 27) In the above figure, point E represents the level of real GDP at which planned saving equals planned investment. At point C, A) unplanned inventories increase. B) changes in inventories cannot be determined. C) unused industrial capacity exists in the economy. D) unplanned inventories decrease. Answer: A Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

28) When real planned saving is greater than real planned investment spending, A) the interest rate will increase. B) the interest rate will decrease. C) real GDP will increase. D) real GDP will decrease. Answer: D Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 29) What is the result when real planned saving is lower than real planned investment spending? A) The economy is in equilibrium. B) There is unplanned accumulation of business inventories. C) There is unplanned depletion of business inventories. D) Employment decreases. Answer: C Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 30) Consider a closed economy without a government and without international trade. What will be TRUE when this economy is in equilibrium? A) Total planned real investment spending will exceed total planned real expenditures. B) Planned real investment spending will exceed real planned saving. C) Planned real consumption spending equals real GDP. D) Planned real consumption spending plus planned real investment spending equals real GDP. Answer: D Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 31) Real consumption is a function of real disposable income, but the simple Keynesian model uses real GDP instead of real disposable income. This is appropriate since A) real disposable income tends to move proportionately with real GDP. B) real disposable income is a fixed percentage of real GDP. C) real GDP is a fixed percentage of real disposable income. D) we cannot measure either exactly and the purpose of the exercise is theoretical only. Answer: A Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

32) When the investment is graphed as a function of real GDP, A) it graphs as a vertical straight line. B) it graphs as a 45-degree line starting at the indicated level of investment. C) it graphs as a negatively sloped line indicating the inverse relationship between interest rates and investment. D) it graphs as a horizontal straight line at the level of investment. Answer: D Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 33) In the simple Keynesian model, why does actual investment spending have to equal saving in the absence of the government and foreign sectors? Is this TRUE only for the equilibrium? Explain. Answer: Real Gross Domestic Product (GDP) equals actual investment spending plus consumption spending, and real Gross Domestic Product (GDP) equals consumption spending plus saving. Therefore, actual investment spending and saving are always equal. However, planned investment spending and saving are not always equal. When they are not equal, unplanned changes in inventories make actual investment spending and saving equal. In equilibrium, planned investment and saving are equal. Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

34) The above figure shows a consumption function and a 45-degree line. Real consumption is a function of disposable income. Why is real GDP used here instead? What is measured along the vertical axis? What is measured by point B? Explain the significance of point A. Answer: Real disposable income is less than real GDP, but can be derived from real GDP. If we assume that real disposable income is the same proportion of real GDP every year, then the change is appropriate. Real GDP is used because we want to find the equilibrium real GDP. Planned consumption expenditures are measured on the vertical axis, and point B measures autonomous consumption. At A, planned consumption spending equals real GDP. Saving equals zero at point A. Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

35) Suppose autonomous consumption is $1 trillion, investment spending is $1.5 trillion, and the marginal propensity to consume is 0.75. Show the graph for the C + I curve. What is the equilibrium level of real GDP? Explain its meaning. Answer: In the below figure, the C curve has a vertical intercept at $1 trillion, indicating autonomous consumption spending. Investment spending is constant at $1.5 trillion, so the vertical intercept for the C + I curve is $2.5 trillion. Equilibrium real GDP is $10 trillion—where the C + I curve intersects the 45-degree line. At this point, planned expenditures exactly equals real GDP. Further, saving equals investment ($1.5 trillion). Consumption spending is $8.5 trillion.

Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

36) In the above diagram, what happens if the real GDP is $3 trillion? $5 trillion? $7 trillion? What is the equilibrium level of real GDP? Why? Answer: At real GDP of $3 trillion, planned real investment is greater than real saving, which means households are buying more than producers had anticipated. There is an unplanned inventory decrease of $500 billion, and businesses increase production and hiring. At $5 trillion, planned real investment and planned real saving are equal, so this is the equilibrium. At $7 trillion, planned real saving is greater than planned real investment so there is an unplanned increase in inventories of $500 billion. Businesses reduce production and lay off workers, forcing real GDP back towards $6 trillion. Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 37) The investment schedule is downward sloping and the saving schedule is upward sloping with respect to the interest rate. Suppose the equilibrium real investment per year at the market rate of interest is $1 trillion. How is this represented when real national income per year is on the horizontal axis? How is this incorporated into the consumption-function graph? Answer: Investment spending is a function of the interest rate, but it is autonomous with respect to real Gross Domestic Product (GDP). So the investment function is a horizontal line at $1 trillion when real Gross Domestic Product (GDP) per year is on the horizontal axis. The C + I curve is found by vertically summing the upward-sloping consumption curve with the horizontal investment curve. The C + I curve slopes up and is always $1 trillion higher than the C curve. Diff: 3 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

38) What determines investment in the Keynesian framework? How is investment related to real Gross Domestic Product (GDP)? Answer: Investment is determined by business people based on their views of what the economic future looks like. Other things equal, investment spending is inversely related to the interest rate. Investment is treated as autonomous and not as a function of real Gross Domestic Product (GDP). Diff: 2 Topic: 12.3 Determining Equilibrium Real GDP Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added 1) Government purchases A) are determined by the public. B) are determined by the political process. C) are determined by taxpayers. D) are determined by suppliers. Answer: B Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

2) Refer to the above figure. The equilibrium level of real Gross Domestic Product (GDP) is A) $6 trillion. B) $7 trillion. C) $12 trillion. D) $20 trillion. Answer: C Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 3) Refer to the above figure. If real Gross Domestic Product (GDP) is $2 trillion, then A) the level of total planned expenditures is less than real GDP. B) the level of total planned expenditures equals real GDP. C) the level of total planned expenditures is greater than real GDP. D) the level of total planned expenditures equals zero. Answer: C Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

4) Refer to the above figure. If real Gross Domestic Product (GDP) is $6 trillion, then unplanned business inventories will A) rise. B) be zero. C) fall. D) be equal to planned inventories. Answer: C Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 5) When real Gross Domestic Product (GDP) is below total planned real expenditures, A) there will be unplanned increases in inventories. B) the circular flow will increase. C) a lower level of equilibrium real Gross Domestic Product (GDP) will occur. D) a higher level of equilibrium real Gross Domestic Product (GDP) will occur. Answer: D Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 6) A higher level of real Gross Domestic Product (GDP) will result if A) total planned real expenditures exceed real Gross Domestic Product (GDP). B) aggregate supply exceeds aggregate demand. C) aggregate demand exceeds aggregate supply. D) leakage exceeds injections. Answer: A Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 7) If, at some level of output, total planned real expenditures are greater than real Gross Domestic Product (GDP), A) real GDP will fall. B) real GDP remains unchanged. C) real GDP will either fall or remain unchanged, depending on the MPC. D) unplanned inventories will decrease. Answer: D Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

8) Suppose the economy is at an equilibrium when C + I + G + X = $12 trillion. If the economy is currently at a real Gross Domestic Product (GDP) level of $13 trillion, then total planned real expenditures A) exceed real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP) will increase. B) are less than real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP) will decline. C) are equal to real Gross Domestic Product (GDP), and there will be no change in real Gross Domestic Product (GDP). D) are less than real Gross Domestic Product (GDP), and real Gross Domestic Product (GDP) will increase. Answer: B Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 9) Suppose equilibrium for an economy occurs when C + I + G + X = $20 trillion. If the real Gross Domestic Product (GDP) is $21 trillion, then unplanned inventories are A) increasing, and real Gross Domestic Product (GDP) will expand. B) decreasing, and real Gross Domestic Product (GDP) will expand. C) increasing, and real Gross Domestic Product (GDP) will contract. D) decreasing, and real Gross Domestic Product (GDP) will contract. Answer: C Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 10) If real Gross Domestic Product (GDP) is above its equilibrium level, A) firms are not maximizing their profits. B) planned investment is greater than planned saving. C) firms accumulate unplanned inventories. D) planned consumption is less than actual consumption. Answer: C Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

11) In the above figure, at an income level of Y3 and planned expenditures of (C + I)1 A) planned saving exceeds planned investment. B) the economy is in equilibrium. C) the quantity of aggregate demand exceeds real Gross Domestic Product (GDP). D) there is full employment. Answer: B Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 12) In the above figure, at an income level of Y1 and planned expenditures of (C + I)1, the level of autonomous investment is A) ED. B) EF. C) JK. D) GK. Answer: B Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 13) Total planned expenditures in a closed economy are equal to A) consumption + investment + government expenditures. B) consumption + savings + transfers + investment. C) saving + investment + government expenditures. D) investment + saving + transfers. Answer: A Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 100 Copyright © 2021 Pearson Education, Inc.

14) If the MPC equals 0.85, then A) for every $100 increase in consumption, real Gross Domestic Product (GDP) increases by $85. B) consumption is always more than real Gross Domestic Product (GDP). C) for every $100 increase in real Gross Domestic Product (GDP), saving increases by $85. D) for every $100 increase in real Gross Domestic Product (GDP), saving increases by $15. Answer: D Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 15) In the Keynesian model, government spending is considered A) a positive function of real GDP. B) a negative function of real GDP. C) to be a negative function of the real interest rate. D) to be autonomous. Answer: D Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 16) The following would cause an upward shift in the C + I + G + X curve EXCEPT A) an increase in disposable income. B) an increase in export spending. C) a decrease in import spending. D) an increase in household wealth. Answer: A Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 17) A lump-sum tax, such as a $1000 tax that every family must pay one time, is A) a type of income tax. B) a regressive tax. C) negatively related to real GDP. D) an autonomous tax. Answer: B Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

18) Which of the following does NOT occur when the economy is operating at the equilibrium level of GDP? A) Total planned expenditures equal real GDP. B) Real GDP tends to rise over time. C) Planned investment equals actual investment. D) Inventory investment equals zero. Answer: B Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 19) When the economy is operating at the equilibrium level of GDP, we know that A) total planned real consumption expenditures equal real GDP. B) planned real investment spending equals real net exports of zero. C) total planned real expenditures equal real GDP. D) real net exports equal inventory changes. Answer: C Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

20) Refer to the above figure. The equilibrium level of real GDP occurs A) at point A. B) to the right of point A. C) to the left of point A. D) at the undetermined point on the graph depending upon the level of investment. Answer: A Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

21) Refer to the above figure. Point B A) equals autonomous consumption. B) equals autonomous consumption plus planned investment plus autonomous government spending plus autonomous net exports. C) has no special significance. D) equals government expenditures. Answer: B Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

Note: Amounts in $ trillions 22) Refer to the above table. Which variables in the table are NOT autonomous? A) taxes, government spending, and saving B) planned investment, net exports, and government spending C) planned consumption and planned saving D) planned saving only Answer: C Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

Note: Amounts in billions. 23) Refer to the above table. Which variables in the table are NOT autonomous? A) taxes, government spending, and saving B) planned investment, net exports, and government spending C) planned consumption and planned saving D) planned saving only Answer: C Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 24) Refer to the above table. The equilibrium real GDP is A) $12 billion. B) $13 billion. C) $14 billion. D) $15 billion. Answer: C Diff: 3 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 25) Refer to the above table. If real GDP is $12 billion, total planned expenditures and unplanned inventory changes are respectively A) $0 and $14 billion. B) $13.2 billion and -$0.8 billion. C) $12.4 billion and -$0.1 billion. D) $12.4 billion and $0.4 billion. Answer: C Diff: 3 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

26) Refer to the above table. When real GDP equals $12 billion, A) government expenditures will increase. B) the economy is in equilibrium. C) unplanned inventories will increase. D) unplanned inventories will decrease. Answer: D Diff: 3 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 27) Refer to the above table. When real GDP equals $16 billion, A) government expenditures will increase. B) the economy is in equilibrium. C) unplanned inventories will increase. D) unplanned inventories will decrease. Answer: C Diff: 3 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 28) Whenever total planned expenditures differ from real GDP, A) unplanned inventories will remain unchanged. B) unplanned inventories will change. C) government spending will adjust. D) tax revenues will move the economy back to equilibrium. Answer: B Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 29) In equilibrium, real GDP is equal to A) C + I + G - X. B) C + I + X - G. C) C + I + G + X. D) C + I + G + X + S. Answer: C Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

30) In the above figure, the equilibrium level of real GDP per year is A) $1.0 trillion. B) $2.0 trillion. C) $3.0 trillion. D) $4.0 trillion. Answer: D Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 31) In the above figure, the sum of real planned investment spending, government expenditures, and net export spending is equal to A) $0.5 trillion. B) $1.0 trillion. C) $1.5 trillion. D) $2.0 trillion. Answer: B Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

32) In the above figure, the equilibrium level of planned saving plus net taxes is A) $1.0 trillion. B) $2.0 trillion. C) $3.0 trillion. D) $4.0 trillion. Answer: A Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 33) Which one of the following is TRUE in an open economy with a government sector? A) The equilibrium level of real GDP occurs when real net export spending equals zero. B) The equilibrium level of real GDP occurs when planned real saving equals government spending. C) The equilibrium level of real GDP occurs when total planned real expenditures equal real GDP. D) The equilibrium level of real GDP occurs when planned real investment spending is zero. Answer: C Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 34) What effect would taxation have on real consumption spending when government spending is autonomous? A) Taxation reduces real consumption spending. B) Taxation increases real consumption spending. C) Taxation causes both real consumption spending and planned real saving to increase. D) None of these is correct. Answer: A Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

35) In the above figure, what is the equilibrium level of real GDP with government and the foreign sector? A) $2.0 trillion B) $2.5 trillion C) $3.0 trillion D) $4.0 trillion Answer: D Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 36) In the above figure, at the equilibrium level of real GDP, there is A) positive saving. B) negative saving. C) zero saving. D) a negative tax rate. Answer: A Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

37) In the above figure, if real GDP is $1 trillion, there is A) dissaving. B) positive saving. C) negative investment. D) negative consumption. Answer: A Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 38) In a closed economy, real Gross Domestic Product (GDP) is at equilibrium occurs where A) the C + I + G line crosses the 45-degree line. B) planned expenditures exceed national income. C) saving exceeds planned investment. D) all of these Answer: A Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 39) If real Gross Domestic Product (GDP) is at an equilibrium level in a closed economy, A) real GDP equals the sum of consumption, investment, and government purchases. B) saving will be less than planned investment. C) unplanned inventory accumulation will equal planned inventory accumulation. D) real GDP equals the sum of consumption and investment minus government purchases. Answer: A Diff: 1 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 40) In the Keynesian model with government and the foreign sector added, what are the components of spending? Which of these components are autonomous and which are NOT? How is the equilibrium found? When the economy is NOT at an equilibrium, what adjustments are made? Answer: There are four components to spending—consumption, investment, government, and net exports. The last three are autonomous and consumption has an autonomous part to it. However, consumption is also a function of income. Equilibrium is found at the point at which total planned real spending (C + I + G + X) exactly equals real Gross Domestic Product (GDP). When the economy is not at an equilibrium, adjustments are made by unplanned inventory changes. Diff: 2 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 109 Copyright © 2021 Pearson Education, Inc.

41) Explain how the aggregate demand curve is related to the C + I + G + X curve. Answer: The C + I + G + X curve determines equilibrium real Gross Domestic Product (GDP) for a given price level. If the price level rises, people reduce consumption at every level of Gross Domestic Product (GDP) because their money balances are less valuable, investment spending falls because interest rates increase, and net exports fall because domestic goods are relatively more expensive. Hence, the C + I + G + X curve shifts down, generating a lower real Gross Domestic Product (GDP). We have two price levels and two equilibrium levels of real Gross Domestic Product (GDP) and can derive the downward-sloping aggregate demand curve. Diff: 3 Topic: 12.4 Keynesian Equilibrium with Government and the Foreign Sector Added Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 12.5 The Multiplier, Total Expenditures, and Aggregate Demand 1) One divided by the marginal propensity to save (MPS) is the formula for A) one minus the multiplier. B) the inverse of the multiplier. C) the multiplier. D) autonomous consumption. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 2) Suppose that the marginal propensity to save (MPS) equals 0.2. The value of the multiplier would be A) 1.25. B) 2. C) 5. D) 20. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

3) Suppose that the marginal propensity to consume (MPC) is .75 and there is an increase in investment spending of $100,000. As a result, equilibrium real Gross Domestic Product (GDP) would increase by A) $20,000. B) $100,000. C) $400,000. D) $500,000. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 4) The smaller is the marginal propensity to consume (MPC) A) the smaller is the multiplier. B) the larger is the multiplier. C) the larger is the slope of the consumption function. D) the smaller is the slope of the saving function. Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 5) If the marginal propensity to consume (MPC) increases, then A) the marginal propensity to save (MPS) increases. B) the multiplier increases. C) the multiplier decreases. D) MPC + MPS is less than 1. Answer: B Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 6) If the marginal propensity to consume (MPC) is 0.95, then the multiplier for a change in autonomous spending will be A) 0.05. B) 95. C) 20. D) 100. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 111 Copyright © 2021 Pearson Education, Inc.

7) If the marginal propensity to save (MPS)decreases, the multiplier A) increases. B) decreases. C) stays the same. D) can either increase or decrease, depending on what happens to the marginal propensity to consume (MPC). Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 8) If the multiplier is 20 and income increases by $1000, then saving will increase by A) $80. B) $800. C) $50. D) $1000. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 9) If the multiplier is 5, then the marginal propensity to consume (MPC) is A) 0.8. B) 0.5. C) 1.0. D) 0.2. Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 10) If the marginal propensity to consume (MPC) is 0.75, the multiplier will be A) 75. B) 0.25. C) 1.25. D) 4. Answer: D Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

11) If the marginal propensity to save (MPS) is 0.5, the multiplier will be A) 0.5. B) 2.5. C) 2. D) 4. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge 12) If the multiplier in the economy is 3, the marginal propensity to save (MPS) must be A) 0.33. B) 0.67. C) 1. D) 3. Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 13) If the multiplier is 10, the marginal propensity to consume (MPC) must be A) 1.0. B) 0.1. C) 0.9. D) 0.09. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 14) The multiplier effect tends to A) generate instability. B) promote stability of the general price level. C) magnify small changes in spending into much larger changes in real Gross Domestic Product (GDP). D) increase the MPC. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

15) If an economy saves 20 percent of any increase in real Gross Domestic Product (GDP), then an increase in investment of $1 billion can produce an increase in real Gross Domestic Product (GDP) of as much as A) $2 billion. B) $5 billion. C) $8 billion. D) $10 billion. Answer: B Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 16) If initial equilibrium real Gross Domestic Product (GDP) is $500 billion, MPC = 0.9, and autonomous investment increases $40 billion, equilibrium real Gross Domestic Product (GDP) will be A) $540 billion. B) $600 billion. C) $800 billion. D) $900 billion. Answer: D Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 17) Other things being constant, if the marginal propensity to save (MPS) is 0.2, and private investment spending falls by $100 million, then real Gross Domestic Product (GDP) A) decreases by $50 million. B) increases by $80 million. C) decreases by $500 million. D) increases by $1 billion. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

18) If an increase of $5 million in investment is associated with an increase of $20 million in real Gross Domestic Product (GDP), the multiplier is A) 1. B) 2. C) 4. D) 5. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 19) The multiplier helps explain A) why a rise in government expenditures causes real Gross Domestic Product (GDP) to rise by more than the amount of the increase in government spending. B) why an increase in disposable income causes real Gross Domestic Product (GDP) to rise by less than the amount of the increase in disposable income. C) why a decrease in taxes causes real Gross Domestic Product (GDP) to fall by more than the amount of the decrease in taxes. D) why a fall in investment cause real Gross Domestic Product (GDP) to rise by more than the amount of the decrease in investment. Answer: A Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 20) If the marginal propensity to consume (MPC) is 0.75 and government purchases increase by $200 billion, then A) equilibrium real Gross Domestic Product (GDP) will increase by $800 billion. B) equilibrium real Gross Domestic Product (GDP) will increase by $200 billion. C) equilibrium real Gross Domestic Product (GDP) will increase by $1600 billion. D) the effect on equilibrium real Gross Domestic Product (GDP) cannot be determined from the given information. Answer: A Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

21) If the marginal propensity to save (MPS) is 0.5 and net exports falls by $15 million, then A) real Gross Domestic Product (GDP) will increase by $7.5 million. B) real Gross Domestic Product (GDP) will fall by $30 million. C) real Gross Domestic Product (GDP) will not change. D) the effect on real Gross Domestic Product (GDP) cannot be determined from the given information. Answer: B Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 22) If autonomous investment increases by $200 million and the marginal propensity to consume (MPC) is 0.75, then A) real Gross Domestic Product (GDP) will rise by $800 million. B) real Gross Domestic Product (GDP) will rise by $400 million. C) real Gross Domestic Product (GDP) will rise by $200 million. D) real Gross Domestic Product (GDP) will fall by $200 million. Answer: A Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 23) A decrease in autonomous investment of $100 million that occurs when the marginal propensity to save (MPS) equals 0.25 will lead to a decrease in real Gross Domestic Product (GDP) of A) $250 million. B) $25 million. C) $400 million. D) $40 million. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

24) Suppose the marginal propensity to consume (MPC) equals 0.75, an increase in autonomous investment of $200 will lead to an increase in real Gross Domestic Product (GDP) by A) $200. B) $750. C) $1000. D) $800. Answer: D Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 25) If the MPS is 1/3, a $100 increase in net exports will A) reduce real Gross Domestic Product (GDP) by $100. B) reduce real Gross Domestic Product (GDP) by $300. C) increase real Gross Domestic Product (GDP) by $100. D) increase real Gross Domestic Product (GDP) by $300. Answer: D Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 26) The multiplier is the ratio of the A) change in the equilibrium level of real GDP to the change in autonomous expenditures. B) equilibrium level of real GDP to the change in induced expenditures. C) change in induced expenditures to the change in autonomous expenditures. D) change in autonomous expenditures to the change in the equilibrium level of real GDP. Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 27) If the multiplier has a value of 1, then the value of the marginal propensity to save (MPS) is A) 1.00. B) 0. C) 10.00. D) 0.10. Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Application of knowledge

28) The multiplier is A) the part of consumption that is independent of the level of disposable income. B) the proportion of total disposable income that is consumed. C) the percentage of a given change in income that goes towards consumption. D) the number which is multiplied by an autonomous change which gives the change in the equilibrium level of real GDP. Answer: D Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 29) The ratio of the change in the equilibrium level of real GDP to the change in autonomous real expenditures is the A) average propensity to consume. B) marginal propensity to consume. C) multiplier. D) unplanned investment. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 30) A permanent reduction in planned real investment spending leads to A) a more than proportional increase in real GDP. B) a more than proportional decrease in real GDP. C) a less than proportional decrease in real GDP. D) a proportional decrease in real GDP. Answer: B Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 31) An increase in real net exports leads to an increase in real GDP. Further A) real consumption spending and real saving increase. B) real consumption spending increases but real saving does not change. C) real consumption spending increases while real investment spending decreases. D) real government spending decreases to offset the increase in real net exports. Answer: A Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

32) The multiplier equals A) consumption/real disposable income. B) change in consumption/change in real disposable income. C) 1/MPC. D) 1/(1 - MPC). Answer: D Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 33) If the marginal propensity to consume (MPC) is 0.8, the spending multiplier will be A) 0.2. B) 8. C) 4.0. D) 5.0. Answer: D Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 34) If the marginal propensity to save (MPS) is 0.1, the spending multiplier will be A) 10. B) 1.1. C) 0.9. D) 0.1. Answer: A Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 35) If the marginal propensity to consume (MPC) is 0.75 and there is an increase in planned investment spending of $1 trillion, then saving will A) increase by $0.5 trillion. B) increase by $1 trillion. C) increase by $1.5 trillion. D) remain unchanged. Answer: B Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

36) Suppose the marginal propensity to consume (MPC) is 0.8 and there is a $1,000 increase in autonomous consumption. Given this information, real GDP will increase by A) $1,600. B) $2,000. C) $2,500. D) $5,000. Answer: D Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 37) Suppose marginal propensity to consume (MPC) is 0.7 and there is a $100 increase in autonomous consumption. Given this information, real GDP will increase by A) $333. B) $143. C) $1,000. D) $700. Answer: A Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 38) Suppose the marginal propensity to consume (MPC) is 0.9 and there is a $4,000 increase in planned investment. Given this information, real GDP will increase by A) $20,000. B) $10,000. C) $40,000. D) $45,000. Answer: C Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 39) Suppose the marginal propensity to consume (MPC) is 0.8 and there is a $2,000 increase in planned investment. Given this information, real GDP will increase by A) $4,000. B) $10,000. C) $50,000. D) $200,000. Answer: B Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 120 Copyright © 2021 Pearson Education, Inc.

40) The smaller the marginal propensity to consume, A) the smaller the marginal propensity to save is. B) the smaller the multiplier is. C) the large the multiplier is. D) the smaller autonomous consumption is. Answer: B Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 41) If the marginal propensity to consume (MPC) is 0.8 and there is a desire to increase real GDP by $400 billion, then A) an increase in autonomous real consumption spending of $100 billion will generate this change. B) a decrease in autonomous real saving of $400 billion will generate this change. C) an increase in planned real investment spending of $100 billion will generate this change. D) an increase in real autonomous spending of $80 billion will generate this change. Answer: D Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 42) The multiplier tells us the relationship between A) the interest rate and the level of investment expenditure. B) the exchange rate and the level of exports. C) the exchange rate and the level of imports. D) a change in autonomous spending and the resulting change in equilibrium real GDP. Answer: D Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 43) The multiplier effect applies to any A) change in autonomous investment but not autonomous consumption. B) change in autonomous consumption but not autonomous investment. C) change in both autonomous consumption and autonomous investment. D) change in any source of spending other than consumption and investment. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 121 Copyright © 2021 Pearson Education, Inc.

44) The larger the value of the marginal propensity to save (MPS), A) the larger is the value of the multiplier. B) the larger is the value of the marginal propensity to consumption (MPC). C) the larger is the value of autonomous consumption. D) the smaller is the value of the multiplier. Answer: D Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 45) If the MPC = 0.8, and planned autonomous investment increases by $80 billion, then equilibrium real GDP will increase by A) $64 billion. B) $80 billion. C) $320 billion. D) $400 billion. Answer: D Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 46) If the MPC is 0.75, the multiplier is equal to A) 0.25. B) 0.75/0.25 = 3. C) 4. D) 5. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 47) The size of the multiplier depends on A) the level of autonomous investment. B) the marginal propensity to consume. C) the level of net exports. D) the level of autonomous consumption. Answer: B Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

48) If the marginal propensity to consume (MPC) is 0.75, what is the value of the multiplier? A) 4.0 B) 3.0 C) 2.0 D) 1.0 Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 49) An increase in the marginal propensity to save (MPS) A) increases the value of the multiplier. B) increases autonomous consumption. C) increases the marginal propensity to consume (MPC). D) none of these. Answer: D Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 50) When the marginal propensity to consume (MPC) increases, A) the multiplier remains unchanged. B) the multiplier increases. C) the multiplier decreases. D) the average propensity to save remains unchanged. Answer: B Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 51) If the marginal propensity to consume (MPC) is 0.85, the multiplier is A) 6.67. B) 5. C) 8.5. D) 15. Answer: A Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

52) Suppose government spending decreases by $10 billion and the marginal propensity to consume (MPC) is 0.8. Given this information, this decrease in government spending will cause a(n) A) increase in equilibrium real GDP equal to $50 billion. B) increase in equilibrium real GDP equal to $80 billion. C) decrease in equilibrium real GDP equal to $50 billion. D) decrease in equilibrium real GDP equal to $80 billion. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 53) Suppose there is a $20 million increase in government spending. We know that this increase in government spending will cause which of the following to occur? A) an increase in equilibrium real GDP and an increase in the multiplier B) an increase in equilibrium real GDP and a reduction in the multiplier C) an increase in equilibrium real GDP and no change in the multiplier D) Equilibrium real GDP will increase by exactly $20 million. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 54) If the marginal propensity to save (MPS) increased from 0.3 to 0.4, this would cause the multiplier effect to A) decrease. B) increase. C) stay the same. D) None of these is correct. Answer: A Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

55) A permanent reduction in net exports leads to A) a more than proportional decrease in real Gross Domestic Product (GDP). B) a less than proportional decrease in real Gross Domestic Product (GDP). C) a proportional increase in real Gross Domestic Product (GDP). D) a reduction in taxes, autonomous government spending, and a fall in real Gross Domestic Product (GDP). Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 56) If the aggregate supply curve is upward sloping, then an increase in autonomous consumption leads to A) an increase in aggregate demand and a rise in the price level. B) a decrease in aggregate demand and a rise in the price level. C) a decrease in aggregate demand and a fall in the price level. D) no change in aggregate demand and no change in the price level. Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 57) When the SRAS curve slopes upward, the actual effect of an increase in real autonomous spending on equilibrium real GDP is smaller than predicted by the multiplier because A) the price level falls. B) the price level rises C) real GDP increases. D) real GDP decreases. Answer: B Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

58) Because a decrease in real autonomous spending results in a ________ in the price level, the ultimate effect on real GDP is ________ than predicted by the multiplier. A) fall; smaller B) fall; larger C) rise; smaller D) rise; larger Answer: A Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 59) When the equilibrium price level adjusts to an increase in autonomous investment spending, the impact of the multiplier effect resulting from that spending increase A) will increase real GDP by an amount smaller than the multiplier effect would indicate. B) will increase nominal GDP by an amount smaller than the multiplier effect would indicate. C) will have no impact on the real GDP. D) is only felt when there are changes in consumption. Answer: A Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 60) Suppose that aggregate demand increases along the upward-sloping portion of the aggregate supply curve. What is the result? A) Nominal GDP and real GDP decrease by the same amount. B) Nominal GDP and real GDP increase by the same amount. C) Nominal GDP increases more than real GDP increases. D) Real GDP increases more than nominal GDP increases. Answer: C Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

61) Which of the following is a TRUE statement? A) The C + I + G + X curve has no relationship to the aggregate demand curve other than some of the variables that affect one curve also affect the other. B) The C + I + G + X curve is used to derive the aggregate demand curve, but the C + I + G + X curve is drawn for one price level while price levels vary along the aggregate demand curve. C) The C + I + G + X curve is used to derive the aggregate demand curve, but the aggregate demand curve is drawn for one price level. D) Both the C + I + G + X curve and the aggregate demand curve are drawn for one price level. Answer: B Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 62) A higher price level causes A) the aggregate demand curve to shift to the left. B) the aggregate demand curve to shift to the right. C) the C + I + G + X curve to shift down. D) the C + I + G + X curve to shift up. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 63) A lower price level causes the C + I + G + X curve to shift as a result of a change in all the following EXCEPT A) an increase in real wealth. B) a decrease in interest rates. C) an increase in aggregate supply. D) an increase in foreign spending on domestic goods. Answer: C Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 64) A decrease in the price level causes A) a decrease in aggregate demand. B) an increase in aggregate demand. C) an increase in total planned real expenditures. D) a decrease in total planned real expenditures. Answer: C Diff: 1 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 127 Copyright © 2021 Pearson Education, Inc.

65) An increase in planned real investment spending causes A) a movement along the C + I + G + X curve and a shift of the aggregate demand curve. B) a shift of the C + I + G + X curve and a movement along the aggregate demand curve. C) a shift of the C + I + G + X curve but has no effect on the aggregate demand curve. D) a shift of the C + I + G + X curve that causes the aggregate demand curve to shift. Answer: D Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 66) An increase in the price level causes A) reduced investment spending, because interest rates increase, but an increase in net exports as U.S. residents buy fewer imports. The change in investment is usually greater than the change in net exports. B) a reduction in net exports as higher priced U.S. goods induce foreigners to buy fewer American products, and an increase in investment spending as the higher prices make businesses more profitable. C) reduced investment spending, because interest rates increase and a decrease in net exports as the higher prices induce foreigners to buy fewer U.S. goods. D) increased government spending, which crowds out investment spending, so that the net effect on aggregate demand is nil. Answer: C Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 67) If society wants aggregate demand to increase without changes in the price level, then there must be A) a gap between full employment and the current level of real GDP and an increase in autonomous spending. B) an increase in autonomous spending combined with an increase in the marginal propensity to save. C) an increase in autonomous saving so that autonomous investment spending can increase. D) an increase in autonomous spending and a horizontal short-run aggregate supply curve. Answer: D Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

68) How does a reduction in the price level affect the position of the C + I + G + X curve and in turn the equilibrium level of real GDP? A) The C + I + G + X curve shifts down, thereby reducing the equilibrium level of real GDP. B) The C + I + G + X curve shifts down, thereby increasing the equilibrium level of real GDP. C) The C + I + G + X curve shifts up, thereby reducing the equilibrium level of real GDP. D) The C + I + G + X curve shifts up, thereby increasing the equilibrium level of real GDP. Answer: D Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 69) How does an increase in the price level affect the position of the C + I + G + X curve and in turn the equilibrium level of real GDP? A) The C + I + G + X curve shifts down, thereby reducing the equilibrium level of real GDP. B) The C + I + G + X curve shifts down, thereby increasing the equilibrium level of real GDP. C) The C + I + G + X curve shifts up, thereby reducing the equilibrium level of real GDP. D) The C + I + G + X curve shifts up, thereby increasing the equilibrium level of real GDP. Answer: A Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 70) What is the significance of the multiplier? What causes the multiplier to be larger or smaller? Answer: The multiplier is important because it means that a relatively small change in autonomous spending, such as investment spending or net exports, can have a much larger effect on total spending and real Gross Domestic Product (GDP). The greater the marginal propensity to consume (MPC), the greater the multiplier because more of a given increase in income is spent, raising the income of other people by more. Diff: 2 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 71) What is the multiplier? How is it calculated? Why is the multiplier related only to consumption spending? Answer: The multiplier is the number by which a permanent change in autonomous spending is multiplied to get the change in the equilibrium level of real GDP. It is equal to 1/(1 - MPC). An increase in income leads to an increase in consumption spending, which increases the income of someone else. This increase in income causes their consumption spending to increase, which is income for someone else, and so on. Since consumption spending is the only component of spending that depends on income, it is the only component used in calculating the multiplier. Diff: 3 Topic: 12.5 The Multiplier, Total Expenditures, and Aggregate Demand Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 129 Copyright © 2021 Pearson Education, Inc.

12.6 Appendix C: The Keynesian Model and the Multiplier 1) According to the Keynesian model, an increase in autonomous investment leads to A) a more than proportional increase in real Gross Domestic Product (GDP). B) a less than proportional increase in real Gross Domestic Product (GDP). C) a proportional increase in real Gross Domestic Product (GDP). D) a reduction in taxes, autonomous government spending, and a fall in real Gross Domestic Product (GDP). Answer: A Diff: 1 Topic: 12.6 Appendix C: The Keynesian Model and the Multiplier Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 2) In the Keynesian model, a decrease in real autonomous spending results in a more than proportional decrease in real Gross Domestic Product (GDP) because A) consumption decreases as a result of lower real disposable income. B) consumption increases while real disposable income decreases. C) real autonomous spending decreases further as real disposable income decreases. D) government spending also decreases. Answer: A Diff: 2 Topic: 12.6 Appendix C: The Keynesian Model and the Multiplier Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking 3) In the Keynesian model, an increase in real autonomous spending results in a greater increase in real Gross Domestic Product (GDP) if A) the marginal propensity to consume (MPC) is lower. B) the marginal propensity to consume (MPC) is higher. C) the average propensity to save (APS) is higher. D) the average propensity to save (APS) is lower. Answer: B Diff: 2 Topic: 12.6 Appendix C: The Keynesian Model and the Multiplier Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

4) Suppose the economy is initially at equilibrium, in which total planned real expenditures equals real GDP. Which of the following will occur if there is an increase in autonomous investment? A) Inventories will increase immediately and production of goods and services will decrease until real GDP catches up with total planned real expenditures. B) Inventories will decrease immediately and production of goods and services will increase until real GDP catches up with total planned real expenditures. C) Both inventories and production of goods and services will increase. D) Inventories will not change and production of goods and services will not change either. Answer: B Diff: 2 Topic: 12.6 Appendix C: The Keynesian Model and the Multiplier Learning Outcome: Macro-8: Investigate the relationship between income and expenditures AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 13 Fiscal Policy 13.1 Discretionary Fiscal Policy 1) When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising A) monetary policy. B) discretionary fiscal policy. C) automatic government budgetary policy. D) a laissez-faire policy. Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) Which of the following is an example of fiscal policy? A) a reduction in the federal funds rate B) a reduction in the money supply C) a reduction in lump-sum taxes D) an increase in the government deficit due to more military spending in wartime Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 3) Which of the following would shift the aggregate demand curve to the right? A) an increase in government spending B) an increase in taxes C) an increase in interest rates D) an increase in labor productivity Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

4) Which of the following fiscal policy actions would be appropriate if the economy is experiencing an inflationary gap? A) an increase in government spending B) an increase in taxes C) a decrease in interest rates D) an increase in the money supply Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) A decrease in government spending would cause which of the following to happen? A) The aggregate demand curve would shift to the left. B) The aggregate demand curve would shift to the right. C) The aggregate supply curve would shift to the right. D) The aggregate supply curve would shift to the left. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) Suppose the economy is experiencing a recessionary gap at the current level of GDP. Which of the following fiscal policy actions would be most appropriate given this gap? A) increasing interest rates B) increasing the money supply C) decreasing taxes D) a simultaneous and equal increase in taxes and increase in government spending Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 7) Fiscal policy refers to the A) manipulation of the money supply in order to increase the amount of cash that the government holds. B) adjustment of government spending and taxes in order to achieve certain national economic goals. C) adjustment of national income data to account for price level changes. D) government policy that aims at raising the market prices of certain goods. Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) Fiscal policy involves which of the following? A) tax policy B) interest rates C) changing the amount of money in circulation D) all of these Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 9) When media commentators refer to "tax and spend" policy, they are referring to A) fiscal policy. B) monetary policy. C) command and control policy. D) automatic stabilizers. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) Which of the following is NOT a fiscal policy action? A) increasing government expenditures on military hardware B) decreasing government spending on social welfare C) decreasing the quantity of money in circulation D) lowering income tax rates Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 11) Fiscal policy is defined as A) the design of a tax system to transfer income from large corporations to the poor. B) the use of Congressional power to pursue social and political goals. C) the discretionary changing of government expenditures or taxes to achieve macroeconomic goals. D) the use of the taxing power of the government to redistribute wealth in a socially acceptable manner. Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 3 Copyright © 2021 Pearson Education, Inc.

12) Which of the following is an example of a discretionary fiscal policy action? A) an increase in government spending to deal with a recession B) a decrease in tax revenues as taxpayers' incomes decrease C) increasing the minimum wage rate D) raising regulations in the banking industry Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13) Which of the following is a discretionary fiscal policy action? A) an increase in the amount of unemployment compensation because more people become unemployed B) a progressive tax system that leads to an increase in income tax revenues from the rich C) a deliberate tax increase when the economy experiences high inflation D) an increase in Supplemental Security Income payments when more people become eligible for the benefits Answer: C Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14) Typical goals for fiscal policy are A) high employment and price stability. B) high prices for consumers and low prices for businesses. C) running high deficits and raising consumer prices. D) increasing the money supply so the government can spend more. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 15) Fiscal policy to solve short-run economic problems supports the Keynesian notion of A) there being no government role in the economy. B) an active government role in the economy. C) achieving a command and control economy. D) the long-run nature of the economy. Answer: B Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

16) According to traditional Keynesian economics, contractionary fiscal policy initiated by the federal government A) is never appropriate. B) is an appropriate way to prevent recessions and depressions. C) is an appropriate way to slow down an over-heated economy. D) will always fail due to crowding out effects. Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 17) Discretionary fiscal policy is A) automatic changes in government expenditures and interest rates that achieve certain national economic goals. B) deliberate changes in government expenditures or taxes in order to achieve certain national economic goals. C) used to achieve full employment by changing monetary growth targets. D) deliberate changes in government regulations in markets to achieve certain social goals. Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 18) All the following actions represent fiscal policy EXCEPT A) an increase in the money supply. B) a decrease in government spending. C) a reduction in individual income tax rates. D) an increase in corporate income tax rates. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 19) Fiscal policy is implemented by A) the central bank. B) local government units. C) the Internal Revenue Service. D) the federal government. Answer: D Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5 Copyright © 2021 Pearson Education, Inc.

20) Which of the following represents expansionary fiscal policy? A) a reduction in government spending B) a decrease in average individual income tax rates C) an increase in corporate income tax rates D) an increase in marginal individual income tax rates Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 21) The discretionary change of government expenditures or taxes to achieve national economic goals is A) crowding-out policy. B) Ricardian-equivalence theorem. C) supply-side economics. D) fiscal policy. Answer: D Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 22) Discretionary fiscal policy is best described as A) a deliberate action to move the economy toward full employment and price stability more quickly than it might otherwise. B) a deliberate attempt to improve the functioning of free markets. C) an automatic change in income transfer payments to keep the economy at full employment. D) the design of a tax system that automatically stabilizes economic activity over time. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 23) Keynes believed that the way to prevent recessions and depressions was to A) reduce spending when there is a recessionary gap. B) only change tax rates as a means of regulating the economy. C) maximize the crowding out effect. D) increase aggregate demand through expansionary fiscal policy. Answer: D Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

24) Fiscal policy involves discretionary changes in A) interest rates. B) exchange rates. C) lump-sum taxes. D) the rate of growth of the money supply. Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 25) According to traditional Keynesian analysis, fiscal policy operates by A) informing business people about its plans for the economy so they will know how to adjust their behavior. B) indirectly affecting aggregate demand through its effect on the money supply. C) directly affecting aggregate demand. D) directly affecting aggregate supply. Answer: C Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 26) To close an inflationary gap through fiscal policy, the government should A) decrease government spending in order to increase aggregate supply. B) decrease government spending in order to reduce aggregate demand. C) reduce taxes in order to stimulate investment, and thus increase aggregate supply. D) increase government spending and taxes in order to both increase aggregate demand and aggregate supply. Answer: B Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 27) An example of fiscal policy is A) an increase in government spending. B) a reduction in investment spending by the private sector. C) an increase in autonomous spending by consumers. D) a cost-of-living adjustment in Social Security payments to the elderly. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

28) Fiscal policy includes all of the following EXCEPT A) changing taxes. B) changing government spending. C) policies that influence aggregate demand. D) policies that influence the rate of growth of the money supply. Answer: D Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 29) If the economy is operating on the long-run aggregate supply curve, then expansionary fiscal policy will A) generate higher prices in the short run, but will induce aggregate supply to increase in the long run. B) generate an increase in real GDP and higher prices in both the short run and the long run. C) generate an increase in real GDP without higher prices in the short run, but then real GDP will return to its long-run level, and the price level will increase. D) generate an increase in real GDP and higher prices in the short run, but then real GDP will decrease to its long-run level, and the price level will increase some more. Answer: D Diff: 3 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 30) If the economy is experiencing a recessionary gap and the government wants to accelerate the adjustment to the long-run equilibrium, it should A) reduce aggregate demand by cutting government spending or raising taxes. B) increase aggregate demand by increasing government spending or cutting taxes. C) increase aggregate supply by cutting government spending or raising taxes. D) increase aggregate supply by increasing government spending or lowering taxes. Answer: B Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

31) Suppose the government decreases lump-sum taxes. This causes A) disposable income to increase, which causes consumption spending to increase and aggregate demand to increase. B) government spending to decrease, which causes aggregate demand to decrease. C) consumption spending to decrease and spending on imports to increase. The effect on aggregate demand depends on whether domestic spending or spending on imports decreased the most. D) disposable income to decrease, which causes aggregate supply to decrease. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 32) Other things being equal, an increase in taxes will A) lead to a reduction in the long run aggregate supply curve as businesses enjoy greater profits. B) influence the short run aggregate supply curve but not the aggregate demand curve. C) lead to a corresponding reduction in interest rates increasing the crowding out effect. D) cause a decrease in aggregate demand due to decreases in consumption, investment, or net exports. Answer: D Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 33) Which of the following actions could be undertaken if the government wants to reduce a recessionary gap? A) Increase taxes and reduce government spending. B) Reduce taxes and increase government spending. C) Increase taxes and increase government spending. D) Increase taxes more than the amount of reduction in government spending. Answer: B Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

34) Which of the following actions could be undertaken if the government wants to close an inflationary gap? A) Increase taxes and reduce government spending. B) Reduce taxes and increase government spending. C) Increase taxes and increase government spending. D) Reduce taxes and reduce government spending. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

35) Refer to the above figure. Suppose the economy is operating at point A. There is a recessionary gap of ________, which can be closed by ________. A) $3 trillion; increasing government spending by $1 trillion B) $1 trillion; expansionary fiscal policy that shifts the short-run aggregate supply curve through point C C) $2 trillion; expansionary fiscal policy that generates another $2 trillion in total spending D) $2 trillion; an increase in government spending of $14 trillion Answer: C Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

36) Refer to the above figure. Suppose the economy is at point A. By the proper use of fiscal policy, the government can A) boost taxes to shift LRAS through point A. B) cut income tax rates to get the economy to point B. C) raise income tax rates to get the economy to point C. D) reduce government spending to get the economy to point D. Answer: B Diff: 3 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

37) Refer to the above figure. If the economy is currently operating at point C, then there is A) deflation. B) a recessionary gap. C) an inflationary gap. D) unemployment. Answer: C Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 38) Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States? A) Raise government spending to stimulate investment, consumption and net exports. B) Increase government spending while holding taxes constant. C) Engage in contractionary fiscal policy by raising income taxes. D) Reduce the interest rate to stimulate investment minimizing the crowding out effect. Answer: C Diff: 3 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 11 Copyright © 2021 Pearson Education, Inc.

39) Refer to the above figure. Suppose that the economy was originally at point A, and then it reached point C by means of a fiscal policy action. Which of the following is correct? A) Point C is a short-run equilibrium that could have been attained through a tax cut, but in the long run the economy will end up at point B. B) Point C is both a short-run equilibrium and a long-run equilibrium that could have been attained through an increase in government spending. C) Point C is a long-run equilibrium that could have been attained through a tax increase, although reaching this point first required a short-run equilibrium at point B. D) Point C is a short-run equilibrium that could have been attained through a reduction in government spending, but in the long run the economy will end up at point B. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 40) Refer to the above figure. If the economy is currently at point C, then an increase in taxes will lead to A) an increase in the price level and an increase in real GDP. B) a decrease in real GDP and an increase in the price level. C) a decrease in real GDP and a decrease in the price level. D) a decrease in the price level and an increase in real GDP. Answer: C Diff: 3 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 41) Suppose there currently is an inflationary gap. What could the government do to bring the overall price level down? A) nothing B) Increase income taxes. C) Increase government spending. D) Reduce the nation's aggregate supply. Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

42) An example of expansionary fiscal policy could be A) to increase the nation's money supply. B) to reduce tax rates. C) to reduce government spending. D) to reduce interest rates. Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 43) In the short run, expansionary fiscal policy usually will A) increase both real GDP and the price level. B) increase real GDP and decrease the price level. C) decrease the price level and increase real GDP. D) decrease both real GDP and the price level. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 44) Contractionary fiscal policy will most likely A) raise real GDP more than the increase in the price level. B) raise real GDP. C) lower the price level. D) raise inflation. Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 45) In the short run, if the government attempts to increase aggregate demand, it should A) increase government spending and reduce taxes. B) decrease government spending and increase taxes. C) shift the long-run aggregate supply curve to the right. D) shift the short-run aggregate supply curve to the right. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

46) The government will conduct expansionary fiscal policy if it attempts to A) reduce the price level. B) reduce real GDP. C) shift the aggregate demand curve to the left. D) reduce the level of unemployment. Answer: D Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 47) Suppose the economy has a low level of employment. This would imply A) that the government should engage in expansionary fiscal policy and increase the tax rate. B) that the economy is operating to the left of the LRAS curve and that government spending could be increased to reduce unemployment. C) that fiscal policy has been ineffective and should be abandoned. D) that the economy is operating on the SRAS curve and that government spending could be decreased to reduce unemployment. Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 48) Fiscal policy involves the actions of A) taxation and spending in an effort to address inflation and unemployment. B) business regulation to increase economic efficiency. C) changing interest rates to stimulate private savings. D) changing the exchange rate to discourage imports. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 49) The changing of government expenditures to achieve national economic goals is A) discretionary fiscal policy. B) automatic fiscal policy. C) budget deficit policy. D) inflationary fiscal policy. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

50) Discretionary fiscal policy in the United States A) is undertaken at the order of the Federal Reserve. B) occurs automatically as the nation's level of GDP changes. C) involves specific changes in taxes and government spending undertaken by Congress and the president. D) involves secret advice given by the Council of Economic Advisers to the president. Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 51) If there is a deliberate change in government taxes and spending, it is called A) a recessionary gap. B) an inflationary gap. C) discretionary fiscal policy. D) discretionary monetary policy. Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 52) Which of the following fiscal policy actions would definitely cause an increase in the size of a recessionary gap? A) cuts in government spending B) cuts in taxes C) increases in taxes and increases in government spending D) cuts in taxes and increases in government spending Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 53) Which of the following fiscal policy actions would most likely cause a reduction in the size of an inflationary gap? A) cuts in taxes and increases in government spending B) increases in government spending C) increases in taxes D) cuts in taxes Answer: C Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 15 Copyright © 2021 Pearson Education, Inc.

54) When the government cuts taxes, A) the long-run aggregate supply curve shifts to the left. B) the short-run aggregate supply curve shifts to the left. C) the aggregate demand curve shifts to the left. D) the aggregate demand curve shifts to the right. Answer: D Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 55) Which of the following is NOT related to fiscal policy? A) passage of a new regulation on a specific industry B) decreasing marginal tax rates C) reducing the budget deficit D) increasing government expenditures Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 56) Which one of the following is TRUE about the effects of fiscal policy? A) A decrease government spending will increase aggregate supply. B) A tax change does not have any direct or indirect effects on aggregate demand. C) An increase in government spending will increase aggregate demand. D) An increase in government spending will reduce aggregate demand. Answer: C Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 57) Which of the following conditions describes an inflationary gap? A) The short-run equilibrium level of real GDP is above the long-run level of real GDP. B) The short-run equilibrium level of real GDP is below the long-run level of real GDP. C) The actual interest rate is above the equilibrium interest rate. D) The actual interest rate is below the equilibrium interest rate. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

58) How might fiscal policy be used to correct a recessionary gap? A) The exchange rate would be adjusted to encourage imports. B) The exchange rate would be adjusted to discourage imports. C) The interest rate would be adjusted to encourage saving. D) Taxes would be cut to stimulate aggregate demand. Answer: D Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 59) How might fiscal policy be used to correct an inflationary gap? A) The exchange rate would be adjusted to encourage imports. B) The exchange rate would be adjusted to discourage imports. C) Government spending would be adjusted to reduce consumer spending. D) Business operations would be regulated by the government to become more efficient. Answer: C Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 60) Expansionary fiscal policy is used to A) flight inflation. B) fight recessions. C) encourage private saving. D) make businesses more efficient. Answer: B Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 61) In 2009, Congress passed a bill that involved government spending increases and tax cuts with the purpose of stimulating the U.S. economy. This policy is an example of A) an automatic stabilizer. B) contractionary fiscal policy. C) expansionary fiscal policy. D) expansionary monetary policy. Answer: C Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

62) Tax policy conducted for the purpose of achieving full employment, price stability, or economic growth is an example of A) monetary policy. B) interest-rate policy. C) exchange-rate policy. D) discretionary fiscal policy. Answer: D Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 63) Government spending conducted for the purpose of achieving full employment or price stability is an example of A) monetary policy. B) interest-rate policy. C) exchange-rate policy. D) fiscal policy. Answer: D Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 64) Discretionary fiscal policy A) is the use of government spending and tax policies to influence economic growth and inflation. B) is the use of regulation to influence economic growth and inflation. C) is the purchase and sale of Treasury securities to influence economic growth and inflation. D) is the use of the money supply to maintain stable prices. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 65) The fiscal policy of the United States is A) summarized in the budget of the U.S. federal government. B) the sum of the budgets of each state and municipality. C) published in the Federal Reserve Bank's Annual Report. D) decided each year by the head of the U.S. Department of the Treasury. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 18 Copyright © 2021 Pearson Education, Inc.

66) Refer to the above figure. If the relevant aggregate demand curve is AD2, what is the current economic situation? A) inflationary gap B) recessionary gap C) equilibrium D) overemployment Answer: B Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 67) Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use discretionary fiscal policy to close the existing gap, it should A) decrease taxes. B) increase taxes. C) increase the money supply. D) decrease government spending. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

68) Refer to the above figure. If the relevant aggregate demand curve was AD2, the government could do all of the following to close the existing gap EXCEPT A) increase government spending on roads. B) reduce marginal tax rates. C) reduce corporate taxes. D) reduce defense spending. Answer: D Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

69) Refer to the above figure. If the relevant aggregate demand curve is AD2, what is the current economic situation? A) inflationary gap B) recessionary gap C) equilibrium D) overemployment Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge

70) Refer to the above figure. Suppose the relevant aggregate demand curve is AD2. If the government wants to use fiscal policy to close the existing gap, it should A) increase taxes. B) decrease taxes. C) increase the money supply. D) increase government spending. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 71) Refer to the above figure. If the relevant aggregate demand curve is AD1, then the economy is experiencing A) an inflationary gap. B) a recessionary gap. C) a deflationary gap. D) full employment. Answer: D Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 72) Refer to the above figure. If the current level of real GDP is $13 trillion, then the economy is experiencing A) an inflationary gap. B) a recessionary gap. C) a deflationary gap. D) a fiscal deficit gap. Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

73) Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap? A) Increase government spending. B) Decrease interest rates. C) Increase the money supply. D) all of these Answer: A Diff: 2 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 74) When the current short-run equilibrium is to the right of the long-run aggregate supply, appropriate discretionary fiscal policy used to address this problem would be to A) increase taxes. B) decrease taxes. C) increase government spending. D) decrease the discount rate. Answer: A Diff: 3 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 75) Which of the following statements about fiscal policy is TRUE? A) Real Gross Domestic Product (GDP) can be increased above its long-run equilibrium only in the short run. B) Real Gross Domestic Product (GDP) can never be increased above its long-run equilibrium, even for a brief period of time. C) Government can shift the aggregate demand curve inward by increasing spending. D) Government can shift the aggregate demand curve outward by reducing spending. Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

76) Which one of the following is an example of discretionary fiscal policy used to correct a recessionary gap? A) a tax decrease passed into law by Congress B) an increase in the money supply by the Federal Reserve C) a decrease in government expenditures approved by Congress D) an agreement among major banks to raise interest rates Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 77) Which one of the following is an example of discretionary fiscal policy used to correct an inflationary gap? A) a tax increase passed into law by Congress B) decrease in the money supply by the Federal Reserve C) an increase in government expenditures approved by Congress D) an agreement among major banks to lower interest rates Answer: A Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 78) What is discretionary fiscal policy and what is its purpose? Answer: Discretionary fiscal policy is the deliberate changing of government spending and/or taxes. Its purpose is to move the economy toward full employment with price stability more rapidly than it would if left on its own. Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 79) Explain how fiscal policy can correct a contractionary gap. Answer: A contractionary gap can be closed by a decrease in aggregate demand. By reducing government spending or increasing taxes, aggregate demand increases, thereby raising the level of real GDP. A contractionary gap can be closed by increasing aggregate demand, increasing government spending or reducing taxes. Diff: 1 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

80) Suppose the government believes the economy is operating beyond the full-employment real GDP. What kind of fiscal policy could it pursue? Answer: The government could initiate contractionary fiscal policy and either reduce government spending or increase taxes. The aggregate demand curve shifts to the left. With an upward-sloping short-run aggregate supply curve, real GDP falls and the price level falls. Diff: 3 Topic: 13.1 Discretionary Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13.2 Possible Offsets to Fiscal Policy 1) What does research tell us about the impact of Ricardian equivalence effects on the economy? A) There is no evidence of any impact of Ricardian equivalence effects. B) Ricardian equivalence effects have a huge impact on aggregate demand. C) There is a very small impact on both aggregate demand and aggregate supply. D) Ricardian equivalence effects may exist, but the sizes of those effects are unclear. Answer: D Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) The Ricardian equivalence theorem states that A) an increase in government spending has no effect on aggregate supply. B) increases in government spending have a larger impact on real Gross Domestic Product (GDP) than decreases in taxes. C) an increase in the government budget deficit created by a current tax cut has no effect on aggregate demand. D) an increase in the government budget deficit has no effect on real Gross Domestic Product (GDP) because it only affects the price index. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

3) The concept that increased government spending will lead to lower investment and consumer spending is referred to as the A) inflationary effect. B) crowding-out effect. C) recessionary effect. D) Keynesian effect. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) The Laffer curve shows a relationship between A) government spending and real Gross Domestic Product (GDP). B) interest rates and investment spending. C) the price level and real Gross Domestic Product (GDP). D) tax rates and tax revenues. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) By definition, a direct expenditure offset will occur whenever A) the government increases spending in an area that competes with the private sector. B) the government increases spending for the military. C) the government increases spending to stimulate consumer spending. D) the interest rate raises to offset the effects of fiscal policy. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) If the government began providing free textbooks to college students who would otherwise have bought their books from the private sector, the government's action would result in A) an increase in real Gross Domestic Product (GDP). B) a direct expenditure offset. C) a Ricardian dilemma. D) a free market equilibrium. Answer: B Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge

7) If the government increases spending and there is a complete direct expenditure offset, then A) aggregate demand and real Gross Domestic Product (GDP) will not change. B) aggregate demand and real Gross Domestic Product (GDP) will increase by the amount of the spending increase. C) the price level will drop. D) the government spending multiplier will be greater than zero. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) The government wants to increase its spending to stimulate the economy. Taking into account direct expenditure offset effects, what is its best spending option? A) a new fighter jet for the military B) expanding the school lunch program C) constructing more low income housing D) providing textbooks for college students Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 9) According to supply-side economics, changes in marginal tax rates will have which of the following effects? A) change the incentive to work B) change the incentive to save C) change the incentive to invest D) all of these Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) One part of the supply-side argument is that A) lower marginal tax rates are required to induce Congress to reduce government spending. B) lower marginal tax rates can increase total tax revenues. C) the marginal tax rate should be set at 50 percent. D) the relevant aggregate supply curve is close to horizontal. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 26 Copyright © 2021 Pearson Education, Inc.

11) The supporters of a proposal to increase marginal taxes on those earning over $100,000 a year say this change would generate $500 million in new tax revenues. A supply-side economist would argue that the actual revenue raised will be A) less than $500 million because some people will respond by working less. B) exactly $500 million because there are no offsetting factors to a tax increase. C) more than $500 million, because lower income people will work harder when they perceive the tax system to be fairer. D) more than $500 million because interest rates will also be affected. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 12) Supply-side economists argue that A) higher tax rates can lead to lower tax revenues. B) higher tax rates lead to increased productivity. C) lower tax rates lead to a drop in real Gross Domestic Product (GDP). D) lower tax rates always lead to lower tax revenues. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13) According to supply-side economists, lower marginal tax rates will not necessarily lead to lower tax revenues because A) the crowding out effect does not apply to taxes. B) lower tax rates have no effect on the opportunity cost of labor. C) the aggregate supply curve will shift inward to the left if the tax rates are lowered. D) the lower marginal tax rates will be applied to a growing tax base due to a higher output level. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14) Supply-side economics focuses on tax cuts to stimulate A) aggregate demand by reducing saving. B) aggregate supply by increasing production. C) government spending. D) household consumption. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

15) When supply-side policy is successful in raising equilibrium real Gross Domestic Product (GDP), the reason is that the policy generates A) a decrease in aggregate demand. B) an increase in aggregate supply. C) a decrease in employment. D) a decrease in saving. Answer: B Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 16) If the government increases its spending but does NOT raise taxes, A) aggregate demand will increase without any effect on the price level. B) the government will have to borrow funds. C) the government will have to reduce the money supply. D) the government will have to raise expenditures or lower taxes the next year. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 17) The crowding-out effect is A) the tendency of contractionary fiscal policy to cause an increase in planned investment or planned consumption in the private sector. B) the tendency of expansionary fiscal policy to cause an increase in planned investment but not in planned consumption in the private sector. C) the tendency of expansionary fiscal policy to cause a decrease in planned investment or planned consumption in the private sector. D) the tendency of contractionary fiscal policy to cause an increase in planned investment but a decrease in planned consumption in the private sector. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

18) At tax rates higher than the tax rate that maximizes tax revenues along a Laffer curve, A) an increase in tax rates increases tax revenues. B) a reduction in tax rates reduces tax revenues. C) a reduction in tax rates increases tax revenues. D) any variation in tax rates has no effect on tax revenues. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 19) If the government increases spending while holding taxes constant, we expect A) an increase in investment spending by businesses too, as they anticipate future economic growth. B) a decrease in real saving as consumers follow suit and also increase borrowing. C) planned real investment spending by businesses to increase. D) interest rates to rise. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 20) The tendency for expansionary fiscal policy to cause a reduction in planned real investment spending by the private sector is called A) the indirect effect. B) the multiplier effect. C) the crowding-out effect. D) the Laffer effect. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

21) The crowding-out effect is A) due to the upward slope of the SRAS when the economy is operating to the right of the LRAS curve. B) due to the government being more powerful in the markets when there is an increase in government spending. C) a situation in which expansionary fiscal policy leads to a decrease in planned spending in the private sector. D) only relevant when an inflationary gap is present. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 22) If the crowding-out effect is complete and the marginal propensity to save is 0.2, then an increase in government spending of $500 billion will generate how much more real Gross Domestic Product (GDP)? A) $0 B) $50 billion C) $400 billion D) $500 billion Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 23) A direct expenditure offset occurs when an increase in government spending A) results in an increase in household saving for retirement. B) is followed by an increase in consumer spending. C) results in a decrease in private spending. D) is followed by an increase in taxes. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

24) Refer to the above figure. The government has just engaged in expansionary fiscal policy shifting the aggregate demand curve from AD1 to AD2. Interest rates have started to rise. Which of the following statements is TRUE in the short run? A) Real GDP will be $14 trillion since the effect of government spending is not influenced by interest rates. B) Real GDP will fall back to $11 trillion since the effect that increased government spending has on real GDP is short lived. C) Real GDP will go beyond $14 trillion as businesses and consumers react to the increase in interest rates. D) Real GDP will end up somewhere between $11 and $14 trillion as businesses and consumers reduce their spending in response to the increase in interest rates. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 25) When a direct expenditure offset occurs with the implementation of an expansionary fiscal policy, A) the stimulative effect will be less than expected. B) the stimulative effect will be more than expected. C) the fiscal policy will not be discretionary. D) the time lags associated with the implementation of fiscal policy will shorten. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

26) Suppose that real GDP is initially $20 trillion and the government attempts to increase real GDP to $21 trillion. The marginal propensity to consume is 0.8, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. Which increase in government spending below could yield the desired level of real GDP? A) $100 billion B) $125 billion C) $200 billion D) $400 billion Answer: D Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 27) Suppose that real GDP is initially $100 trillion and the government attempts to increase real GDP to $101 trillion. The marginal propensity to consume is 0.75, and every $1.00 increase in real government spending crowds out $0.50 in real planned investment expenditures. How much increase in real government spending could lead to the desired level of real GDP? A) $0 B) $250 billion C) $500 billion D) $100 trillion Answer: C Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

28) Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to AD3, but the increase in spending only shifts the aggregate demand curve to AD2, then A) complete crowding out has occurred. B) some crowding out has occurred. C) the increased borrowing caused interest rates to fall. D) the short-run aggregate supply curve is steeper than the figure indicates. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 29) Refer to the above figure. Suppose the economy is at E and the government uses an expansionary fiscal policy to move the aggregate demand curve to AD2. In the end, the aggregate demand curve is still AD1. A possible reason for this is that A) the economy is already at full employment. B) the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving. C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending. D) some of the increased government spending is not counted in GDP. Answer: C Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

30) The Ricardian equivalence theorem states that A) the effects of an increase in government spending are equivalent to the effects of an increase in the money supply. B) an increase in government spending financed by higher taxes has no effect on aggregate demand. C) spending on national defense is a direct expenditure offset. D) government spending financed by taxes is equivalent to government spending financed by borrowing. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 31) According to the Ricardian equivalence theorem, a tax cut that increases the government budget deficit will have A) no effect on aggregate demand because people realize that there will be a future tax liability so that there is no increase in consumption expenditures. B) no effect on aggregate demand because people only look at changes in taxes or government spending in the present. C) a positive effect on aggregate demand because people look at changes in taxes or government spending in the present. D) an effect on aggregate demand. The magnitude the effect will have depends upon whether the increase is caused by a reduction in taxes or an increase in government spending. Answer: A Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 32) An increase in government spending will have no effect on real GDP if A) people look at changes in taxes only in the present. B) there is no crowding out. C) the Ricardian equivalence theorem holds. D) the tax decrease is offset by an increase in government spending. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

33) The proposition that increases in government spending that raise the government budget deficit have no effect on aggregate demand is called the A) open-economy effect. B) federalism effect. C) Ricardian equivalence theorem. D) interest-rate effect. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 34) According to the Ricardian equivalence theorem, budget deficits resulting from tax cuts A) increase aggregate demand. B) increase both aggregate demand and aggregate supply. C) have no effect on aggregate demand. D) affect only aggregate supply. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 35) Expansionary fiscal policy fails to achieve the government's national economic goals. Some economists claim it is due to indirect crowding out. What evidence would be consistent with this claim? A) An increase in consumer spending occurred. B) The interest rate increased. C) Saving decreased. D) The price level decreased. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

36) Three candidates for political office disagree over the benefits of enlarging the federal budget deficit. Candidate X says the stimulation package is needed to increase employment and real GDP; Candidate Y says it will only cause higher prices; and Candidate Z says it will have no effect on either real GDP or the price level. How do the three candidates differ with respect to the condition of the economy and the effects of fiscal policy? A) Candidate X thinks the simple Keynesian model is applicable, while Y thinks the expansionary policy will fully crowd out private investment. Z believes the economy is experiencing a recessionary gap. B) Candidate X thinks the simple Keynesian model is applicable; Y thinks the short-run aggregate supply curve is horizontal; and Z thinks the expansionary policy will generate lower interest rates. C) Candidate X thinks the economy is below the full-employment real GDP and that the shortrun aggregate supply curve is horizontal. Candidate Y believes the economy is at full employment. Candidate Z believes the expansionary policy will result only in direct fiscal offsets. D) Candidate X thinks the short-run aggregate supply curve is upward sloping; Y thinks interest rates will rise; and Z thinks the economy is at full employment. Answer: C Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 37) "Expansionary fiscal policy is always 100 percent effective when the short-run aggregate supply curve is horizontal." Is this statement TRUE? A) yes, because theoretically nothing else can offset the effects of fiscal policy B) yes, when the long-run aggregate supply curve is horizontal too C) no, because crowding out could take place D) no, because the increased spending may cause the price level to increase Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 38) Direct expenditure offsets are A) the discretionary changing of government expenditures to achieve a higher employment level. B) the decrease in planned investment that occurs as the result of an increase in interest rates. C) the same as the Ricardian equivalence theorem. D) the decrease in spending in the private sector in areas in which the government is competing. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

39) Whenever government spending is a substitute for private spending, A) interest rates will rise. B) the Ricardian equivalence theorem holds. C) the effects of expansionary fiscal policy are dampened. D) there is a direct multiplier effect. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 40) The government has decided to give every resident a $1000 coupon that they can use to purchase their choice of a new car. We would expect this policy to lead to A) an increase in aggregate demand equivalent to the full impact of all of the coupons redeemable. B) no increase in aggregate demand due to the Ricardian equivalence theorem. C) no increase in aggregate demand because there would be no direct expenditure offset. D) an increase in aggregate demand but not equivalent to the full impact of all of the coupons redeemed due to some direct expenditure offset. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 41) The Laffer curve A) initially slopes upward as increasing tax rates lead to increasing tax revenue but eventually will slope downward as increasing tax rates lead to decreasing tax revenue. B) slopes downward throughout its range since increasing tax rates will always lead to decreases in tax revenue. C) slopes upward throughout its range since increasing tax rates will always lead to increases in tax revenue. D) is horizontal because tax revenue is independent of the rate of interest. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

42) Supply-side economics focuses on how fiscal policy might be used to A) increase aggregate demand to the full-employment level of real GDP. B) increase aggregate supply. C) align aggregate demand and aggregate supply. D) increase consumption. Answer: B Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 43) The Laffer curve indicates which of the following? A) There is an ideal interest rate that will maximize investment spending. B) There is an ideal amount of government spending that will lead to full national employment. C) There is an ideal tax-revenue-maximizing tax rate for government taxes. D) There is an ideal income tax rate on individuals, depending on their consumption behavior. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 44) According to the Laffer curve, increases in the tax rate will lead to a(n) A) steady decrease in tax revenues. B) steady increase in tax revenues. C) initial decrease in tax revenues and then an increase in tax revenues. D) initial increase in tax revenues and then a decrease in tax revenues. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

45) Refer to the above figure. Which panel is consistent with the Laffer curve? A) Panel A B) Panel B C) Panel C D) Panel D Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 46) If the government wishes to promote a higher rate of growth of real GDP, a supply-side economist would argue the appropriate policy is A) engaging in expansionary fiscal policy by lowering marginal tax rates. B) engaging in expansionary fiscal policy of increasing government spending. C) lowering marginal tax rates on people and raising them on corporations. D) leaving the economy alone and letting the natural forces bring it into a long-run equilibrium. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

47) According to supply-side economics, lower tax rates on wages A) generate higher revenues for the government and increased unemployment. B) create incentives to work more, which increases real GDP. C) are less productive than lower tax rates on consumers. D) have little effect on the economy. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 48) The idea that creating incentives for individuals and firms to increase productivity leading to an increase in long-run aggregate supply is A) supply-side economics. B) demand-side economics. C) the Ricardian equivalence theorem. D) laissez-faire economics. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 49) Supply-side economics A) promotes expansionary fiscal policy by simultaneously increasing taxes and government spending. B) promotes reducing taxes to create incentives to increase productivity. C) is based on the crowding-out effects. D) is based on the Ricardian equivalence theorem. Answer: B Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

50) A government proposal to increase marginal tax rates on the wealthiest 1 percent of U.S. residents is supposed to generate an additional $200 billion in tax revenues. It is likely that A) the actual revenue raised will exceed the $200 billion, because the other 98 percent of the population will increase their work effort with a more fair tax system. B) the actual revenue raised will be more than $200 billion, because the short-run aggregate supply curve is upward sloping. C) the actual revenue raised will be less than $200 billion, because some of the people will respond by working less and earning less income that can be taxed. D) the actual revenue raised will be close to $200 billion, because the wealthy don't respond to work incentives the way poorer workers do. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 51) An increase in government spending without any increase in taxes A) does not increase aggregate demand. B) would effectively eliminate an inflationary gap. C) causes investment spending to increase. D) requires additional government borrowing. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 52) Which one of the following statements is NOT true? A) Expansionary fiscal policy is employed to offset recessionary gaps. B) Expansionary fiscal policy has an effect on interest rates. C) Crowding out dilutes the effect of expansionary fiscal policy. D) When crowding out occurs, fiscal policy has a larger effect on aggregate demand. Answer: D Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

53) In the extreme case of a complete crowding-out effect, A) an increase in interest rates will stimulate investment spending. B) an increase in tax rates will stimulate work effort. C) an increase in government spending will not increase aggregate demand. D) an increase in government spending will stimulate investment spending. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 54) Because of crowding out, A) expansionary fiscal policy during a recession must involve a tax increase. B) expansionary fiscal policy during a recession is reinforced by private investment spending. C) the effect of expansionary fiscal policy is partially offset by the decline in investment spending caused by higher interest rates. D) expansionary fiscal policy is completely achieved even with a decline in investment spending. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 55) If an increase in government spending causes an increase in government borrowing, this could induce A) an increase in interest rates, which would cause private domestic investment to fall. B) an increase in interest rates, which would cause private domestic investment to rise. C) an increase in interest rates but no effect on private domestic investment. D) a decrease in interest rates, which would cause private domestic investment to rise. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 56) The crowding-out effect refers to A) an increase in the consumption of domestic goods at the expense of imported goods. B) an increase in the consumption of imported goods at the expense of domestic goods. C) a decrease in consumption and investment caused by an increase in government borrowing. D) a decrease in consumer spending caused by a decrease in consumer confidence. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

57) The permanent income hypothesis implies that the effect of a temporary tax cut on economic activity A) is greater than the effect of a permanent tax cut. B) is the same as the effect of a permanent tax cut. C) can be greater than or smaller than the effect of a permanent tax cut, depending on how the tax cut affects the government. D) is smaller than the effect of a permanent tax cut. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 58) According to the permanent income hypothesis, taxpayers react to a one-time tax rebate A) by spending all of the tax rebate. B) by spending more than the amount of the tax rebate. C) by saving half of the tax rebate and spending the rest. D) by saving all of the tax rebate. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 59) Assuming that the Ricardian equivalence theorem is TRUE, which of the conditions below will hold? A) An increase in the government budget deficit will not affect aggregate demand. B) Exports will not be considered part of aggregate demand. C) Investment spending will not be considered part of aggregate demand. D) The long-run aggregate supply curve will not be vertical. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

60) Which of the following best explains why the federal tax rebates in the 2000s had almost no effects on aggregate demand? A) According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because they did not change taxpayers' permanent income. B) According to the permanent income hypothesis, those one-time tax rebates did not affect consumption because taxpayers did not believe the rebates would occur. C) According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because they were accompanied by more government spending. D) According to Ricardian equivalence theorem, those tax rebates did not affect aggregate demand because there were no direct expenditure offsets. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 61) If there is a dollar-for-dollar direct expenditure offset, then A) increases in aggregate demand will also increase long-run aggregate supply. B) increases in government spending will not increase aggregate demand. C) increases in aggregate demand will increase the price level, but leave real output unchanged. D) increases in aggregate demand will increase real output, but leave the price level unchanged. Answer: B Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 62) The theory that government borrowing may function like an increase in taxes is known as A) the marginal propensity to consume. B) the Ricardian equivalence theorem. C) planned tax policy. D) Congressional Tax policy. Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

63) Who formulated the theory that government borrowing may function like an increase in taxes in the sense of reducing current consumption and business expenditures? A) John Maynard Keynes B) Jean Baptiste Say C) David Ricardo D) Adam Smith Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 64) The idea that a tax reduction funded by government borrowing has no effect on aggregate demand is known as A) the expenditure-offset theorem. B) the Keynesian Cross. C) the balanced budget multiplier. D) the Ricardian equivalence theorem. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 65) Supply-side economists argue that changes in tax rates cause changes in A) the full-employment level of output. B) labor supply. C) tax revenues. D) all of these. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 66) Supply-side theory asserts that high marginal tax rates A) encourage private saving. B) encourage business investment. C) raise additional tax revenues. D) discourage work effort. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

67) Supply-side theory suggests that A) aggregate supply does not depend on labor productivity. B) increased government spending does not increase aggregate demand. C) higher tax rates may not increase overall tax revenues. D) increased labor productivity may not increase real output. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 68) Supply-side economists argue that decreasing marginal tax rates A) increases productivity and shifts the AS curve to the right. B) decreases productivity and shifts the AD curve to the right. C) increases productivity and shifts the AD curve to the left. D) due to the Ricardian equivalence, has no impact on the economy. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 69) Supply-side economists argue cuts in tax rates A) always reduce tax revenues. B) can raise tax revenues. C) always increase budget deficits. D) only lead to reductions in government spending. Answer: B Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 70) The concept that a decline in tax rates and other incentives will induce individuals and firms to increase productivity is typically referred to as A) demand-side economics. B) Ricardian equivalence. C) supply-side economics. D) Keynesian economics. Answer: C Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

71) The Laffer curve shows that as tax rates increase A) initially tax revenues increase, then decrease. B) tax revenues decrease as the incidence of cheating on tax returns increases. C) tax revenues increase as more individuals and businesses have to pay taxes. D) tax revenues remain unchanged. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 72) According to the Laffer curve, we know with certainty that an increase in the tax rate will A) cause tax revenue to increase. B) cause tax revenue to decrease. C) have no effect on tax revenue. D) cause tax revenue to increase, decrease, or remain unchanged. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

73) Consider the above figure. The curve shown is sometimes referred to as A) the Laffer curve. B) the Ricardian curve. C) the Keynesian curve. D) the Phillips curve. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

74) Consider the above figure. This curve suggests that as the government continues to raise the tax rate, the revenues that are collected will eventually A) increase. B) decline. C) approach infinity. D) become negative. Answer: B Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

75) Refer to the above figure. Suppose that the economy initially is operating along AD1. If the government seeks to close the recessionary gap by raising government spending without any change in taxation, which moves the aggregate demand curve from AD1 to AD2, then to AD3. Which of the following scenarios is TRUE? A) Interest rates fall and investment rises. B) Both interest rates and investment fall. C) Both interest rates and investment rise. D) Interest rates rise and investment falls. Answer: D Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

76) Refer to the above figure. Suppose that the economy starts at AD1. If the government reduces taxes, then the economy goes to AD2, but then falls back to AD3. This is an example of A) partial crowding-out effect. B) Ricardian equivalence. C) laissez-faire. D) complete crowding-out effect. Answer: A Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 77) Refer to the above figure. Suppose that the economy starts at AD1. If the government reduces taxes, then the economy goes to AD2, but then falls back to AD1. This is an example of A) partial crowding-out effect. B) the free rider problem. C) laissez-faire. D) complete crowding-out effect. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 78) If the federal government borrows from households to pay for increased budget deficits, this will cause A) a decrease in planned investment and planned consumption. B) an increase in planned investment and planned consumption. C) a decrease in planned investment and an increase in planned consumption. D) an increase in planned investment and a decrease in planned consumption. Answer: A Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 79) The crowding out effect of expansionary fiscal policy refers to which of the following? A) a reduction in private sector planned investment B) a reduction in interest rates C) the reduction in the size of the budget deficit D) the reduction in the size of the inflationary gap Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 49 Copyright © 2021 Pearson Education, Inc.

80) When private expenditures decrease as a result of increased government spending, this is known as A) a monetary effect. B) the crowding out effect. C) the multiplier effect. D) an automatic stabilizer. Answer: B Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 81) The crowding out effect refers to A) a permanent increase in taxes. B) an increase in the interest rate caused by government borrowing. C) the reinforcing impact of state and local tax changes on federal tax changes. D) the impact of a tax rate increase when the aggregate supply function is horizontal. Answer: B Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 82) Suppose policy makers pass a budget that results in a reduction in government spending and no change in taxes. This reduction in government spending will likely A) increase government borrowing and increase interest rates. B) generate extra tax revenues to cover the extra spending. C) reduce interest rates and increase planned investment. D) reduce interest rates, increase in planned investment, and increase real GDP. Answer: C Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 83) An increase in government spending that is NOT financed by an increase in taxes will cause which of the following? A) an increase in interest rates and an increase in planned investment B) an increase in interest rates and a reduction in planned investment C) a reduction in interest rates and an increase in planned investment D) a reduction in interest rates and a reduction in planned investment Answer: B Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 50 Copyright © 2021 Pearson Education, Inc.

84) The crowding-out effect refers to the tendency of expansionary fiscal policy to A) cause decreases in planned expenditures in the private sector. B) cause households to save less. C) replace low-skilled labor with higher-skilled labor. D) cause firms to produce above their full capacity. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 85) To offset the indirect crowding-out effects, a government engaging in expansionary policy aimed at eliminating a recessionary gap could A) increase spending less than the simplest Keynesian model would predict. B) increase spending more than the simplest Keynesian model would predict. C) reduce taxes rather than increase government spending. D) both reduce taxes and reduce spending to be able to achieve full employment. Answer: B Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 86) Other factors being constant, what happens when the federal government finances a growing budget deficit by increasing the amount it borrows from the private sector? A) There will be an increase in the interest rate. B) There will be a decrease in the interest rate. C) The crowding out effect will be cancelled out. D) There will be an increase in net exports. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

87) According to the Ricardian equivalence theorem, an increase in government spending without any tax increase will not increase aggregate demand because A) consumers will consume less and save more to prepare for increased taxes in the future. B) the private sector is more likely than the public sector to spend any extra income on national defense. C) consumers will increase their consumption proportionately more than Keynesian economists believe they will. D) consumers will save less than they otherwise would have. Answer: A Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 88) The Ricardian equivalence theorem suggests that an increase in the government budget deficit created by a tax cut will A) increase real Gross Domestic Product (GDP) in both the short and long run. B) decrease real Gross Domestic Product (GDP) in the short run, but increase it in the long run. C) increase real Gross Domestic Product (GDP) in the short run, but decrease it in the long run. D) have no effect on real Gross Domestic Product (GDP) in either the short run or the long run. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 89) Which of the following is a basic assumption of the Ricardian equivalence theorem? A) Consumers pay no attention to government budget deficits. B) Consumers think only in terms of the present. C) If current tax cuts result in budget deficit increases, consumers increase their labor supply today. D) Consumers consider future tax payments when deciding how much to spend and save today. Answer: D Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

90) The proposition that an increase in the federal budget deficit caused entirely by a current tax cut has no effect on aggregate demand is called the A) indirect effect. B) interest rate effect. C) open-economy effect. D) Ricardian equivalence theorem. Answer: D Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 91) What is supply-side economics? Answer: Supply-side economics is the idea that creating incentives for individuals and firms to increase productivity will cause the aggregate supply curve to shift outward. It focuses on reducing marginal tax rates to create incentives to increase productivity. Diff: 1 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 92) Using graphs, explain how indirect crowding out can occur when the government increases spending in an attempt to stimulate the economy. Answer:

See the above figure. The original equilibrium is E1, where there is a recessionary gap. The government pursues expansionary fiscal policy by increasing spending. Its goal is to reach E2. However, the increased borrowing causes the interest rate to increase, so private investment spending falls. The aggregate demand curve shifts back to AD2. Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

93) What are direct expenditure offsets and how do they influence the effects of fiscal policy? Answer: When government spending competes with the private sector, direct expenditure offsets may occur. If the government provides lunches for children in school, families can reduce their expenditures on food to some extent. The impacts of fiscal policy actions on real GDP are reduced. In the extreme case, the government spending multiplier may be zero. Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 94) Suppose the government pursues expansionary fiscal policy by lowering taxes. What are the expected demand-side effects? What are the possible offsets to the demand-side effect? How might supply-side effects change these results? Answer: Aggregate demand increases as consumption spending increases after the increase in disposable income. Crowding out and the effect of the Ricardian equivalence theorem can offset this if the government must borrow more and interest rates increase and if people anticipate higher future taxes they may increase saving. The supply-side effect may be to generate more productivity as people have a greater incentive to work with the lower tax rates. Tax revenues may not decrease. If the government does not have to borrow more, interest rates don't change, and there is no crowding out. Diff: 3 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 95) Explain how indirect crowding out can offset expansionary fiscal policy. Answer: If the government increases spending, it must pay for it some way. If it increases borrowing, interest rates increase. Firms will issue fewer bonds because of the higher interest rates, so private investment spending is reduced. This reduction in investment spending partially offsets the increased government spending. Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 96) Explain the Ricardian equivalence theorem. Answer: The Ricardian equivalence theorem is the proposition that an increase in the government budget deficit has no effect on aggregate demand. When government spending increases without taxes, people expect future taxes to increase and so increase their saving to be ready to pay the higher future taxes. The reduction in consumption spending offsets the higher government spending, so that aggregate demand does not change. Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

97) Explain why proponents of supply-side effects of tax rate variations who also believe that tax-rate changes influence aggregate demand might claim that cuts in marginal income tax rates can potentially push up real Gross Domestic Product (GDP) without generating inflation. Answer: According to supply-side economics, a reduction in marginal income tax rates causes the aggregate supply curve to shift rightward. If such tax-rate reductions also cause total planned expenditures to rise and generate an equal-sized rightward shift of the aggregate demand curve, then equilibrium real Gross Domestic Product (GDP) rises, but the equilibrium price level remains the same. Diff: 2 Topic: 13.2 Possible Offsets to Fiscal Policy Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags 1) The period between the recognition of a problem and the implementation of a policy to solve the problem is A) the recognition lag. B) the action lag. C) the policy effect lag. D) the political decision lag. Answer: B Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) Which of the following are time lags that fiscal policymakers must cope with? A) recognition lags B) action lags C) effect lags D) all of these Answer: D Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

3) The effect time lag of fiscal policy refers to A) the time needed for Congress to enact a policy. B) the delay in recognizing an economic problem. C) the time between the onset of a policy and when the policy has impact on the economy. D) the difficulty in getting the President and the Congress to agree on an appropriate policy. Answer: C Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) The time required to collect information about the current state of the economy is known as A) the recognition lag. B) the action lag. C) the effect lag. D) the fiscal lag. Answer: A Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) Fiscal policy may end up being destabilizing to an economy because A) time lags are always too short for policy actions to take effect. B) the economy is almost always at full employment. C) the President may have different goals than Congress. D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve. Answer: D Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) The recognition time lag recognizes that it takes time A) to collect information about the state of the economy. B) to get politicians to agree on the best policy to enact. C) for any change in policy to take effect and for people to recognize that the policies are effective. D) for the politicians to enact the policy once the need for change has been recognized. Answer: A Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

7) The amount of time that it takes to identify a national economic problem is A) fiscal policy. B) the recognition time lag. C) the effect time lag. D) the action time lag. Answer: B Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) The amount of time that it takes between recognizing an economic problem and implementing policy to solve it is A) the artificial intelligence lag. B) the recognition time lag. C) the effect time lag. D) the action time lag. Answer: D Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 9) The amount of time that elapses between the implementation of a policy and the results of that policy is A) fiscal policy. B) the recognition time lag. C) the effect time lag. D) the action time lag. Answer: C Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) Once either expansionary or contractionary fiscal policy has been undertaken, A) aggregate demand will respond quickly and the problems in the economy will be corrected. B) aggregate demand will respond quickly in the short run but the economy will not improve in the long-run. C) a time lag exists between implementation and the results of the policy. D) taxes will need to be adjusted because of the recognition time lag. Answer: C Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 57 Copyright © 2021 Pearson Education, Inc.

11) The amount of time it takes the government to determine the size of a tax policy is known as the A) action time lag. B) effect time lag. C) recognition time lag. D) Ricardian-equivalence time lag. Answer: A Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 12) The various time lags involved with fiscal policy imply that A) fiscal policy is effective only slowly, but the slowness ensures that it is effective in the long run. B) fiscal policy is most effective as a short-run measure to fine tune the economy's quarterly ups and downs. C) fiscal policy may often be destabilizing if the policy effects occur after the need is over. D) when fiscal policy is carefully coordinated, it can quickly move to keep the economy at the full-employment level of real GDP. Answer: C Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13) In January 2009, the President submitted a bill to Congress that was designed to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to September 2010. Consequently A) the economy should have been at full employment by December 2009. B) the full impact of the bill would be felt by March 2009 because people anticipated the effects of the increased spending. C) the full impact of the bill would be felt by the end of September 2010. D) the full effect of the spending would be felt some time after September 2010 because the full multiplier effects could not be felt until all the increase in spending took place. Answer: D Diff: 3 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

14) In January 2009, the President submitted a bill to Congress in order to stimulate the economy and increase employment. The legislation was passed in March 2009, and the spending occurred from June 2009 to March 2011. As a result A) the full effect of the fiscal policy change would not be felt until after March 2011 because of the effect time lag. B) the full effect of the fiscal policy change would not be felt until after March 2011 because of the recognition time lag. C) the full effect of the fiscal policy change would be felt by March 2011 because people anticipated the spending and changed their behavior accordingly. D) the full effect of the fiscal policy change would be felt when the last of the funds were spent by the government. Answer: A Diff: 3 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 15) Discretionary fiscal policy A) may not have desired effects on real GDP because of the time lags. B) may not have desired effects on real GDP because it leads to increases in aggregate demand. C) may not have desired effects on real GDP because it leads to decreases in aggregate demand. D) would have a larger effect on real GDP if the multiplier was smaller. Answer: A Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 16) To the extent that the political process of moving legislation through Congress is slow, A) the effect time lag will be long. B) the recognition time lag will be long. C) the action time lag will be long. D) automatic stabilizers will not be effective. Answer: C Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

17) The time required to acquire information about the state of the economy is known as A) the action lag. B) the recognition lag. C) the bureaucracy lag. D) the data lag. Answer: B Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 18) The period between the implementation of a policy and its intended result is known as A) the political action lag. B) the recognition time lag. C) the effect time lag. D) the data lag. Answer: C Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 19) A problem with using fiscal policy to fine-tune the economy is that A) it takes time for policymakers to agree on the appropriate fiscal policy. B) fiscal policy impacts the economy too fast. C) fiscal policy impacts only urban areas of the nation. D) fiscal policy impacts only the largest states in the nation. Answer: A Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 20) The recognition time lag is the time between A) when an economic problem manifests itself and it is officially acknowledged. B) the recognition of an economic problem and implementing policies to solve it. C) implementing policies to solve an economic problem and when the results of that policy can be measured. D) the beginning of the budgetary process and the final budget resolution. Answer: A Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

21) The action time lag is the time period that elapses A) between when an economic problem manifests itself and it is officially acknowledged. B) between the recognition of an economic problem and implementing policies to solve it. C) between implementing policies to solve an economic problem and when the results of that policy can be measured. D) between the beginning of the budgetary process and the final budget resolution. Answer: B Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 22) The effect time lag is the time period that elapses A) between when an economic problem manifests itself and it is officially acknowledged. B) between the recognition of an economic problem and implementing policies to solve it. C) between implementing policies to solve an economic problem and when the results of that policy can be measured. D) between the beginning of the budgetary process and the final budget resolution. Answer: C Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 23) When data on the economy requires some time to gather and interpret, there is A) an aggregate time lag. B) an action time lag. C) a recognition time lag. D) an effect time lag. Answer: C Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 24) When it takes time for the president and Congress to change fiscal policy to act on economic data, we have a(n) A) aggregate time lag. B) action time lag. C) recognition time lag. D) effect time lag. Answer: B Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

25) When there is an interval between when the fiscal policy changes and corresponding changes in aggregate spending, we have a(n) A) aggregate time lag. B) action time lag. C) recognition time lag. D) effect time lag. Answer: D Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 26) When fiscal policy is used, time lags are variable and last anywhere from A) one to three weeks. B) one to three months. C) one to three years. D) one to three decades. Answer: C Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 27) Fiscal policy time lags tend to be A) constant, always thirteen months long. B) variable, between one and three years. C) variable, between one and three weeks. D) variable, between one and three months. Answer: B Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 28) A recession begins in January but government policy makers do NOT reach a consensus that a recession had in fact begun until June. This is an example of a(n) A) recognition time lag. B) action time lag. C) effect time lag. D) quick time lag. Answer: A Diff: 2 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge

29) What are the various time lags that affect discretionary fiscal policy, and what are their effects? Answer: The recognition lag refers to the time it takes before economic problems can be identified; the action time lag is the time required between recognizing the problem and putting policy into effect; and the effect time lag is the time that elapses between the onset of policy and the results of that policy. The result is that the effects of a change in fiscal policy may take hold only after the problem no longer exists, and may have unintended effects. Diff: 1 Topic: 13.3 Discretionary Fiscal Policy in Practice: Coping with Time Lags Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13.4 Automatic Stabilizers 1) One characteristic of automatic stabilizers is that A) they require no new legislative action by the government to have an effect. B) they automatically produce surpluses during recessions and deficits during inflation. C) they have no effect on the distribution of income. D) they reduce the size of the public debt during times of recession. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) Unemployment compensation programs are called automatic stabilizers because payments increase during A) expansionary periods. B) periods of high unemployment. C) both recessions and expansions. D) wartime only. Answer: B Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 3) All of the following are automatic fiscal stabilizers EXCEPT A) a congressionally mandated decrease in tax rates to stimulate the economy. B) a decrease in unemployment compensation payments during an expansion. C) a decrease in overall tax revenues during a recession. D) an increase in unemployment expenditures during a recession. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 63 Copyright © 2021 Pearson Education, Inc.

4) When real Gross Domestic Product (GDP) rises, which of the following will automatically occur? A) an increase in income tax rates B) an increase in income tax revenues C) an increase in unemployment compensation expenditures D) a decrease in government expenditures Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) Automatic stabilizers are A) provisions that cause changes in government spending and taxes without new action by Congress or the President. B) policies set by certain committees in Congress. C) tools used by the President's Council of Economic Advisers. D) provisions that cause the aggregate supply curve to be upward sloping. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) An example of an automatic stabilizer is A) unemployment compensation. B) a newly enacted surtax to slow down an overheated economy. C) a constant money supply rule. D) a deliberate increase in government spending to fight recession. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 7) An advantage of automatic stabilizers over discretionary fiscal policy is that A) automatic stabilizers are not subject to the same time lags as discretionary fiscal policy. B) automatic stabilizers can be easily fine-tuned to move the economy to full employment. C) only policymakers are involved in implementing automatic stabilizers. D) the Ricardian equivalence theorem applies more readily to automatic stabilizers than to discretionary fiscal policy. Answer: A Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

8) In the United States economy, the progressive income tax and unemployment compensation are both A) destabilizers. B) discretionary presidential effectors. C) automatic stabilizers. D) time lag factors. Answer: C Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

9) Refer to the above figure. As the real national income expands from Y2 to Y3, A) a budget surplus occurs. B) a budget deficit occurs. C) tax revenues fall. D) government transfers rise. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge

10) Refer to the above figure. A budget deficit occurs when real national income is A) Y1. B) Y2. C) Y3. D) None of these: cannot be determined given the information. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 11) Provisions that cause changes in government spending and taxes that do NOT require action of the President or Congress are called A) discretionary fiscal policy. B) discretionary stabilizers. C) automatic stabilizers. D) private stabilization effects. Answer: C Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 12) Many government programs, such as unemployment compensation, operate on a deficit during recessions and a surplus during periods of economic expansion. The programs are referred to as A) discretionary fiscal policy. B) automatic stabilizers. C) Ricardian equivalence. D) Recognition time lag. Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 13) The existence of automatic stabilizers will A) reduce the recognition lag of discretionary fiscal policy. B) eliminate recessions. C) reduce the size of recessionary and inflationary gaps. D) cause the effects of shocks to aggregate demand to have a larger effect on GDP. Answer: C Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

14) Which of the following is an example of an automatic stabilizer? A) cost of living adjustments to Social Security payments B) unemployment benefits C) a temporary tax rebate D) all of these Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 15) All of the following are automatic stabilizers EXCEPT A) discretionary increases in government spending. B) income transfer payments. C) progressive income tax system. D) unemployment compensation. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 16) Suppose there are two economies that are identical in every way with the following exception. Economy A has an unemployment compensation system while economy B does NOT have an unemployment compensation system. Now suppose both economies experience the same drop in planned investment. Which of the following is correct? A) Real GDP will fall more in economy A than in economy B. B) Real GDP will fall more in economy B than in economy A. C) Real GDP will fall the same in both economies. D) The effect on the relative size of the reduction in real GDP in the two economies is ambiguous. Answer: B Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 17) What do automatic stabilizers attempt to stabilize? A) long-run aggregate supply B) aggregate demand C) exports D) imports Answer: B Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 67 Copyright © 2021 Pearson Education, Inc.

18) Which of the following might be considered an automatic fiscal stabilizer? A) government spending for the war effort B) 401(k) retirement program C) unemployment compensation D) government budgeting for education Answer: C Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 19) Government-provided unemployment insurance is an example of A) a discretionary fiscal stabilizer. B) an automatic fiscal stabilizer. C) a monetary stabilizer. D) an automatic monetary stabilizer. Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 20) Automatic stabilizers have the effect of A) increasing aggregate demand during a recessionary gap. B) increasing aggregate demand during an inflationary gap. C) increasing long-run aggregate supply during a recessionary gap. D) increasing long-run aggregate supply during an inflationary gap. Answer: A Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 21) Which one of the following is NOT an automatic stabilizer? A) the income tax system B) the system of national defense procurement C) the system of welfare payments D) unemployment compensation programs Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

22) Automatic stabilizers are so-named because A) they are automatically undertaken by the Federal Reserve Bank to reduce budget deficits. B) they occur automatically when real GDP changes. C) the policy suggestions of the Council of Economic Advisors are automatically followed. D) the policy suggestions of the Office of Management and Budget are automatically followed. Answer: B Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 23) An example of an automatic stabilizer is A) the progressive tax system. B) the decision of the President to cut taxes in a recession. C) the Congressional decision to increase unemployment benefits in a recession. D) the raising of taxes on cigarettes to discourage smoking to stabilize health-care costs. Answer: A Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 24) The advantage of automatic stabilizers is that they A) help to balance the budget. B) reduce the size of the net public debt. C) reduce the fluctuations in the business cycle. D) help reduce the inflation rate. Answer: C Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 25) All of the following are automatic stabilizers EXCEPT A) the federal income tax system. B) welfare payments. C) discretionary tax cuts. D) unemployment compensation. Answer: C Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

26) Automatic stabilizers are fiscal policy measures that A) must be determined by the Congress in each budget. B) do not require new legislation. C) are determined by the Federal Reserve System. D) are part of discretionary fiscal policy. Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 27) Automatic stabilizers A) work counter-cyclically to moderate the business cycle. B) often make any downturn in the economy worse. C) must be determined by the Congress in each budget. D) are never altered. Answer: A Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 28) Automatic stabilizers are designed to A) promote global trade. B) simplify the tax system. C) moderate changes in disposable income. D) stabilize the bipartisan budget process. Answer: C Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 29) Because of time lags, automatic stabilizers A) are less effective than discretionary fiscal policy in stabilizing real GDP. B) are more effective than discretionary fiscal policy in stabilizing real GDP. C) are equally effective as discretionary fiscal policy in stabilizing real GDP. D) have no effect on real GDP at all. Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

30) Automatic stabilizers A) are more effective in influencing real GDP at normal times than at times of a recession. B) are probably not very effective in influencing real GDP during a recession. C) are more effective in influencing real GDP than discretionary fiscal policy at times of a recession. D) work well because there are no policy lag problems in influencing real GDP. Answer: C Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 31) Automatic stabilizers A) are not effective in influencing real GDP at any time. B) are only effective in influencing real GDP at times of a recession. C) are only effective in influencing real GDP during normal times. D) can influence real GDP at normal times and times of a recession. Answer: D Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 32) During which time will fiscal policy be the most effective? A) normal times B) times of war C) in the middle of expansions D) times of stagflation Answer: B Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 33) During normal times A) fiscal policy is very effective because it the effects of fiscal policy will swamp automatic stabilizers and time lags can be. B) fiscal policy can immediately correct problems in the economy. C) automatic stabilizers are not effective in affecting real GDP. D) fiscal policy is not effective because of the recognition time lag. Answer: D Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

34) What are the automatic stabilizers the United States has in place, and how do they function differently from discretionary fiscal policy? Answer: Automatic stabilizers are provisions of the tax law that cause changes in government spending or taxes without the action of Congress or the President. The progressive income tax takes more money out of the hands of people during inflationary times and less during recessions. Unemployment compensation gives spending power to people even when they are not working due to a recession. The key difference is that automatic stabilizers work without the lags associated with discretionary fiscal policy. Diff: 2 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 35) What are the effects of fiscal policy during normal times? What are the effects of fiscal policy during abnormal times? Answer: During normal times, discretionary fiscal policy may not have its intended effects and, therefore, may actually cause more harm than good. The various time lags and the possible offsets make it fairly ineffective as a tool. During a major recession, fiscal policy is more likely to be effective, since the offsets are less likely. Diff: 1 Topic: 13.4 Automatic Stabilizers Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13.5 Appendix D: Changes in Government Spending 1) In the traditional Keynesian model, if the government increases spending, then A) real Gross Domestic Product (GDP) will rise and the price level will remain constant. B) real Gross Domestic Product (GDP) will increase and the price level will fall. C) both real Gross Domestic Product (GDP) and the price level will decrease. D) real Gross Domestic Product (GDP) will remain constant and the price level will rise. Answer: A Diff: 1 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

2) In the traditional Keynesian model, an increase in government spending A) causes the C + I + G + X line to shift upward by the full amount of the increase in government spending. B) causes the C + I + G + X line to shift upward by an amount less than the increase in government spending. C) causes the C + I + G + X line to shift upward by more than the increase in government spending. D) causes no change in the C + I + G + X line. Answer: A Diff: 2 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 3) In the traditional Keynesian model, if the government decreases spending, then A) consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by more than the increase in government spending. B) consumption will decrease, and so real Gross Domestic Product (GDP) will decrease by less than the increase in government spending. C) consumption will remain the same, and so real Gross Domestic Product (GDP) will increase by the same amount of the increase in government spending. D) consumption will increase or decrease, and so real Gross Domestic Product (GDP) will increase or decrease depending on the change in consumption. Answer: A Diff: 2 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) According to the traditional Keynesian analysis, if the government increases spending by $20 million, then A) consumption will increase, and so total expenditures will increase by more than $20 million. B) consumption will decrease, and so total expenditures will increase by less than the $20 million. C) consumption will remain the same, and so total expenditures will increase by exactly $20 million. D) consumption will increase or decrease, and so total expenditures will increase or decrease depending on the change in consumption. Answer: A Diff: 2 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

5) In the traditional Keynesian model, if the government increases government spending, A) the C + I + G + X line will shift down but the aggregate demand curve will not shift. B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. D) the C + I + G + X line will shift up but the aggregate demand curve will not shift. Answer: C Diff: 2 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) In the traditional Keynesian model, a decrease in government spending lowers total planned real expenditures by more than the original decrease in government spending because A) consumption spending depends negatively on real GDP. B) consumption spending depends positively on real GDP. C) consumption spending is not related to real GDP. D) of the crowding-out effect on consumption spending. Answer: B Diff: 2 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 7) In the traditional Keynesian model, an increase in government spending leads to all of the following EXCEPT A) an increase in aggregate demand. B) an increase in the price level. C) an increase in consumption. D) higher real GDP. Answer: B Diff: 2 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) The traditional Keynesian approach concludes that an increase in government spending A) generates a greater increase in investment spending. B) generates an equal increase in total spending because government spending makes up part of total spending. C) generates a greater increase in total spending because consumption spending increases as incomes increase. D) has no effect on total spending because consumers increase saving by an equal amount. Answer: C Diff: 2 Topic: 13.5 Appendix D: Changes in Government Spending Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 74 Copyright © 2021 Pearson Education, Inc.

13.6 Appendix D: Changes in Taxes 1) According to the traditional Keynesian approach, if the government raises taxes, then A) real Gross Domestic Product (GDP) will fall and the price level will remain constant. B) real Gross Domestic Product (GDP) will rise but the price level will fall. C) both real Gross Domestic Product (GDP) and the price level will fall. D) real Gross Domestic Product (GDP) will remain constant but the price level will fall. Answer: A Diff: 1 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) In the traditional Keynesian model, a tax decrease A) causes the C + I + G + X line to shift upward. B) causes the C + I + G + X line to shift downward. C) causes a leftward movement along the C + I + G + X line. D) causes a rightward movement along the C + I + G + X line. Answer: A Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 3) In the traditional Keynesian model, a cut in current taxes A) increases disposable income but does not affect consumption. B) increases both disposable income and consumption. C) decreases disposable income but increases consumption. D) has no effect on either disposable income or consumption. Answer: B Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) According to the traditional Keynesian approach, a tax increase lowers aggregate demand because A) taxes are part of the C + I + G + X line. B) disposable income available to consumers decreases. C) taxpayers anticipate a tax increase in the future. D) a tax cut always results in a balanced budget. Answer: B Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

5) In the traditional Keynesian model, if the government raises taxes, then A) both consumption and real Gross Domestic Product (GDP) will decrease. B) both consumption and real Gross Domestic Product (GDP) will increase. C) consumption will increase but Gross Domestic Product (GDP) will decrease. D) consumption will decrease but Gross Domestic Product (GDP) will increase. Answer: A Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) In the traditional Keynesian model, if the government raises current taxes A) the C + I + G + X line will shift down but the aggregate demand curve will not shift. B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left. C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right. D) the C + I + G + X line will shift up but the aggregate demand curve will not shift. Answer: B Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 7) In the traditional Keynesian model, an income tax cut raises real GDP because A) consumption spending depends negatively on after-tax income. B) consumption spending depends positively on after-tax income. C) consumption spending is not related to after-tax income. D) of the crowding-out effects of taxes. Answer: B Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) In the traditional Keynesian model, an increase in taxes leads to all of the following EXCEPT A) a decrease in aggregate demand. B) an increase price level. C) a decrease in consumption. D) lower real GDP. Answer: B Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

9) According to the Keynesian approach, an increase in taxes A) will reduce consumption exactly by the amount of the taxes. B) will reduce consumption by an amount less than the change in taxes. C) will not impact consumption, as most consumption is autonomous. D) will increase consumption, as the government will spend the extra tax revenue and that increases consumption. Answer: B Diff: 1 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) According to the Keynesian approach, a decrease in taxes A) will increase consumption exactly by the amount of the taxes. B) will increase consumption by an amount of less than the change in taxes. C) will not impact consumption, as most consumption is autonomous. D) will decrease consumption, as the government will have to spend less. Answer: B Diff: 1 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 11) The Keynesian perspective on the effect of an increase in taxes is that this policy action A) generates reductions in consumption and in saving. B) generates reductions in consumption and an increase in saving to pay for the new taxes. C) has no impact on consumption. D) increases current consumption and reduces future consumption. Answer: A Diff: 2 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

12) Suppose there are two policy options facing a vote in the Senate. In the first, government spending will increase $100 billion, while the second option is to cut taxes by $100 billion. A Keynesian economist would argue for A) the tax option because it also affects the incentives workers face. Long-run aggregate supply will increase with the tax cut, but not with the spending increase. B) the tax option because it is easier to pass. The effects on total spending would be identical. C) the spending option because it won't affect the deficit the way the tax cut would. D) the spending option because it has a bigger impact on total spending. The spending directly raises total spending plus it works through the multiplier, while the tax cut only works through the multiplier. Answer: D Diff: 3 Topic: 13.6 Appendix D: Changes in Taxes Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13.7 Appendix D: The Balanced-Budget Multiplier 1) In Country A, the government simultaneously increases its expenditures by $200 billion and increases taxes by $200 billion. If the MPS is equal to 0.5, the government's action ________ real GDP by ________. A) increases; $400 billion B) decreases; $400 billion C) increases; $200 billion D) has no effect on; $0 Answer: C Diff: 2 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) In Country B, the government simultaneously decreases its expenditures by $25 billion and decreases taxes by $25 billion. If the MPS is equal to 0.2, the government's action ________ real GDP by ________. A) decreases; $125 billion B) decreases; $25 billion C) increases; $125 billion D) has no effect on; $0 Answer: B Diff: 2 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

3) The balanced-budget multiplier is equal to A) the percentage increase in government expenditures. B) the reciprocal of the increase in government expenditures. C) the percentage increase in taxes. D) one. Answer: D Diff: 1 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) According to the traditional Keynesian analysis, if the government increases spending and pays for all of it by raising current taxes, then A) aggregate demand will decrease. B) a budget deficit will occur. C) a budget surplus will occur. D) aggregate demand will increase. Answer: D Diff: 2 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) According to the traditional Keynesian approach, if the government increases spending by $10 million and raises current taxes by $10 million at the same time, then A) real GDP will increase by $10 million. B) real GDP will decrease by $10 million. C) real GDP will decrease by more than $10 million. D) real GDP will remain the same. Answer: A Diff: 2 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 6) The Keynesian approach assumes that A) there is no unemployment in the economy. B) the economy is self-regulating. C) the government budget is always in deficit. D) the price level does not change. Answer: D Diff: 2 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

7) If the price level is fixed, then a decrease in government spending will lead to A) a larger decrease in nominal GDP than in real GDP. B) a smaller decrease in nominal GDP than in real GDP. C) no decrease in either nominal GDP or real GDP. D) a decrease in nominal GDP by the same amount as a decrease in real GDP. Answer: D Diff: 2 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) According the traditional Keynesian approach, an increase in government spending is effective in raising real Gross Domestic Product (GDP) if A) the price level is fixed. B) the price level is flexible. C) the price level does not exist. D) Ricardian equivalence occurs, regardless of the price level. Answer: A Diff: 2 Topic: 13.7 Appendix D: The Balanced-Budget Multiplier Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 14 Deficit Spending and the Public Debt 14.1 Public Deficits and Debts 1) In the current year, a nation's government spending equals $200 trillion and its revenues are $250 trillion. Which of the following is TRUE? A) The nation's national debt equals $50 trillion. B) This nation has a current year budget surplus of $50 trillion. C) This nation is currently running a budget deficit of $50 trillion. D) This nation has a current year budget surplus of $450 trillion. Answer: B Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 2) When government revenues exceed government outlays in a particular year, this is called A) a budget surplus. B) a budget deficit. C) the national debt. D) fiscal policy. Answer: A Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 3) Suppose that the government of Smallville spends $2 trillion in 2020 and receives tax revenues of $1.5 trillion in that same year. Which of the following is TRUE? A) Smallville has a budget surplus of $0.5 trillion. B) Smallville has a budget deficit of $0.5 trillion. C) Smallville has a trade deficit of $0.5 trillion. D) Smallville has a trade surplus of $0.5 trillion. Answer: B Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge

4) When government spending exceeds government revenues during a given period of time, A) a budget deficit exists. B) a budget surplus exists. C) the national debt must be decreasing. D) Congress is obliged to raise taxes. Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) How does a government budget deficit occur? A) A government's tax revenues exceed its spending. B) A government's spending exceeds its tax revenues. C) If a nation carries a public debt, it must be running a deficit every year. D) A nation earns more on exports than it spends on imports. Answer: B Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) Stocks change ________ whereas flows relate to ________. A) within a given period of time; changes between points in time B) only at the end of each year; amounts at a given point in time C) between points in time; changes within a given time period D) and that causes flows to change; changes that have no impact on stocks Answer: C Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 7) Which of the following is NOT an example of a flow variable? A) planned investment B) capital stock C) the federal deficit D) inventory investment Answer: B Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

8) If the government's spending exactly equals its revenues during a budget year, that government is A) running a budget deficit. B) experiencing a budget surplus. C) balancing its budget. D) paying off its public debt. Answer: C Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 9) Which of the following is a stock variable? A) public debt B) wealth C) money supply D) all of these Answer: D Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) How does the federal government finance a budget deficit? A) It prints more money. B) It purchases U.S. Treasury bonds. C) It cuts spending on entitlement programs. D) It borrows funds by selling Treasury bonds. Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

11) Other things being equal, during a period when the federal government issues more Treasury securities to borrow funds, A) the flow of government expenditures during that period must exceed the flow of tax revenues. B) the flow of government expenditures during that period must exceed the stock of tax collections. C) the stock of government deficit spending during that period must exceed the flow of tax revenues. D) the stock of government deficit spending during that period must exceed the stock of tax collections. Answer: A Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 12) If the public debt increased by the same amount each year during the past three years, then A) the U.S. government must have operated with the same budget surpluses during the past three years. B) the U.S. government must have experienced budget surpluses that increased by the same amount each of the past three years. C) the U.S. Treasury must have issued securities to fund a flow of government spending that exceeded a flow of tax revenues by the same amount during each of the past three years. D) during each of the past three years, the U.S. Treasury must have bought back the same amount of securities that had previously been issued to cover deficits experienced more than three years ago. Answer: C Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13) The total value of all outstanding federal government securities is A) a flow variable. B) the budget deficit. C) total personal wealth. D) none of these. Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

14) A government budget deficit is A) an excess of government spending over government revenues during a given time period. B) a situation in which the government's spending is exactly equal to the total taxes and other revenues it collects during a given time period. C) the total value of all outstanding federal government securities. D) all federal government debt irrespective of who owns it. Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 15) If the government spends more than it receives in taxes during a given interval, then the result is A) a balanced budget. B) the gross public debt. C) the net public debt. D) a government budget deficit. Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 16) Which of the following statements about the budget deficit is TRUE? A) It is a stock variable. B) It is a flow variable. C) It is equal to the public debt. D) none of these Answer: B Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 17) A federal surplus of $10 billion means that A) the government has a total debt of $10 billion. B) government spending is $10 billion a year. C) the government is spending $10 billion a year less than it is collecting in taxes. D) the government plans on collecting $10 billion in taxes this year. Answer: C Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

18) A government balanced budget is A) an excess of government spending over government revenues during a given time period. B) a situation in which the government's spending is exactly equal to the total taxes and other revenues it collects during a given time period. C) the total value of all outstanding federal government securities. D) all federal government debt irrespective of who owns it. Answer: B Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 19) If the government spends exactly what it receives in taxes during a given interval, then the result is A) a balanced budget. B) the gross public debt. C) the net public debt. D) a government budget deficit. Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 20) If the government spends less than what it receives in taxes during a given interval, then the result is A) a balanced budget. B) an entitlement. C) unrealized public debt. D) a government budget surplus. Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 21) A government budget surplus is A) a situation in which the supply of goods in the economy is greater than the demand for goods. B) a situation in which the amount spent by the government is greater than the amount collected in taxes. C) the public debt. D) an excess of revenues over government spending. Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

22) The public debt is A) an excess of government spending over government revenues during a given time period. B) a situation in which the government's spending is exactly equal to the total taxes and other revenues it collects during a given time period. C) the total value of all outstanding federal government securities. D) all federal government debt irrespective of who owns it. Answer: C Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 23) Which of the following statements about the public debt is TRUE? A) It is a stock variable. B) It is equal to the budget deficit. C) It decreases when the government runs a budget deficit. D) all of these Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 24) The public debt can be thought of as A) the total amount consumers owe on their credit cards. B) the total amount in taxes consumers pay to the government. C) accumulated budget deficits and surpluses. D) the total amount the government spends for goods and services. Answer: C Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

25) Which of the following statements is TRUE about the difference between the public debt and the government budget deficit? A) The public debt always increases while the government budget deficit may increase or decrease. B) The public debt for this year will increase or decrease depending upon whether there is a government budget deficit or a government budget surplus. C) The public debt is a flow measure and the government budget deficit is not a flow measure. D) There is no relationship between the public debt and the government budget deficit since one is a stock measure and the other is a flow measure. Answer: B Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 26) Which of the following will NOT cause the public debt to change? A) an amount of tax collection by the government more than it spends B) government budget deficit C) government budget surplus D) balanced budget Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 27) Public debt is held as A) bank deposits in U.S. banks. B) Federal Reserve Notes. C) U.S. Notes. D) Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds. Answer: D Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 28) Which of the following is TRUE when a budget deficit exists? A) Government expenditures exceed tax revenues. B) Tax revenues exceed government expenditures. C) A trade surplus exists. D) Dissaving exists. Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8 Copyright © 2021 Pearson Education, Inc.

29) A government budget deficit occurs during a budget year when A) tax revenues > government spending. B) tax revenues = government spending. C) tax revenues < government spending. D) tax revenues + government spending = personal consumption. Answer: C Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 30) A government budget surplus occurs during a budget year when A) tax revenues > government spending. B) tax revenues = government spending. C) tax revenues < government spending. D) tax revenues + government spending = personal income. Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 31) If the government has a spending flow that exceeds the revenues it collects, the government will run a ________ that year. A) debt B) deficit C) debt and a deficit D) surplus Answer: B Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 32) While the budget deficit represents a ________, the public debt represents a ________. A) flow; flow B) flow; stock C) stock; stock D) stock; flow Answer: B Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

33) When government spending exceeds tax revenues during a specific time period, this is known as a A) government budget deficit. B) government budget surplus. C) balanced budget. D) public debt. Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 34) When government spending is less than the tax revenues during a specific time period, this is known as a A) government budget deficit. B) government budget surplus. C) balanced budget. D) public debt. Answer: B Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 35) When government spending is equal to the tax revenues during a specific time period, this is known as a A) government budget deficit. B) government budget surplus. C) balanced budget. D) public debt. Answer: C Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 36) When government expenditures are greater than tax revenues, A) there will be budget deficit. B) there will be budget surplus. C) automatic stabilizers do not kick in. D) the public debt will be reduced. Answer: A Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

37) Suppose that the federal government had a budget deficit of $100 billion in year 1 and $90 billion in year 2, but that it experiences budget surpluses of $40 billion in year 3 and $30 billion in year 4. Also assume that the government uses any budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have A) decreased by $120 billion. B) increased by $260 billion. C) increased by $120 billion. D) decreased by $260 billion. Answer: C Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 38) Suppose that the federal government had a budget deficit of $80 billion in year 1 and $10 billion in year 2, but it had budget surpluses of $140 billion in year 3 and $20 billion in year 4. Also assume that the government uses any budget surpluses to pay down the public debt. At the end of these four years, the Federal government's public debt would have A) decreased by $70 billion. B) increased by $250 billion. C) increased by $70 billion. D) decreased by $62.5 billion. Answer: A Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 39) If the government has no debt initially, but then has annual revenues of $20 billion per year for 4 years and annual expenditures of $20.5 billion per year for 4 years, then the government has A) a budget surplus of $0.5 billion per year and a debt of $2 billion at the end of the 4 years. B) a budget deficit of $0.5 billion per year and a budget surplus of $2 billion at the end of the 4 years. C) a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years. D) a budget surplus of $0.5 billion per year and a surplus of $2 billion at the end of the 4 years. Answer: C Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge

40) Between 2000 and 2020, the U.S. government budget deficit A) has been more than 100% of U.S. GDP. B) as a percentage of U.S. GDP has increased steadily each year. C) as a percentage of U.S. GDP has decreased steadily each year. D) none of these Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 41) When was the last year the United States had a budget surplus? A) 2020 B) 1984 C) 1993 D) 2001 Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 42) Since 1940, the U.S. government has experienced A) about the same number of years with budget deficits as with budget surpluses. B) twice as many annual budget surpluses as annual budget deficits. C) only one year with a budget surplus. D) many more budget deficits than budget surpluses. Answer: D Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 43) Expressing the U.S. federal budget deficit as a percentage of Gross Domestic Product (GDP) A) results in inflation-adjusted revenue and expenditure numbers. B) helps us understand the size of the deficit relative to the size of the economy. C) was useful through the 1980s, but is no longer helpful because both the deficit and real Gross Domestic Product (GDP) have grown so large. D) is only useful if the budget deficit is rising at an annual rate of more than 4 percent. Answer: B Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

44) What is TRUE about government budget deficits and surpluses since 1940? A) Balanced budgets have been more common than government budget deficits or government budget surpluses. B) There have been more government budget surpluses than government budget deficits. C) There have been more government budget deficits than government budget surpluses. D) The number of government budget deficits is about the same as the number of government budget surpluses. Answer: C Diff: 1 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 45) Between the years 1998 and 2001, the U.S. government experienced A) budget surpluses. B) balanced budgets. C) budget deficits. D) contractionary budget cycles. Answer: A Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 46) All of the following are possible explanations for the increase in U.S. government budget deficits as a percentage of GDP since 2000 EXCEPT A) increases in tax revenues. B) increases in payments for entitlements. C) increases in government spending. D) decreases in tax rates. Answer: A Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 47) Explain the differences between the public debt and the government budget deficit. Answer: The public debt is a stock measured at a point in time, while the government budget deficit is a flow measure. The public debt changes as a result of government budget deficits or surpluses. The public debt is the total value of all outstanding federal government securities. Diff: 2 Topic: 14.1 Public Deficits and Debts Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

14.2 Evaluating the Rising Public Debt 1) The difference between net public debt and gross public debt is A) all government interagency borrowing. B) the interest paid annually on the public debt. C) the amount owed to individuals and firms outside the United States. D) the current year's budget deficit from the amount of public debt at the start of the year. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) The value of all outstanding federal government securities is called A) the budget deficit. B) the public debt. C) the fiscal deficit. D) the net internal debt. Answer: B Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 3) According to the text, approximately what percentage of U.S. net public debt is held by foreign residents? A) 5% B) 50% C) 200% D) 100% Answer: B Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) According to the text, the net public debt to Gross Domestic Product (GDP) ratio is currently about A) 200%. B) 1%. C) 75%. D) 120%. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

5) Net public debt is the A) difference between tax revenues and government expenditures each year. B) sum of accumulated government deficits and surpluses held by individuals and businesses and foreign institutions. C) sum of accumulated government deficits and surpluses held by U.S. government agencies. D) sum of accumulated government deficits and surpluses held by large money center banks. Answer: B Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) The amount of funds the Social Security system has loaned the federal government is A) included in the net public debt. B) added to the gross public debt to calculate the net public debt. C) included in the net private debt. D) excluded from the net public debt. Answer: D Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 7) Since the late 1980s, the share of the net public debt owed to foreign interests has A) remained constant. B) decreased. C) increased. D) gone up and then down, finally settling at around 10 percent. Answer: C Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) If the government borrows to purchase goods and services, today's consumption of government goods and services will be paid for by A) today's taxpayers. B) government employees. C) future taxpayers. D) today's taxpayers and tomorrow's taxpayers in even shares. Answer: C Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 15 Copyright © 2021 Pearson Education, Inc.

9) Other things being equal, what is the effect of deficit spending on credit markets? A) Both the demand for credit and the supply of credit will increase. B) Both the demand for credit and the supply of credit will decrease. C) The demand for credit increases while the supply of credit remains constant. D) The supply of credit will increase while the demand for credit remains the same. Answer: C Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) Other things being equal, what is the effect of government deficit increases on interest rates? A) Interest rates decline. B) Interest rates rise. C) Interest rates hold constant because the demand for credit decreases. D) There is no impact unless the Federal Reserve decides to alter the money supply. Answer: B Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 11) Higher interest rates as a result of deficit spending A) raise growth in investment spending. B) ultimately have a positive impact on productivity gains and society's standard of living. C) increase the wealth of future generations. D) crowd out private investment. Answer: D Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 12) Gross public debt is A) an excess of government spending over government revenues during a given time period. B) a situation in which the government's spending is exactly equal to the total taxes and other revenues it collects during a given time period. C) the total value of budget deficits plus budget surpluses over the past five years. D) all federal government debt irrespective of who owns it. Answer: D Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

13) The difference between the gross public debt and the net public debt is A) the sum of all previously accumulated government budget deficits and surpluses. B) the sum of all previously issued U.S. government securities that have been purchased by foreign residents. C) all private-sector borrowing from private sources. D) borrowing of government agencies from other government agencies within the nation. Answer: D Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14) Net public debt is A) all federal public debt irrespective of who owns it. B) gross public debt minus all government interagency borrowing. C) all public debt minus all money owed on the federal income tax. D) all public debt plus all government interagency borrowing. Answer: B Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 15) If no foreign residents owned any of the U.S. public debt, then it would be TRUE that A) there would be no distributional consequences associates with he public debt. B) U.S. residents would essentially owe the public debt to themselves. C) there would be no interest payments on the public debt. D) the public debt would naturally disappear over time. Answer: B Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 16) Gross public debt minus all government interagency borrowing is A) the money supply. B) net public debt. C) U.S. Treasury bonds. D) an entitlement. Answer: B Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

17) When the Social Security Administration holds U.S. Treasury Bonds, A) interagency borrowing has occurred and the government owes itself. B) there is a balanced budget. C) an entitlement has occurred. D) the gross public debt has increased. Answer: A Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 18) The difference between the gross public debt and the net public debt is that the A) gross public debt includes entitlements while the net public debt does not. B) gross public debt is based on budget deficit while the net public debt is not based on budget deficits. C) gross public debt includes government interagency borrowing while the net public debt does not. D) the gross public debt is expressed as a percentage of GDP while the net public debt is not. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 19) Which of the following is the best statement about how the amount of the net public debt that a typical individual owes to the holders of the debt has varied in the recent past? A) The amount has not varied at all. B) The amount has varied a lot over time. C) The amount has steadily increased over time. D) The amount has steadily decreased over time. Answer: A Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

20) Some economists believe that financing deficit spending by increasing taxes will lead to a lower level of national consumption and a higher level of national savings than deficit spending. The reason is A) people believe that they can consume the government provided goods and have future generations pay the bill. B) that people do not realize that taxes have increased also. C) people will forgo private consumption now as society substitutes government goods for private goods. D) the interest rate on the debt will increase. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 21) Assume the economy is closed and that it is operating at full employment. Which statement is TRUE when the size of the budget deficit decreases? A) The interest rate will decrease, leading to an increase in investment and capital formation. B) Demand and supply of credit will increase. C) A reduction in the growth of productivity, and a reduction in society's standard of living will occur. D) The increased amount of public goods will crowd out privately produced goods. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 22) Some economists believe that deficit spending can impose a burden on future generations. Which of the following does NOT explain the burden? A) Investment will be crowded out by an increase in current consumption. B) Deficit spending that is allocated to purchases leads to long-term increases in real GDP. C) Future generations will have a smaller capital stock that will reduce their wealth. D) Future generations will have to be taxed at a higher rate. Answer: B Diff: 3 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

23) Which of the following statements is TRUE about the public debt and future generations? A) Future generations will always be worse off because they will have to pay off the public debt. B) Increased consumption today will lead to increases in the capital stock in the future. C) Future generations may be better off if the rate of return on the borrowed funds is higher than the interest rate paid to foreign residents. D) The public debt cannot be held by foreign residents; therefore, we really owe the debt to ourselves. Answer: C Diff: 3 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 24) The difference between gross public debt and net public debt is that A) net public debt includes interagency borrowing while the gross domestic product debt does not. B) net public debt is expressed in real terms while gross public debt is expressed in nominal terms. C) gross public debt includes interagency borrowing while net public debt does not. D) gross public debt is held by individuals while net public debt is held by the government. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 25) An increase in the public debt would most likely indicate that A) the budget deficit has increased. B) the budget deficit has decreased. C) the trade deficit has decreased. D) national saving has increased. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 26) The share of net public debt owed to foreign residents today is close to A) 100 percent. B) 80 percent. C) 50 percent. D) 10 percent. Answer: C Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 20 Copyright © 2021 Pearson Education, Inc.

27) Media reports often suggest that the increasing public debt is a burden on future generations. What they mean is that A) it reduces the current level of investment. B) it makes predicting future unemployment levels unpredictable. C) it causes deflation. D) it reduces both nominal and real interest rates. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

28) Suppose that initially there is no public debt. Using the above table, the public debt over this four-year period would have A) increased by $215. B) decreased by $100. C) increased by $1,375. D) decreased by $1,590. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 29) Suppose that initially there is no public debt. Using the above table, what is the public debt as a percentage of GDP in 2017? A) 0.5 percent B) 2.0 percent C) 3.6 percent D) 8.0 percent Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge

30) Suppose that initially there is no public debt. Using the above table, what is the public debt as a percentage of GDP in 2019? A) 1.7 percent B) 2.0 percent C) 7.7 percent D) 5.9 percent Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Application of knowledge 31) The gross public debt is the A) amount of U.S. paper currency and coins in circulation. B) difference between current government expenditures and tax revenues. C) ratio of past deficits to past surpluses. D) total of all accumulated deficits and surpluses. Answer: D Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 32) If the net public debt expanded last year, then which of the following most likely occurred during the year? A) The government's budget was balanced. B) The government experienced a budget surplus. C) The government experienced a budget deficit. D) The government's tax collections exceeded its spending. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 33) One mechanism through which increasing public debt may impact the economy is that the resulting A) increased competition for funds increases interest rates and causes a reduction in investment. B) increased competition for funds decreases interest rates and causes an increase in investment. C) decreased competition for funds decreases interest rates and causes a reduction in investment. D) decreased competition for funds decreases interest rates and causes an increase in investment. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 22 Copyright © 2021 Pearson Education, Inc.

34) If the net public debt declined last year, then which of the following most likely occurred during that year? A) The government's budget was balanced. B) The government experienced a budget surplus. C) The government experienced a budget deficit. D) The share of foreign holdings of the government's debt increased. Answer: B Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 35) To evaluate relative changes in the net public debt, we must A) look at the absolute amount owed by the government. B) compare it to the nation's real GDP. C) look at the annual percentage change in the public debt. D) compare it to the debts of all developed countries. Answer: B Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 36) Gross public debt is the amount of funds that A) U.S. residents owe to foreign residents. B) states owe to the federal government. C) the federal government owes to taxpayers. D) the federal government owes to all holders of U.S. securities. Answer: D Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 37) Which of the following statements is FALSE? A) The federal budget deficit in 2020 was about 4 percent of the GDP. B) A budget deficit of $10 billion in a given year increases the public debt by $10 billion. C) The public debt of $10 billion is the accumulated debt of all U.S. individuals, firms, and institutions. D) During the past five years, the U.S. public debt has been increasing. Answer: C Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

38) Net public debt is equal to A) the gross public debt minus current year tax revenue collection. B) the gross public debt minus taxes paid by foreign corporations on their profits made in the United States. C) the gross public debt plus all governmental interagency borrowing. D) the gross public debt minus all governmental interagency borrowing. Answer: D Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 39) Borrowing to finance the increases in government expenditures A) reduces current private investment expenditures. B) increases interest rates. C) reduces growth in the nation's private capital stock. D) all of these Answer: D Diff: 1 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 40) The two ways in which deficit spending can impose a burden on future generations are A) by requiring future generations to face higher taxes and to work with a lower accumulated stock of capital goods. B) by requiring future generations to face lower government spending and to utilize a smaller stock of human capital. C) by substituting private goods for public goods and thereby shifting resources to foreign residents. D) by substituting private goods for public goods and thereby benefiting only large businesses. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

41) If the net public debt remains unchanged during a given period, but the gross public debt increases, then which of the following statements must be correct? A) Government interagency borrowing must have increased during the period. B) Government interagency borrowing must have decreased during the period. C) Foreign ownership of U.S. Treasury securities must have risen during the period. D) Foreign ownership of U.S. Treasury securities must have fallen during the period. Answer: A Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 42) Which of the following is the best measure of the total amount that the federal government owes to private owners of U.S. Treasury securities? A) government interagency borrowing B) the government budget deficit C) the gross public debt D) the net public debt Answer: D Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 43) Which of the following correctly describes a way in which deficit spending can impose a burden on future generations? I. Failure to allocate deficit spending to uses that boost future real Gross Domestic Product (GDP) will require taxing future generations at a higher rate to repay the resulting higher public debt. II. Government deficits that lead to higher employment and real Gross Domestic Product (GDP) in the future will generate increased income taxes for future governments, which will respond by spending the higher tax revenues, creating higher future government budget deficits. III. Other things being equal, deficit spending fuels increased consumption of goods and services by the current generation that crowds out capital investment, thereby leaving future generations with a smaller stock of capital than otherwise would have existed. A) I only B) II only C) I and III only D) II and III only Answer: C Diff: 3 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

44) Which of the following is TRUE of the portion of the net public debt held by foreign residents? A) It will definitely be a benefit to current and future generations of U.S residents, because foreign residents have shown a willingness to lend to the U.S. government in exchange for rates of return significantly lower than they can receive elsewhere in the world. B) It will definitely be a burden on current and future generations of U.S. residents who will have to pay interest on this portion of the debt, thereby transferring a portion of future U.S. incomes abroad. C) It will be a burden on future generations of U.S. residents only if funds that the U.S. government obtains from borrowing are expended on projects with rates of return lower than the rates of interest that the government pays foreign residents. D) It will be a benefit to future generations of U.S. residents only if funds that the U.S. government obtains from borrowing are expended on projects with rates of return lower than the rates of interest that the government pays foreign residents. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 45) Net public debt is A) the excess of annual government spending over annual tax revenues. B) the excess of annual tax revenues over annual government spending. C) the portion of government debt held by private individuals and firms. D) the sum owed by the public to keep the Social Security system afloat. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 46) To compare the net public debt of various countries, the debt has to be compared to A) the country's trade deficit. B) the country's current budget deficit or surplus. C) the country's real GDP. D) the country's national defense expenditure. Answer: C Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

47) Explain how deficit spending could be a burden to future generations. Answer: Deficit spending can lead to two negative effects. First, future generations will have higher taxes to pay off the debt. Second, current consumption crowds out investment, and reduces the growth of capital goods leaving future generations with a reduced capital stock. Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 48) Explain how deficit spending can benefit future generations. Answer: If the rate of return on borrowed funds is higher than the interest to be paid to foreign residents, future generations can be made better off. Diff: 2 Topic: 14.2 Evaluating the Rising Public Debt Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance 1) In which decade did the United States begin experiencing large trade deficits? A) 1960s B) 1970s C) 1950s D) 2000s Answer: D Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) Are federal budget deficits related to trade deficits? A) Yes. If U.S. consumers buy too many imported goods they don't have money to save and a budget deficit results. B) No. The budget deficit is entirely a domestic matter while the trade deficit only affects U.S. citizens who travel abroad. C) Yes. As deficit spending goes up, it is likely government borrowing will, too. Then foreign residents who lend funds to the U.S. government have less to spend on our goods, so U.S. exports will fall. D) Yes, but only if the quality of U.S. goods and services is deteriorating. Answer: C Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

3) Which of the following statements is TRUE about the historical relationship between the trade deficits and government budget deficits? A) There is no relationship between trade deficits and budget deficits. B) There is a positive relationship between trade deficits and budget deficits. C) There is a negative relationship between trade deficits and budget deficits. D) A relationship exists only when there is a balanced budget. Answer: B Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) Historic data indicate that there is usually a ________ relationship between trade deficits and federal government budget deficits. A) positive B) zero C) negative D) fluctuating Answer: A Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) A trade surplus occurs when A) the value of imports is less than the value of exports. B) government spending is less than total tax revenue. C) consumption is greater than disposable income. D) none of these Answer: A Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

6) Which of the following is TRUE about how trade deficits and government budget deficits are related? A) The trade deficit leads to a reduction in investment that leads to a government budget deficit. B) The trade deficit leads to a decline in imports relative to exports that leads to a government budget deficit. C) The government budget deficit leads to higher interest rates that will lead to a trade deficit. D) The government budget deficit leads to lower interest rates that will lead to a lower trade deficit. Answer: C Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 7) If foreign residents buy U.S. Treasury securities to finance the budget deficit, then which of the following will likely occur? A) an increase in the trade deficit B) a decrease in the trade deficit C) there will be a trade balance D) a reduction in the public debt Answer: A Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) Historical evidence seems to indicate that A) budget and trade deficits generally move in the same direction. B) budget and trade deficits generally move in the opposite direction. C) there is no consistent relationship between trade and budget deficits. D) trade and budget deficits decrease when the president is a Republican, and increase when the president is a Democrat. Answer: A Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

9) Which of the following is TRUE of the relationship between U.S. trade deficits and federal government budget deficits? A) Increases in the budget deficit tend to be associated with increases in the trade deficit. B) Increases in the budget deficit tend to be associated with reductions in the trade deficit. C) Increases in the budget deficit are always associated with increases in the trade deficit. D) Increases in the budget deficit are always associated with reductions in the trade deficit. Answer: A Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) Which of the following is TRUE of the U.S. trade balance and the federal government budget? A) In most years since the 1970s, both have been in surplus. B) In most years since the 1970s, both have been in deficit. C) Both exhibited greater variability before the 1970s than they have since. D) The federal government budget deficit was more variable before the 1970s, but the trade deficit has been more variable since. Answer: B Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 11) Are federal budget deficits related to trade deficits? A) Yes. If U.S. consumers buy too many imported goods, they do not have funds to save, and a budget deficit results. B) No. The budget deficit is entirely a domestic matter, while the trade deficit only affects U.S. citizens who travel abroad. C) Yes. Higher deficit spending goes up resulting in more government borrowing, and foreign residents who lend funds to the U.S. government have fewer resources to spend U.S. export goods. D) Yes, but only if the quality of U.S. goods and services is deteriorating. Answer: C Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

12) What is the short-run effect of increased deficit spending on an economy experiencing a recessionary gap? A) Aggregate demand increases, and the gap closes. B) Aggregate supply increases, closing the gap. C) Aggregate demand decreases, and the gap widens. D) Aggregate demand will increase, creating an inflationary gap. Answer: A Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 13) In the long run, what effect does a government's deficit spending have on equilibrium real Gross Domestic Product (GDP)? A) The government's deficit spending will increase equilibrium real Gross Domestic Product (GDP). B) Deficit spending will decrease the nation's equilibrium real Gross Domestic Product (GDP). C) Higher government deficits will not raise equilibrium Gross Domestic Product (GDP) above the full-employment level. D) Equilibrium real Gross Domestic Product (GDP) will increase beyond the full-employment level and there will also be an inflationary effect. Answer: C Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14) One of the long-run effects of higher government budget deficits is A) a redistribution of real Gross Domestic Product (GDP) away from government-provided goods and toward more privately provided goods. B) an increase in the government's share of the nation's economic activity. C) growth in the economy's private sector at the same time the government sector shrinks. D) a fall in the equilibrium price level. Answer: B Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

15) Why is it unlikely that tax increases will be the way to eliminate current U.S. federal budget deficits? A) Increasing every worker's taxes by the same amount could eliminate the deficit, but it is likely this action would be viewed as too burdensome for workers with modest incomes. B) The revenues generated by increasing taxes on the rich would only pay for a small portion of the federal budget deficit in any recent year. C) Since World War II, on average when taxes were increased by a dollar, federal government spending increased by that much and more. D) all of these Answer: D Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 16) The largest expenditure component of the federal budget is spending on A) the military. B) entitlement programs. C) public education. D) foreign aid. Answer: B Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 17) Government programs such as Social Security or Medicare are examples of A) discretionary spending. B) controllable expenditures. C) entitlements. D) automatic stabilizers. Answer: C Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

18) In the long run, what effect does a government's deficit spending have on equilibrium real Gross Domestic Product (GDP)? A) Government deficit spending will increase equilibrium real Gross Domestic Product (GDP). B) Deficit spending will decrease the nation's equilibrium real Gross Domestic Product (GDP). C) Higher government deficits will not raise equilibrium Gross Domestic Product (GDP) above the full-employment level. D) Higher government deficits will raise equilibrium Gross Domestic Product (GDP) above the full-employment level and also have an inflationary effect. Answer: C Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 19) In the long run, a higher government deficit does NOT affect equilibrium real Gross Domestic Product (GDP), so that continuous increases in the government deficit will A) lead to greater tax revenues. B) reduce the price level. C) reduce spending on privately provided goods and services. D) increase the unemployment rate. Answer: C Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 20) In the long run, a higher government budget deficit causes A) a decrease in both private spending and equilibrium real GDP. B) an increase in both private spending and equilibrium real GDP. C) a decrease in private spending while equilibrium real GDP remains unchanged. D) no change in private spending but a decrease in equilibrium real GDP. Answer: C Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

21) When analyzing the effects of the government budget deficit, A) no distinction must be made between an economy where full employment exists and one where substantial unemployment exists. B) it is important to examine the effects of the reported capital budget and the reported operating budget separately. C) there should be a comparison of the effect of the deficit to the effects of higher taxes needed to eliminate it. D) the baseline budget should be used since it is the most accurate. Answer: C Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 22) In the short run, a fiscal policy action that results in a reduction in the size of the budget deficit will cause A) an increase in real GDP with stable prices if the economy was below full employment. B) a reduction in real GDP with falling prices if the economy was below or at full employment. C) an inflationary gap if the economy was initially operating at full employment. D) an inflationary gap if the economy was initially operating below full employment. Answer: B Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 23) Suppose the economy is initially experiencing a recessionary gap. An increase in the size of the budget deficit will A) increase the size of the recessionary gap. B) reduce the size of the recessionary gap. C) lead to an increase in prices with no increase in real GDP. D) lead to a decrease in prices with an increase in real GDP. Answer: B Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

24) Suppose the economy is initially operating at full employment. A reduction in the size of the budget deficit will cause which of the following in the short run? A) a recessionary gap B) an increase the price level and a reduction in real GDP C) an increase in the price level with no change in real GDP D) an increase in real GDP and an increase in the price level Answer: A Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 25) Suppose the economy is initially operating at full employment. A fiscal policy action that results in an increase in the size of the budget deficit will cause which of the following in the long run? A) an increase in real GDP B) no effect on either the level or composition of real GDP C) a reduction in the price level D) a change in the composition of real GDP Answer: D Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 26) In the long run, higher government budget deficits will A) lead to a redistribution of real GDP from privately produced goods and services to government produced goods and services. B) lead to a redistribution of real GDP from government produced goods and services to privately produced goods and services. C) cause the price level to go down on government goods but not on private goods. D) lead to a reduction in the amount of goods and services produced by the government and private sector. Answer: A Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

27) What is the difference between the short run and the long run when there is full employment and the government engages in deficit spending? A) Real GDP will increase in both the short run and the long run. B) Real GDP will increase in the long run but not the short run. C) Real GDP will increase in the short run but not the long run. D) Real GDP will not increase in either the long run or the short run. Answer: C Diff: 1 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 28) Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of the budget deficit will cause which of the following in the short run? A) a reduction in the size of the recessionary gap and increase in real GDP B) an increase in the size of the recessionary gap and decrease in real GDP C) an increase in inflation and increase in aggregate supply D) an inflationary gap Answer: B Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 29) If the economy is experiencing an inflationary gap, an increase in the budget surplus A) will reduce the size of the inflationary gap. B) will increase the size of the inflationary gap. C) will cause an increase in inflation and increase aggregate supply. D) will increase aggregate demand and will increase the price level. Answer: A Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 30) Suppose the economy is initially operating at full employment. A reduction in the size of the budget deficit will cause which of the following in the long run? A) a recessionary gap B) a reduction in real GDP C) an inflationary gap D) none of these Answer: D Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

31) The long-run effect of increasing government budget deficits includes A) a redistribution of output from privately provided goods to government provided goods. B) no change in equilibrium real GDP. C) an increase in the price level. D) all of these. Answer: D Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 32) What are the macroeconomic consequences of a budget deficit when the economy is operating at full employment? Be sure to discuss the effects in the short-run and in the long-run. Answer: In the short run, a budget deficit will create an inflationary gap. Real GDP and prices will increase. In the long run, a budget deficit will be inflationary and have no effect on the full employment level of real GDP. The deficit will lead to a redistribution of real GDP with a larger share going to government provided goods and services. Diff: 2 Topic: 14.3 Growing U.S. Government Deficits: Implications for U.S. Economic Performance Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14.4 How Could the Government Reduce All of Its Red Ink? 1) Today, U.S. government spending on entitlements represents ________ of the total federal budget. A) about 10 percent B) less than 5 percent C) nearly 60 percent D) nearly 100 percent Answer: C Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 2) Which is the fastest growing component of the federal government budget? A) spending on the military and the war on terrorism B) spending to improve the nation's public education C) spending to improve and expand the nation's infrastructure D) spending on entitlements Answer: D Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 37 Copyright © 2021 Pearson Education, Inc.

3) The largest component of U.S. federal spending that contributes to the U.S. government budget deficit is A) entitlements. B) military spending. C) interest expenses. D) salaries of government employees. Answer: A Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 4) Which of the following has NOT been proposed as a possible economic solution to reducing the government deficit? A) reducing expenditures B) increasing taxes for the rich C) increasing the number of entitlements D) increasing taxes for everyone Answer: C Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 5) As a possible approach to eliminating the government budget deficit, increasing taxes for everyone would A) mean only a small increase in taxes. B) lead to an inflationary gap. C) transfer more goods and services to the government sector. D) lead to a large increase in taxes for every worker. Answer: D Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 6) As a possible approach to eliminating the government budget deficit, increasing taxes on the rich only would A) lead to a significant increase in tax revenues. B) not lead to a significant increase in tax revenues. C) lead to a greater number of entitlements. D) lead to an increase in real GDP. Answer: B Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 38 Copyright © 2021 Pearson Education, Inc.

7) An entitlement is A) government spending on things like military salaries. B) guaranteed benefits under some government programs. C) another word for a government budget surplus. D) the payments to the private sector in exchange for goods and services. Answer: B Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 8) Legislated federal government payments that anyone who qualifies can receive are called A) controllable expenditures. B) a fiscal stabilizer. C) balanced expenditures. D) entitlements. Answer: D Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 9) Which of the following is NOT an entitlement? A) Medicaid B) Social Security C) salaries of government employees D) Medicare Answer: C Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 10) Among economists, it is generally believed that A) the federal budget deficit will be eliminated within one year. B) the public debt will be paid off within 20 years. C) entitlement spending will continue to decline. D) the federal government will find it difficult to cut entitlement programs. Answer: D Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

11) Government spending that changes automatically without action by Congress is A) a noncontrollable expenditure. B) national defense. C) payments to contractors for routing services performed. D) discretionary payments. Answer: A Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 12) The part of the federal budget that has increased at the fastest rate is A) national defense. B) interest payments. C) entitlements. D) government salaries. Answer: C Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 13) Noncontrollable expenditures are called "noncontrollable" because A) they increase at the same rate as the public debt. B) they change without congressional action. C) only the president can approve these entitlement payments. D) the political process determines the size of the payments. Answer: B Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 14) All of the following are noncontrollable government expenditures EXCEPT A) Social Security. B) national defense spending. C) Medicare. D) unemployment benefits. Answer: B Diff: 2 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

15) Politicians have suggested that the budget deficit could be reduced by A) increasing taxes and reducing expenditures. B) lowering the interest rates. C) imposing higher tariffs on imported goods. D) forbidding interest payments on government bonds outsourcing. Answer: A Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 16) Which government program would be considered an "entitlement" program? A) national defense B) subsidies for mass transportation C) law enforcement in major U.S. cities D) Social Security Answer: D Diff: 2 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 17) The fastest growing component of the annual federal budgets since 2000 is A) the education budget. B) entitlement payments. C) funding for health research. D) interest payments on government debt. Answer: B Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 18) Which of the following statements is CORRECT? A) Since the mid-1940s, expenditures on national defense have increased considerably as a percentage of total federal government spending. B) Since the mid-1940s, expenditures on income security and health programs have increased considerably as a percentage of total federal government spending. C) Taken together, expenditures on national defense and on income security and health programs now account for less than half of all federal government spending. D) Expenditures on national defense now account for more than twice as much federal government spending as expenditures on income security and health programs. Answer: B Diff: 2 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking 41 Copyright © 2021 Pearson Education, Inc.

19) By approximately how much would the federal government have to raise each worker's annual taxes to eliminate the current federal budget deficit? A) between $50 and $100 per year B) about $50,000 per year C) between $500 and $1,000 per year D) about $8,000 per year Answer: D Diff: 1 Topic: 14.4 How Could the Government Reduce All of Its Red Ink? Learning Outcome: Macro-9: Discuss fundamental approaches to fiscal policy AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 15 Money, Banking, and Central Banking 15.1 Functions and Measures of Money 1) In a barter system, there are A) many different units of money. B) money and goods exchanged for each other. C) financial institutions to facilitate all exchanges. D) goods traded directly for other goods and services. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 2) Money functions as A) a store of value. B) an unit of account. C) a medium of exchange. D) all of these. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 3) A barter arrangement basically means A) a cashless transaction. B) a credit deal. C) buying with an I.O.U. D) exchanging goods for cash. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

4) For barter to occur there must be A) no markets for people to exchange goods. B) a double coincidence of wants for each good to be exchanged. C) one person who pays cash. D) services in exchange for goods. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 5) A barter arrangement simply means A) a direct exchange of goods without the use of money. B) a promise to pay in the future. C) that gold must be offered from one party. D) the government has to facilitate the exchange. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 6) The direct exchange of goods and services for other goods and services is known as A) barter. B) purchasing power. C) intermediation. D) remediation. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 7) Without an accepted medium of exchange, people A) have to specialize in one area of production. B) have to rely on gold or silver in order to exchange goods and services. C) have to rely on barter in order to exchange goods and services. D) have to use credit to obtain goods and services. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) As a result of money in an economy, A) people are greedier than in a barter economy. B) people can get rich more quickly with the same amount of goods and services available. C) transaction costs are higher than would be the case in a barter economy. D) real Gross Domestic Product (GDP) and economic growth are greater than they would be in a barter economy. Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 9) Which of the following represents a function of money? A) medium of exchange B) unit of accounting C) standard of deferred payment D) all of these Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 10) Money is defined as A) a person's net worth. B) anything people generally accept in exchange for goods and services. C) a by-product of a barter economy. D) any financial instrument that is backed by gold. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

11) Which of the following statements does NOT describe a function of money? A) a store of value B) a hedge against inflation C) a standard of deferred payment D) a unit of accounting Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 12) When you buy a hotdog for lunch, you are using money as a A) store of value. B) standard of deferred payment. C) medium of exchange. D) unit of accounting. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 13) When money is accepted as payment in a market transaction, it is functioning as a A) store of value. B) unit of accounting. C) medium of exchange. D) unit of investment. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

14) Money as a medium of exchange I. Facilitates the exchange of goods II. Reduces the incentive to barter A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 15) The use of money as a medium of exchange I. lowers transaction costs. II. permits more specialization. A) I only B) II only C) Neither I nor II D) Both I and II Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 16) A price tag of $4 for a portable power bank is an example of money as A) a medium of exchange. B) a unit of accounting. C) a store of value. D) a time deposit. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

17) When money provides a yardstick that allows individuals to compare the relative values of goods and services, it is functioning as a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 18) When money serves as a standard for comparing values of different things, it is functioning as a A) store of value. B) hedge against inflation. C) standard of deferred payment. D) unit of accounting. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 19) To function as money, something must hold its purchasing power over time. That is, it must be a A) store of value. B) standard of deferred payment. C) unit of accounting. D) medium of exchange. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

20) If you save $20,000 for a down payment on a house, you are using money as A) a store of value. B) a unit of account. C) a medium of exchange. D) a standard of deferred payment. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 21) To be accepted as money, an item must perform all of the following functions EXCEPT A) serve as a store of value. B) be easily reproduced. C) be a medium of exchange. D) serve as a standard of deferred payment. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 22) In economics, money is A) another term for income. B) a financial instrument backed by some precious metal such as gold or silver. C) anything that people generally accept in exchange for goods and services. D) whatever the government defines it to be. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

23) When you set aside the money you have today in order to purchase goods and services later on, you are using money as a A) medium of exchange. B) standard of deferred payment. C) unit of accounting. D) store of value. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 24) The most important function of money is when money is used as a A) medium of exchange. B) standard of deferred payment. C) unit of accounting. D) store of value. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 25) For something to serve as money, it must be A) backed by the authority of the government. B) generally accepted by buyers and sellers. C) light, durable, and common. D) convertible to gold. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

26) Which of the following is NOT one of the functions of money? A) medium of exchange B) protection from increases in prices of goods and services C) unit of accounting D) store of value Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 27) The function of money as a store of value diminishes if A) prices of goods and services increase. B) interest rates increase. C) people begin to barter. D) money is no longer backed by gold. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 28) Which of the following statements is NOT true about money? A) Anything that serves as a medium of exchange, as a unit of accounting, as a store of value, and as a standard of deferred payment can be called money. B) Money is any medium that is universally accepted by sellers and creditors. C) Money is a standard of deferred payment. D) Money can only be coins and paper. Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

29) A medium of exchange is A) any asset that sellers will accept as payment. B) a measure by which prices are expressed. C) an asset that is used to settle future debts. D) the thing traded when barter takes place. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 30) Any asset that sellers will accept as payment is a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 31) Without an accepted medium of exchange A) there would be no trade. B) people would have to rely on gold or silver in order to exchange goods and services. C) goods and services would be exchanged by barter. D) prices are very difficult to determine. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

32) One of the benefits of money as a medium of exchange is that A) it allows for private transactions such as trading vegetables for medical services. B) it allows individuals to compare the relative value of goods. C) over time it will become more valuable so that individuals can purchase more goods and services. D) it allows for specialization that leads to economic efficiencies. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 33) The direct exchange of goods and services for other goods and services is known as A) primitive trade. B) nonmarket trade. C) barter. D) purchasing power parity. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 34) The direct exchange of goods and services for other goods and services without the use of money is A) a standard of deferred payment. B) barter. C) a store of value. D) financial intermediaries. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

35) Which function of money allows people to specialize in areas in which they have a comparative advantage? A) medium of exchange B) unit of accounting C) store of value D) standard of deferred payment Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 36) Compared to a barter economy, an economy that uses money will A) be greedier. B) be poorer. C) have more corruption. D) have more output. Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 37) Which of the following is NOT a benefit of money when used as a medium of exchange? A) allowing individuals to specialize B) allowing individuals to pay off debts C) allowing for some economic efficiencies D) providing economic growth Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

38) As a unit of accounting, money is used A) to define prices of all other goods. B) to pay off future debts. C) to hold purchasing power over time. D) to exchange for goods and services. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 39) The function of money that allows individuals a method to compare the relative value of goods and services is A) medium of exchange. B) unit of accounting. C) store of value. D) liquidity. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 40) A measure by which prices are expressed is a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

41) The function of money that provides for a commonly recognized measure of value for the price system is a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 42) Camels have been used as money. Which function of money would this type of money perform least well? A) medium of exchange B) store of value C) unit of accounting D) standard of deferred payment Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 43) Which term below fits closest to money functioning as a unit of accounting? A) medium of exchange B) adverse selection C) standard of value D) liquidity Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

44) Which function of money allows for comparison shopping? A) medium of exchange B) unit of accounting C) store of value D) standard of deferred payment Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 45) Money serves as a standard of value, which is another way of saying that money functions as A) a medium of exchange. B) a unit of accounting. C) an opportunity cost of investment. D) standard of deferred payment. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 46) Cigarettes served as money in some prisoner of war (POW) camps during World War II. Given this, we would expect to observe A) no one ever smoking a cigarette. B) people usually resorting to barter rather than using cigarettes as money. C) prices of other goods expressed in terms of cigarettes. D) only government-issued cigarettes being accepted as money. Answer: C Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

47) If something serves as a store of value, we expect it to be A) divisible. B) durable. C) of intrinsic value. D) light. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 48) The ability of an asset to hold its value over time is a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 49) If something is to serve as money it must be a store of value. This means that it must A) be divisible. B) be the standard by which all goods are compared in setting prices. C) hold its purchasing power over time. D) be liquid. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

50) Money that we have today can be set aside to purchase things in the future. This function of money is known as A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 51) Money provides a way to transfer wealth into the future. This function of money is known as A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 52) If lenders refuse to state the debt in terms of dollars, then dollars are NOT a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

53) The property of money that allows for the settling of debts that mature in the future is A) liquidity. B) acceptability. C) store of value. D) standard of deferred payment. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 54) A property of an asset that makes it desirable for use as a means of settling debts maturing in the future is a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 55) What characteristic defines something as money? A) assets declared by the government to be of value B) a medium of exchange widely accepted in an economy C) notes you can deposit in a savings account D) an asset that earns interest Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

56) The requirement for a double coincidence of wants occurs when A) there is inflation. B) there is deflation. C) a system of barter is used. D) the medium of exchange is liquid. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 57) When money serves as a store of value, it allows you to A) transfer wealth into the future. B) eliminate a double coincidence of wants. C) be an effective negotiator. D) find good bargains. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 58) Money serves as a medium of exchange means that A) it benefits both buyers and sellers. B) it reduces transaction costs. C) it eliminates the need for barter. D) All of these are correct. Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 59) The advantage of holding money as an asset is that A) money earns interest. B) money is liquid. C) money is safe from theft. D) the value of money appreciates over time. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

60) The existence of money in an economy promotes efficiency by A) creating an equal distribution of income. B) creating incentives to be self-sufficient. C) facilitating trade, thereby allowing for greater specialization. D) allowing for the formation of corporations as legal entities. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 61) Which of the following is NOT a function of money? A) medium of exchange B) form of credit C) store of value D) standard of deferred payment Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 62) When Alice compared the price of a tablet with the price of a smartphone, she discovered the smartphone was more expensive. This is an example of using money as A) a store of value. B) a medium of exchange. C) a unit of accounting. D) a standard of deferred payment. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

63) If Alyssa buys a cup of chai at Starbucks, her money serves as a A) unit of accounting. B) standard of deferred payment. C) store of value. D) medium of exchange. Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 64) When Jason and Jacky use dollars to compare the market values of their cellphones, money is acting as a A) unit of accounting. B) standard of deferred payment. C) store of value. D) medium of exchange. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 65) When Kobe puts money under his mattress for purchases later on, money is acting as a A) unit of accounting. B) standard of deferred payment. C) store of value. D) medium of exchange. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

66) A monetary system is preferable over the barter system because of the problems associated with A) cash leakages. B) the double coincidence of wants. C) the law of diminishing marginal utility. D) the law of increasing relative costs. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 67) A monetary system is preferable over the barter system because it A) reduces transaction costs. B) is easier to track by the government. C) limits cash leakages. D) is determined by the Congress. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 68) The direct exchange of one good or service for another is called A) a token exchange. B) a standard of deferred payment. C) the exchange of purchasing power. D) barter. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

69) For barter to occur there has to be A) a commodity to serve as a medium of exchange. B) a formal market where prices are quoted. C) a double coincidence of wants. D) a single coincidence of wants. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 70) A $1,000 price tag on a Coach handbag in a department store is an example of money serving as a(n) A) medium of exchange. B) unit of accounting. C) store of value. D) investment tool. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 71) Giving the store clerk a $20 bill for a pair of earbuds priced at $20 is an example of money serving as a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred value. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

72) If a friend of yours keeps cash hidden under the mattress, he is using money as a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred value. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 73) You go to work today, but will get your paycheck at the end of the month. This is an example of money serving as a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 74) Which of the following is NOT a function of money? A) medium of stored value B) standard of deferred payment C) unit of accounting D) store of value Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

75) The price tag on a pair of Nike shoes illustrates how money performs the function of a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 76) Perishable goods such as tomatoes and eggs are never used as money, because they cannot function as a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 77) Suppose you are offered a concert ticket in exchange for four hours of your work in your friend's garden. This is an example of A) money as a medium of exchange. B) money as a store of value. C) barter. D) money as a standard of deferred payment. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

78) Suppose you pay $800 for a new iPhone. This is an example of A) money as a medium of exchange. B) money as a store of value. C) barter. D) money as a standard of deferred payment. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 79) Given the list of assets below, which is the most liquid? A) $100 worth of Google common stock B) $100 worth of government bonds C) A $100 travelers check D) A bitcoin that is accepted by many stores Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 80) The degree to which an asset can be acquired or disposed of without much loss of nominal value or transaction costs is known as A) fiat money. B) liquidity. C) fiducia. D) credit. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

81) An individual who desires the most liquid asset possible will hold A) currency. B) a savings account. C) checkable deposits at a bank. D) U.S. government bonds. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 82) The ability to quickly convert an asset into cash is A) disintermediation. B) the standard of deferred payment. C) financial intermediation. D) liquidity. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 83) When an asset is described as being highly liquid, which one of the following characteristics does it possess? A) It earns a high rate of interest, so its purchasing power is maintained when prices rise. B) It is easily and readily converted into money without any loss in purchasing power. C) The face value of the asset is somewhat less than its value when converted into currency. D) The asset holds its value over time. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

84) Liquidity refers to A) the ease with which an asset can be acquired or disposed of without incurring high transaction costs. B) the expected return from an asset. C) the amount of indebtedness held against an asset. D) the net worth of the individual in question. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 85) Which of the following is the most liquid asset? A) small denomination time deposits B) currency C) short-term treasury bonds D) shares of stock Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 86) A highly liquid asset A) has high transaction costs associated with its sale. B) must be held for a substantial period of time. C) generally has a very limited market for its resale. D) can be disposed of easily without loss of value. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

87) The cost of holding money is best described as A) the cost of printing money. B) the goods and services that money can buy C) the yield which is paid to money holders by the U.S. government. D) the yield that could have been earned had the asset been held in another form. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 88) A government bond is NOT as liquid as cash because the bond A) cannot be converted to spendable dollars either until it matures or is sold to another investor. B) can be exchanged only for the goods or services produced by the company that issued the bond. C) must be exchanged for a stock certificate before it can be converted to spendable funds. D) always has a face value less than its actual value. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 89) If an asset can be disposed of without much risk of losing its nominal value, it is said to be A) fiduciary. B) liquid. C) worthless. D) valuable. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

90) The opportunity cost of holding money is measured by A) the return from company stock shares that the money can buy. B) the price of government bonds. C) the interest yield that could have been earned by holding some other asset. D) the liquidity of interest-bearing assets. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 91) The most liquid asset is A) gold. B) a vehicle. C) money. D) stocks of a highly profitable company. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 92) The reason we are willing to accept money with no intrinsic value is that A) paper currency may be exchanged for full-bodied money. B) the money supply is backed by an equal amount of gold and silver. C) we have a fiduciary monetary system in which currency is widely acceptable. D) the value of the money varies directly with changes in the price level. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 93) In a fiduciary monetary system, the value of the money issued by a government is based on A) the gold held in that government's vaults. B) public confidence in that currency's acceptability and predictability of value. C) the ability to convert it to some valuable commodity. D) its being made out of some material with a market value equal to a bill's face value. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 30 Copyright © 2021 Pearson Education, Inc.

94) Checkable and debitable accounts in commercial banks and other financial institutions are classified as money because A) they are not liabilities of the banks. B) they sometimes earn an interest income for the depositor. C) they are generally acceptable in the payment of debt. D) banks hold currency in their vaults equal to the value of demand deposits. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 95) A fiduciary monetary standard exists when the value of a currency A) cannot be determined. B) is convertible to a fixed quantity of gold. C) depends upon the public's confidence that the currency can be exchanged for goods and services. D) increases with inflation. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 96) Which of the following is a correct reason for stating that the United States has a fiduciary monetary system? I. The U.S. currency is convertible to a fixed amount of silver or gold. II. The U.S. currency has a predictable value. A) I only B) II only C) Both I and II D) Neither I nor II Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

97) A system in which the value of currency issued by the government is based entirely on public faith that the currency will be acceptable in trade is A) a fiduciary system. B) a private property system. C) a Gresham system. D) a socialistic system. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 98) A checkable account A) is a very illiquid asset. B) allows its holder to make transactions by writing checks. C) must be traded on the stock exchange. D) cannot serve as a store of value. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 99) Which of the following is a checkable and debitable account? A) a brokerage account with an online stockbroker B) a savings account C) a checking account D) All of these are checkable and debitable accounts. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

100) A fiduciary monetary system is A) fully backed by gold. B) dependent on barter for exchanges of goods and services. C) one which cannot have any inflation. D) dependent on the public's faith to accept the currency. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 101) Transactions deposits include A) credit cards. B) certificates of deposit. C) lines of credit. D) checkable and debitable accounts. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 102) Money in a fiduciary monetary system is backed by A) a commodity such as gold or silver. B) the public's confidence that the assets will continue to serve as money. C) the intrinsic value of the materials used to make the assets that serve as money. D) assets owned by the government that are intrinsically valuable. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 103) The purchasing power of money A) is determined by law. B) varies inversely with the price level. C) depends on the value of gold. D) varies inversely with the interest rate. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 33 Copyright © 2021 Pearson Education, Inc.

104) The purchasing power of the dollar A) varies directly with the price of gold. B) varies directly with interest rates. C) varies directly with the price level. D) varies inversely with the price level. Answer: D Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 105) When the price level goes up, the purchasing power of the dollar A) also increases. B) falls. C) remains constant. D) varies directly with the interest rate. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 106) Money is still useful during times of inflation because A) it still retains the characteristic of predictability of value. B) more money can be made so people can still purchase the goods and services they want. C) it is not a liquid asset. D) its opportunity cost falls as inflation rises. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

107) An asset is liquid if it A) is of intrinsic value. B) can be exchanged for other goods and services. C) is a store of value. D) can be obtained or disposed of without losing much of its nominal value. Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 108) Which of the following is the most liquid? A) certificate of deposit B) cash C) checkable and debitable account D) stocks and bonds Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 109) The liquidity of money refers to A) the amount of gold it is backed by. B) the standard of deferred payments and how quickly those payments can be made. C) how quickly it can be disposed of without high transaction costs. D) asymmetric information. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 110) The opportunity cost of holding money A) is measured by the alternative interest yield obtainable by holding some other asset. B) is based on the fiduciary monetary system. C) refers to the amount of paper currency held by the Fed. D) equals the amount paid for renting a house instead of buying it. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 35 Copyright © 2021 Pearson Education, Inc.

111) The cost of holding money is A) transactions accounts. B) the opportunity cost. C) the liquidity approach. D) capital controls. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 112) The opportunity cost of holding a dollar is A) a dollar. B) the price of a government bond. C) less than a dollar. D) the interest yield that could have been earned by holding some other asset. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 113) An increase in the interest rate would induce people to A) sell shares of stock and buy bonds, but would have no effect on their desire to hold money. B) get rid of all their money and buy stocks with it. C) sell their least liquid assets and hold more money in case interest rates go up again. D) hold a smaller fraction of their wealth in the form of money. Answer: D Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

114) The degree to which an asset can be acquired or disposed of without much danger of any intervening loss in nominal value is known as A) transaction deposits. B) a time deposit. C) liquidity. D) the opportunity cost of holding cash. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 115) An asset that can be easily disposed of without high transactions costs and with relative certainty as to its value is A) profitable. B) liquid. C) fiduciary. D) M2. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 116) In a fiduciary monetary system, money is backed by A) the public's confidence about the general acceptability of the money. B) the intrinsic value of the materials used to make the assets. C) the assets of the institutions that issue the various assets used as money. D) gold. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

117) A system in which money is issued by the government and its value is based uniquely on the public's faith that the currency represents command over goods and services is the A) transactions approach. B) gold standard. C) fiduciary monetary system. D) barter system. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 118) The U.S. fiduciary monetary system A) is the one agency responsible for providing coins and paper currency. B) is one where money is not convertible to a valuable commodity such as gold. C) puts capital controls in place. D) controls the private banking system. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 119) The main difference between paper money and coins as forms of money is that A) the metallic content of coins makes them more acceptable as money. B) paper money issued by the Federal Reserve Board is backed by gold while coins are not. C) paper money serves as a unit of account while coins do not. D) the metal in coins is more durable than paper. Answer: D Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

120) Even when a particular monetary asset is NOT performing one of the functions of money well, people still use the asset because A) it is still easier than relying on barter. B) they can always earn interest from holding money. C) once an asset is defined as money it is always money. D) people expect money will come back at a later date. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 121) A fiduciary monetary system ultimately rests on A) the power of the government. B) the public's confidence in the system. C) the value of the assets backing up the system. D) the difficulty of counterfeiting the currency. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 122) The value of a dollar A) is determined only by the U.S. government. B) varies inversely with the price level. C) various directly with the price level. D) varies directly with the purchasing power of other major currencies. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

123) Even when people know the purchasing power of the currency is declining, they continue to use the currency because A) they have no other choice. B) the return of holding currency is always higher than the returns of all other assets. C) its value is still predictable. D) it still has some intrinsic value. Answer: C Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 124) Which of the following would be considered the least liquid asset? A) currency B) checkable deposits C) travelers checks D) a house Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 125) Which of the following assets is the most liquid in the United States? A) U.S. Treasury bonds B) U.S. currency C) Alphabet stock shares D) an antique car Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

126) Which of the following is the most liquid? A) a used textbook B) currency C) government bonds D) shares of stock Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 127) An asset is liquid if A) it earns interest. B) it is backed by a government guarantee. C) it can be exchanged for other items of value without high transaction costs. D) All of these are correct. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 128) Of the items in the following lists, which go from most liquid to least liquid? A) a checking account, a new vehicle, a six-month certificate of deposit, shares of stock B) a six-month certificate of deposit, shares of stock, a new vehicle, a checking account C) a checking account, a certificate of deposit, shares of stock, a new vehicle D) a new vehicle, a six-month certificate of deposit, shares of stock, a checking account Answer: C Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 129) In a fiduciary monetary system A) coins get their value from the precious metals of which they are made. B) money gets its value from the confidence that the public has in its acceptability. C) paper currency does not have value, but balances in checking accounts do. D) checking account balances do not have value, but paper currency does. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 41 Copyright © 2021 Pearson Education, Inc.

130) The term "fiduciary" comes from the Latin fiducia, which means A) value. B) gold. C) money. D) trust or confidence. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 131) A fiduciary monetary system means A) that the value of each currency is determined by the amount of gold held by each nation. B) that the currency is backed by implicit faith in government. C) that money is legal tender. D) that money has commodity value. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 132) A fiduciary monetary system has to have all of the following EXCEPT A) trust. B) a central bank. C) acceptability. D) predictability of value. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

133) Which one of the following statements is TRUE? A) Not all forms of currency are accepted equally well by the public as a medium of exchange. B) Checkable and debitable account balances are not money, but currency is. C) Checkable and debitable accounts are considered money by law in only 15 states. D) The value of the dollar rises along with the increases in the consumer price index. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 134) To the extent that the value of money is less predictable, it becomes A) more acceptable as a standard of deferred payment. B) more acceptable as a unit of account. C) more acceptable as a store of value. D) less acceptable as a medium of exchange. Answer: D Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 135) Which of the following would be considered a transaction deposit? A) mutual funds account B) checking account C) credit card account D) 401(k) retirement account Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 136) The intrinsic value of U.S. currency today is the value of A) gold. B) government bonds. C) nothing. D) silver. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 43 Copyright © 2021 Pearson Education, Inc.

137) The money supply in the United States is backed by A) faith. B) gold. C) silver. D) platinum. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 138) United States coins and currency are backed by A) silver. B) gold. C) reserves of foreign currencies. D) confidence that they will retain their value. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 139) Stock market price quotations are an example of money serving as a(n) A) store of value. B) medium of exchange. C) unit of accounting. D) economic value. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

140) A fiduciary monetary system is dependent on A) acceptability and predictability of value. B) precious metals backing fiat money. C) Congressional monetary support. D) a negative inflation rate. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 141) The two basic ways to define money are A) the transactions approach and the fiduciary approach. B) the cash approach and the M3 approach. C) the transactions approach for M1 and the liquidity approach for M2. D) the liquidity approach and the store of value approach. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 142) Which of the following institutions has the responsibility for distributing currency and coins to the U.S. banking system? A) the Office of the Comptroller of the Currency B) the Federal Reserve System C) the U.S. Bureau of Engraving and Printing D) the U.S. Treasury Department Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

143) Which of the following institutions has the responsibility for producing the coins that are distributed in the United States? A) the Office of the Comptroller of the Currency B) the Federal Reserve System C) the U.S. Treasury Department D) the U.S. Mint Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 144) Which approach to measuring money focuses on the value of currency, transaction deposits, and travelers checks? A) the transactions approach B) the liquidity approach C) near moneys D) M2 Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 145) The transactions approach to measuring money stresses the role of money as a A) medium of exchange. B) unit of accounting. C) store of value. D) standard of deferred payment. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

146) Which of the following is NOT included using the transactions approach to measuring the money supply (M1)? A) currency B) certificates of deposit C) transaction deposits D) traveler's checks Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 147) The designate M1 measure of money consists of A) the most liquid types of money in the U.S. system. B) small time deposits only. C) credit cards and ATM cards. D) gold and gold coins. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 148) Checkable deposit account balances are A) counted in the calculation of the money supply. B) part of M2 but not part of M1. C) considered credit, but not money. D) only a small component of the money supply. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

149) Which of the following is NOT part of M1? A) credit cards B) checking accounts C) currency D) traveler's checks Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 150) Which one of the following is NOT a part of the M1 definition of money? A) paper currency (i.e., Federal Reserve notes) B) coins C) savings accounts D) checkable and debitable accounts Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 151) When we examine the U.S. money supply, the smallest component of M1 is A) currency and coins. B) transaction deposits. C) certificates of deposit. D) traveler's checks. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 152) The transactions approach to measuring money includes A) government bonds. B) the value of shares of stock in commercial banks. C) traveler's checks. D) all of these. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 48 Copyright © 2021 Pearson Education, Inc.

153) The transactions approach to measuring M1 includes all of the following EXCEPT A) traveler's checks. B) certificates of deposit. C) checking accounts. D) currency. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 154) All of the following are included in M1 EXCEPT A) coin and currency. B) money market mutual fund shares. C) traveler's checks. D) checking account balances. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 155) Which of the following is NOT part of M1? A) money market deposit accounts B) coin and currency C) checking deposits D) traveler's checks Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

156) Thrift institutions A) receive most of their funds from the public's savings deposits. B) include commercial banks and investment firms. C) include credit unions but not savings and loan associations. D) do not offer transaction deposits. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 157) A time deposit with a fixed maturity date offered by banks is called a A) checking account. B) savings deposit. C) small-denomination certificate of deposit. D) corporate bond. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 158) Which of the following is NOT part of M1 but is included in M2? A) currency B) small-denomination certificates of deposits C) traveler's checks D) cash Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 159) Assets that can be easily converted into money without significant loss of value are A) transactions balances. B) near monies. C) currencies. D) liabilities. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 50 Copyright © 2021 Pearson Education, Inc.

160) Small-denomination time deposits are A) considered part of near money. B) included in the definition of both M1 and M2. C) included in the definition of M1, but not in M2. D) the same as transaction deposits. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 161) Which of the following is included in M2? I. money market mutual funds II. small-denomination certificates of deposit A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 162) Which of the following would most likely NOT be included in the liquidity approach to defining the money supply? A) savings deposits B) money market mutual fund accounts C) government bonds D) traveler's checks Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

163) Which of the following is TRUE of M2? A) It is larger than M1. B) It excludes savings deposits. C) It does not include highly liquid components of the money supply. D) It includes credit limits for credit card transactions. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 164) The liquidity approach to measuring money stresses the role of money as a A) medium of exchange. B) unit of accounting. C) temporary store of value. D) standard of deferred payment. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 165) Since 1982, banks and thrift institutions have offered a type of savings account that yields a market rate of interest with a minimum balance and a limit on transactions. These accounts, which have no minimum maturity, are known as A) certificates of deposit. B) money market mutual funds. C) mutual funds. D) repurchase agreements. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

166) What differentiates a savings deposit from a small-denomination certificate of deposit (CD)? A) A CD has a fixed maturity date; a savings deposit can be withdrawn at any time. B) A savings deposit cannot be withdrawn before its maturity date without incurring a penalty; funds in a CD are available at any time with no interest penalty. C) Only a savings deposit is a time deposit. D) All depository institutions accept savings deposits, whereas only a thrift institution can issue a CD. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 167) All transaction deposits are included in A) M1 only. B) M2 only. C) both M1 and M2. D) savings balances only. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 168) Which of the following is NOT included in the MZM definition of money? A) currency B) money market funds C) travelers checks D) small-denomination time deposits Answer: D Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

169) According to the above table, the value of M1 is A) $1,888 billion. B) $1,629 billion. C) $1,313 billion. D) $1,205 billion. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 170) According to the above table, the value of M2 is A) $3,807 billion. B) $5,337 billion. C) $6,237 billion. D) $6,253 billion. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 171) The money supply is A) the rate at which the Federal Reserve Board prints currency. B) limited to currency and coins. C) the amount of money in circulation. D) the rate at which the Federal Reserve Board creates money. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

172) The largest component of M1 is A) currency and coins. B) traveler's checks. C) transaction deposits. D) time deposit. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 173) The best measure of money is A) coins and currency. B) the one based on the transactions approach. C) the one based on the liquidity approach. D) something economists have never agreed on. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 174) The transactions approach to measuring money relies on the role of money primarily as a A) medium of exchange. B) unit of account. C) temporary store of value. D) standard of deferred payment. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

175) A method of measuring the money supply by looking at money as a medium of exchange is the A) fiduciary monetary system. B) capital control. C) transactions approach. D) liquidity approach. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 176) A method of measuring the money supply by looking at money as a temporary store of value is the A) fiduciary monetary system. B) capital control. C) transactions approach. D) liquidity approach. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 177) Which function of money does the liquidity approach to measuring money stress? A) medium of exchange B) unit of account C) store of value D) standard of deferred payment Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

178) One key measure of the money supply is A) the total stock value. B) all bank loans. C) all liquid assets. D) M2. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 179) The money supply that consists of currency, transaction deposits, and traveler's checks is A) M1. B) M2. C) MZM. D) L, which stands for liquid assets. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 180) Transaction deposits A) are deposits in a banking institution on which a check may be written. B) are only deposits that you can check on through the Internet. C) include savings accounts. D) are accounts that pay interest to the depositor. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 181) Traveler's check are A) part of M1 but not M2. B) part of M2 but not M1. C) part of M1 and M2. D) not part of M1 or M2. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 57 Copyright © 2021 Pearson Education, Inc.

182) If the transactions approach to measuring money is used, then the money supply consists of A) currency only. B) transaction deposits only. C) currency and transaction deposits only. D) currency, checkable and debitable deposits, and traveler's checks. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 183) Which of the following is NOT included in the money supply when the transactions approach is used? A) money market deposit accounts B) traveler's checks C) transaction deposits D) currency Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 184) Which of the following is NOT included in M1? A) currency B) transaction deposits C) saving deposits D) traveler's checks Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

185) Currency consists of A) only coins minted by the U.S. Treasury. B) only Federal Reserve notes. C) coins minted by the U.S. Treasury and Federal Reserve notes. D) coins, Federal Reserve Notes and traveler's checks. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

186) Refer to the above table. The value of M1 is A) $760 billion. B) $810 billion. C) $1,260 billion. D) $2,560 billion. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

187) The liquidity approach to measuring the money supply uses A) M1 only. B) near moneys only. C) M1 plus some highly liquid assets. D) M2 plus some highly liquid assets. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 188) An interest-earning account that can be withdrawn at any time without payment of a penalty is a A) savings deposit. B) money market deposit account. C) government security account. D) certificate of deposit. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 189) An account issued by banks yielding a market rate of interest with a minimum balance requirement and a limit on transactions is a A) savings deposit. B) money market deposit account. C) mutual funds account. D) certificate of deposit. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

190) A deposit in a financial institution that requires notice of intent to withdraw is a A) savings deposit. B) money market deposit account. C) time deposit. D) security deposit. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 191) Which of the following is a time deposit with a fixed maturity date offered by banks and other financial institutions? A) savings deposit B) money market deposit account C) time deposit D) small-denomination certificate of deposit Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 192) Small-denomination time deposits are less than A) $1 million. B) $100,000. C) $10,000. D) $1,000. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

193) U.S. paper currency is issued by the A) United States Mint. B) Federal Reserve System. C) U.S. Treasury. D) national commercial banks. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

194) Based on the information in the above table, the value of M1 is A) $2,200. B) $1,900. C) $3,000. D) $3,100. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 195) Using the information in the above table, the value of M2 is A) $3,600. B) $3,800. C) $4,600. D) $5,500. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

196) The M1 definition of the money supply includes all of the following EXCEPT A) currency. B) transaction deposits. C) savings accounts. D) travelers checks. Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 197) In defining money as M1, economists exclude time deposits because A) they have no intrinsic value. B) they do not directly serve as a medium of exchange. C) they are not recognized as legal tender. D) they earn an interest for their holders. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 198) If people withdraw $1,000 from the nation's money market mutual funds and redeposit the funds in various checkable and debitable accounts, then A) M1 and M2 will remain unchanged. B) M1 will increase, M2 will remain unchanged. C) M1 will increase, M2 will decrease. D) M1 and M2 will increase. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

199) In defining money according to the transactions approach, you would want to include A) those assets that are used as a store of value. B) those assets that are used as a medium of exchange. C) those assets that are used as a unit of account. D) those assets that are used as a standard of deferred payment. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 200) Which one of the following is TRUE? A) Transaction deposits are counted in M2 but are not included in M1. B) Most of the U.S. currency in existence circulates outside U.S. borders. C) Traveler's checks are not considered to be money because they are not valid unless signed. D) Balances in money market deposit accounts are counted in M1 but are not included in M2. Answer: B Diff: 3 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 201) The M1 measure of money is suggested by the ________ approach to measuring money. A) investment B) liquidity C) transactions D) speculative Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 202) The M2 measure of money is suggested by the ________ approach to measuring money. A) investment B) liquidity C) transactions D) speculative Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

203) Which one of the following is included in M2 but NOT in M1? A) coins and currency B) transaction deposits C) a savings deposit D) large-denomination time deposits Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 204) Which of the following is NOT included in the M1 money supply? A) currency B) passbook savings accounts C) checkable and debitable accounts D) traveler's checks Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 205) Which of the following is included in M2 but NOT in M1? A) small-denomination time deposits B) transaction deposits C) currency D) traveler's checks Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

206) The M2 money supply is equal to the M1 money supply plus A) small time deposits, savings deposits, and retail money market mutual fund shares. B) all credit card balances and retail money market mutual fund shares. C) large time deposits and retail money market mutual fund shares. D) every account held by commercial banks. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 207) Small-denomination certificates of deposits are A) included in M1 but not M2. B) included in M1 and M2. C) included only in M1. D) included in M2 but not M1. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 208) The narrowest definition of the money supply is A) M1. B) M2. C) the difference between M2 and M1. D) the sum of M1 and M2. Answer: A Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 209) Money market mutual funds are funds pooled by A) a group of people to buy shares of stocks. B) a group of people to buy stock market funds. C) a group of people to buy short maturity credit instruments. D) a group of people to buy U.S. Treasury bonds. Answer: C Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

210) For a small-denomination certificate of deposit to be included in M2 it must be a denomination of less than A) $2,500,000. B) $100,000. C) $1 trillion D) $1,000. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 211) Which of the following assets are counted in M1? A) transaction deposits B) mutual funds accounts C) bonds D) line of credit Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 212) Which of the following assets are counted in M2? A) gold B) balances in retail mutual funds accounts C) value of outstanding bonds D) lines of credit offered by commercial banks Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

213) Suppose your $1,000 certificate of deposit matures and you transfer the funds to your checking account. This causes A) M1 to decrease by $1,000 and M2 to increase by $1,000. B) M1 to increase by $1,000 and M2 to remain the same. C) both M1 and M2 to increase by $1,000. D) no change to either M1 or M2. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 214) Which of the following is NOT included in M1? A) transaction deposits B) currency C) small time deposits D) travelers checks Answer: C Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 215) The largest component of M1 is A) currency. B) transaction deposits. C) travelers checks. D) savings accounts. Answer: B Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

216) Checking account deposits are included in A) money market account. B) currency. C) lines of credit. D) M1. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 217) A checking account balance in a commercial bank is A) part of the currency supply. B) a time deposit. C) not liquid enough to be considered money. D) an asset readily usable for most transactions. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 218) A transaction deposit is A) a fiduciary monetary system. B) a checkable and debitable account. C) opportunity cost. D) the liquidity approach. Answer: B Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 219) Federal Reserve notes are A) paper currency. B) savings bonds. C) checks issued by the U.S. government. D) backed by gold. Answer: A Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 69 Copyright © 2021 Pearson Education, Inc.

220) The term "depository institution" refers to A) commercial banks only. B) credit unions only. C) savings and loan associations only. D) commercial banks, credit unions, and savings and loan associations. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 221) Financial institutions that receive most of their funds from the savings of the public are A) the fiduciary monetary system. B) the world index fund. C) universal banking. D) thrift institutions. Answer: D Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 222) What is money? Answer: Money is any medium that is universally accepted in an economy by sellers of goods and services as payments for the goods and services and by creditors as payment for debts. Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 223) Why is money as a medium of exchange important in an economy? Answer: Money permits more specialization and reduces the transaction costs associated with means-of-payment uncertainty. Under barter, one might be uncertain as to what the other party might be willing to accept. With money, this uncertainty is greatly reduced. Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

224) What are the functions of money? Answer: Money serves as a medium of exchange, which means it is accepted as payment. It serves as a unit of account in which prices are expressed. It also serves as a store of value and as a standard of deferred payment. Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 225) What is liquidity? Why is money the most liquid of all assets? What is the cost of this liquidity? Answer: Liquidity is the degree to which an asset can be acquired or disposed of without much danger of any loss in nominal value and with small transaction costs. Money is the most widely and readily accepted asset that can be exchanged for other goods and services, so it is the most liquid asset. The cost of this liquidity is the interest yield given up that was available by holding another asset. Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 226) What is a fiduciary monetary system? Answer: A fiduciary monetary system is a system in which currency is issued by the government and its value is based on the public's confidence that the currency represents command over goods and services. The currency used in the system has no intrinsic value. Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 227) Savings accounts, certificates of deposit, and bonds pay interest and stocks pay dividends. Why does anyone hold on to currency or other forms of money and lose this extra income? Answer: Money is more liquid than these other assets and this liquidity is often valuable. If one wants to purchase something, stocks cannot be used. The stock must be sold and payment to the broker must be paid. The transaction costs will be greater than the costs of holding the money balances. Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

228) For the United States, what is the transactions approach to measuring money? Answer: The transactions approach looks at what is used as a medium of exchange. For the United States, this includes currency, transaction deposits, and traveler's checks. Diff: 1 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 229) How does the liquidity approach to measuring the money supply differ from the transaction approach? Answer: The liquidity approach focuses on assets that can be converted into money quickly and without loss of nominal value while the transaction approach only looks at assets that are used as a medium of exchange. People can earn some interest with these assets and still convert them to money easily and cheaply. Diff: 2 Topic: 15.1 Functions and Measures of Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 15.2 Financial Intermediation and Banks 1) The financial institutions in our banking system are all in the business of transferring funds from savers to investors. This process is known as A) the circular flow. B) direct financing. C) money laundering. D) financial intermediation. Answer: D Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 2) Suppose you place your savings in a time deposit at the bank, and that bank lends some of those funds to a business that desires a loan. This is an example of A) direct finance. B) indirect finance. C) credit rationing. D) adverse selection. Answer: B Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 72 Copyright © 2021 Pearson Education, Inc.

3) An item to which a business holds legal claim is called a(n) A) asset. B) liability. C) loan. D) opportunity cost. Answer: A Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 4) A checkable and debitable banking account is A) a liability to a commercial bank. B) an asset to a commercial bank. C) a liability to the household or firm that has the account. D) an asset for the Federal Reserve System. Answer: A Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 5) Financial institutions participate in which of the following activities? A) financial intermediation B) indirect finance C) the issuance of loans D) all of these Answer: D Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 6) Financial intermediation is best defined as the process by which A) inflation is controlled. B) corporations issue new stock. C) liabilities are liquidated. D) financial institutions accept savings from savers and make loans to investors. Answer: D Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 73 Copyright © 2021 Pearson Education, Inc.

7) Financial intermediaries are institutions that A) produce money for the federal government. B) regulate the activities of stock and bond markets. C) act as middlemen in the process of directing funds from savers to investors. D) oversee the activities of government institutions such as the Federal Reserve. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 8) Financial intermediaries are important because A) they bring lenders and borrowers together in a way that lowers transaction costs. B) they provide large funds to the stock market. C) they employ large numbers of people. D) they increase costs for banks. Answer: A Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 9) Suppose that a new customer opens a checking account and a saving account, placing $50,000 in each. Later, the bank makes a loan of $100,000 to a business firm. For this bank A) assets increased by $50,000 because the saving account is an asset, while liabilities increased by $50,000 because the checking account is a liability. B) assets increased by $50,000 because the checking and saving accounts are assets, and liabilities increased by $50,000 because the loan is a liability. C) assets increased by $100,000 because the loan is an asset, and liabilities increased by $100,000 because the checking and saving accounts are liabilities. D) assets remained unchanged but liabilities increased by $50,000 because of the loan. Answer: C Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

10) Which of the following is NOT an example of a financial intermediary? A) a credit union B) a pension fund C) the U.S. Treasury Department D) an insurance company Answer: C Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 11) A business owner applies for a bank loan to launch a fairly low-risk project. After receiving the loan, she cancels the low-risk project and instead uses the borrowed funds for a high-risk venture. This is an example of A) financial intermediation. B) the transactions approach. C) moral hazard. D) capital controls. Answer: C Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 12) If knowledge possessed by one party in a financial transaction is NOT known to the other party, ________ exists. A) disintermediation B) asymmetric information C) fraud D) no financial intermediation Answer: B Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 13) Who benefits from the process of financial intermediation? A) savers only B) borrowers only C) both savers and borrowers D) There is no benefit, because money does not create wealth. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

14) Asymmetric information is a situation in which A) information possessed by one party in a transaction is not known by another party. B) information possessed by one party in a transaction is also known by another party. C) the government has information that it chooses to pass along to private firms. D) private firms have information that they choose to pass along to the government. Answer: A Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 15) The process in which financial institutions accept savings from businesses, households, and governments and lend the funds to other businesses, households, and governments is called A) central banking system. B) financial intermediation. C) moral hazard. D) adverse selection. Answer: B Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 16) A central bank is A) the largest bank in the country. B) the same as the government. C) a banker's bank. D) an international bank. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 17) Financial intermediaries are institutions that A) create money. B) provide checking accounts. C) set interest rates. D) transfer funds in the form of loans from savers to investors. Answer: D Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking

18) All of the following are examples of financial intermediaries EXCEPT A) credit unions. B) insurance companies. C) retirement funds. D) stock exchanges. Answer: D Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 19) Possession of information by one party in a financial transaction but not by the other party is A) asymmetric information. B) symmetric information. C) informational hazard. D) financial intermediation. Answer: A Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 20) Two people are involved in a borrower/lender situation, and one person has superior knowledge of its own current and future prospects over the other person. This is known as A) preventable information. B) symmetric information. C) asymmetric information. D) deceptive knowledge. Answer: C Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 21) The tendency for high-risk projects to be overrepresented among investors of projects is A) asymmetric information. B) adverse selection. C) moral hazard. D) financial intermediation. Answer: B Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking

22) The possibility that a borrower might engage in riskier behavior after a loan has been obtained is A) asymmetric information. B) adverse selection. C) moral hazard. D) financial intermediation. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 23) Russia borrowed funds from the International Monetary Fund in 1989 in exchange for agreeing to undertake certain changes. However, after receiving the funds, Russia spent the funds on other things, making the loan repayment more unlikely to occur. This situation is referred to as A) adverse selection. B) moral hazard. C) asymmetric information. D) deceptive knowledge. Answer: B Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 24) The process by which financial institutions accept savings from businesses, households and governments and lend the savings to other businesses, households and governments is A) asymmetric information. B) adverse selection. C) moral hazard. D) financial intermediation. Answer: D Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking

25) When you deposit funds in a bank and then the bank lends these funds to a borrower, the bank is engaged in A) fiduciary investment. B) fraudulent behavior. C) universal banking. D) financial intermediation. Answer: D Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 26) Which of the following is NOT an asset of commercial banks? A) consumer loans B) business loans C) savings deposits D) home mortgages Answer: C Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 27) People with savings often deposit their funds in a commercial bank, rather than investing them directly with business enterprises, in order to A) avoid the problems associated with financial intermediation. B) avoid the problems associated with asymmetric information. C) earn the highest possible return for taking on the riskiest investments. D) All of these are correct. Answer: B Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

28) From an accounting point of view, a checking account should be considered part of a bank's A) assets. B) liabilities. C) profits. D) reserves. Answer: B Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 29) Which of the following is NOT a description of indirect finance? A) You take out a student loan from your bank. B) A pension fund company lends funds to you. C) You borrow $10,000 from your parents. D) You buy shares in a mutual fund. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 30) Which of the following is a financial intermediary? A) the U.S. Department of the Treasury B) the Internal Revenue Service C) a share of corporate stock D) an insurance company Answer: D Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 31) Which of the following is NOT a financial intermediary? A) commercial banks B) a savings and loan association C) the Federal Reserve Bank of New York D) the Internal Revenue Service Answer: D Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking

32) Let us suppose that you apply for a bank loan. You tell the bank that you are going to remodel your house, but after you get the loan you go to Las Vegas to gamble with the money. Your behavior is an example of A) adverse selection. B) direct credit allocation. C) moral hazard. D) indirect credit allocation. Answer: C Diff: 3 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 33) The function that banks perform by obtaining funds from households, businesses, and governments and lending these funds to other households, businesses, and governments is known as A) financial intermediation. B) lending intermediation. C) fiscal intermediation. D) liquidity intermediation. Answer: A Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 34) Which of the following is NOT a reason that people tend to deposit their funds with banks rather than lend their funds directly to other individuals? A) adverse selection problems B) asymmetric information problems C) moral hazard problems D) liquidity problems Answer: D Diff: 3 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

35) Adverse selection refers to the A) possibility that the borrower may engage in riskier behavior after the loan is obtained. B) likelihood that a potential borrower may use the funds that he receives for unworthy, high risk projects. C) possession of information by one party in a financial transaction not known by the other party. D) use of statistical discrimination in making loans. Answer: B Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 36) The possibility that a borrower might engage in riskier behavior after a loan is made is called A) adverse selection. B) liability aversion. C) moral hazard. D) the risk of default. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 37) Which of the following describes a moral hazard problem? A) a process by which individuals have substantial resources devoted to the exchange process and need to make a profit or they will be adversely affected B) a post-contractual problem that may result because participants to the exchange process have information that allows them to act in an opportunistic manner C) a process by which individual buyers or sellers with better information are more likely to participate in voluntary exchange D) a contractual problem that results because monopolies exist in all economies Answer: B Diff: 3 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking

38) Suppose you and your friend are in a shopping mall and you borrow $500 from your friend to pay for a smartphone that you purchase in a shop. This is an example of A) direct financing. B) indirect financing. C) moral hazard. D) money laundering. Answer: A Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Application of knowledge 39) Suppose you borrow $50,000 from your bank to purchase a Tesla vehicle. This is an example of A) direct financing. B) indirect financing. C) moral hazard. D) transaction costs. Answer: B Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Application of knowledge 40) When you use a debit card to purchase a pair of jeans, you are A) creating a 30-day loan from your bank to the seller. B) creating a 30-day loan from the seller to your bank. C) giving your bank an instruction to transfer funds directly from your bank account to the store's bank account. D) creating an overnight repurchase agreement between your bank and the store. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Application of knowledge

41) When you make a purchase at a retail store by giving your bank an instruction to transfer funds directly from your bank account to the store's bank account, you have most likely made the purchase using A) cash. B) a loan. C) a debit card. D) credit. Answer: C Diff: 1 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 42) Explain the role of financial intermediation. Answer: Financial intermediation is the process by which financial institutions accept savings from households and lend the savings to households, businesses, and the government. It is a middleman role that brings savers and borrowers together. Diff: 2 Topic: 15.2 Financial Intermediation and Banks Learning Outcome: Macro-5: Describe the key components and functions of a financial system AACSB: Analytical thinking 15.3 The Federal Reserve System: The U.S. Central Bank 1) The central bank for the United States is A) American Bank. B) the U.S. Treasury. C) the Federal Reserve System. D) First National Bank of America. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

2) The current chair of the Board of Governors of the Federal Reserve is A) Alan Greenspan. B) Ben Bernanke. C) Jerome Powell. D) Janet Yellen. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 3) Which of the following is TRUE of the Federal Reserve System? I. It was established in the early 1980s. II. It serves as the central bank of the United States. A) I only B) II only C) Both I and II D) Neither I nor II Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 4) The Federal Open Market Committee (FOMC) A) determines the tax policy of the government. B) influences the future growth of the money supply. C) oversees all transactions on the stock market. D) lends to the least credit-worthy customers. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

5) The part of the Federal Reserve System that determines monetary policy actions is the A) District Bank Board. B) Federal Deposit Insurance Corporation (FDIC). C) Federal Open Market Committee. D) Comptroller's Office. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 6) The Board of Governors of the Federal Reserve System is A) elected by the general public. B) composed of seven members who are appointed by the President and approved by the Senate. C) composed of representatives from the country's 12 largest commercial banks. D) composed of 12 members of the Senate and the U.S. House of Representatives. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 7) Monetary policy actions are determined by the A) Federal Open Market Committee. B) New York Federal Reserve Bank. C) President of the United States. D) all of these Answer: A Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 8) Who appoints the Federal Reserve System's Board of Governors? A) the Secretary of the Treasury B) the President of the United States C) the Speaker of the House of Representatives D) the American Banking Association Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

9) Which of the following is NOT a part of the Federal Reserve System? A) the Twelve District Federal Reserve banks B) the Federal Open Market Committee C) the Federal Deposit Insurance Corporation D) the Board of Governors Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 10) The Board of Governors of the Federal Reserve System is A) appointed by the Congress. B) elected by the public. C) appointed by the President with approval of the U.S. Senate. D) elected by members of the American Banking Association. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 11) Which of the following is NOT a function of the Federal Reserve System? A) The Fed holds reserves of depository institutions. B) The Fed supplies the economy with fiduciary currency. C) The Fed determines government spending and taxation policies. D) The Fed acts as fiscal agent for the United States Department of the Treasury. Answer: C Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

12) Which of the following is NOT a function of the Fed? A) regulating the money supply in the economy B) offering credit and loans to the U.S. public C) acting as government's fiscal agent D) providing a system of check collection and clearing for depository institutions Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 13) Which of the following is NOT a function of the Fed? A) holding reserves for depository institutions B) supervising member banks C) regulating the money supply D) determining the credit-worthiness of firms and individuals Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 14) Which of the following is NOT a function of the Federal Reserve System? A) providing for check collection and clearing B) holding deposits of member banks C) supervising member banks D) making loans to private firms Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 15) Regarding the nation's money supply, the Federal Reserve A) has no ability to influence its magnitude or its rate of growth. B) precisely sets the amount of money in circulation in consultation with the Congress. C) has a major impact on its rate of growth. D) gives the U.S. Treasury the authority to print as much as it wishes. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 88 Copyright © 2021 Pearson Education, Inc.

16) Which of the following statements is correct? I. The Fed can periodically and without warning examine member commercial banks to ensure that they are conforming to current banking standards. II. The Fed helps the government collect certain tax revenues and aids in the purchase and sale of government securities. A) I only B) II only C) Both I and II D) Neither I nor II Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 17) The Fed is said to be the "lender of last resort" in that A) it stands ready to lend to any depository institution that it has decided should not fail. B) it makes loans to individuals whom commercial banks do not believe are credit-worthy. C) it charges a higher interest rate to borrowers than does any other bank. D) it functions as the government's bank only when commercial banks fail to do so. Answer: A Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 18) All of the following are functions of the Federal Reserve System EXCEPT A) supplying the economy with fiduciary currency. B) providing a system of check collection and clearing. C) acting as the government's fiscal agent. D) lending funds to risky customers denied credit by commercial banks. Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

19) It is widely believed that the Federal Reserve's most important function is A) to provide loans to the federal government. B) to regulate the money supply. C) to set the legal, controlled consumer interest rates. D) to lend to risky customers. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 20) Which of the following is NOT a function of the Federal Reserve System? A) regulating the money supply B) offering banking services to households and businesses C) acting as the fiscal agent of the federal government D) supervising member banks Answer: B Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 21) The Federal Reserve System acts as the government's fiscal agent by A) auditing taxpayers. B) providing checking account services for the government. C) preparing the budget the President presents to Congress every year. D) determining how to finance a deficit. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 22) Which of the following is NOT a correct statement about the Federal Reserve banks? A) They supervise member banks within the Federal Reserve System. B) They provide a system of check collection and clearing. C) They provide the economy with gold backed currency. D) They act as banker and fiscal agent for the U.S. government. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 90 Copyright © 2021 Pearson Education, Inc.

23) A "banker's bank" is another name for A) a financial intermediary. B) a government bank. C) a central bank. D) the Federal Depository Insurance Agency. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 24) Which of the following is the central bank for the United States? A) the Bank of America B) the U.S. Mint C) the Comptroller of the Currency D) none of these Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 25) The U.S. central bank performs all the following roles for the nation EXCEPT A) performing banking functions for their nations' governments. B) lending funds directly to the public. C) providing financial services for private banks. D) conducting the nation's monetary policies. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

26) The Federal Reserve System was established in which year? A) 1865 B) 1913 C) 1929 D) 1965 Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 27) The Board of Governors of the Federal Reserve System has how many governors? A) 50 B) 5 C) 7 D) 12 Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 28) All of the following are functions of the Federal Reserve System EXCEPT A) to provide loans to developing countries. B) to supply the economy with fiduciary currency. C) to hold depository institutions' reserves. D) to act as the government's fiscal agent. Answer: A Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 29) By serving as the lender of last resort, A) the Fed provides check clearing services. B) the Fed supervises depository institutions. C) the Fed can prevent bank failures. D) the Fed aids in the sale of government securities. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 92 Copyright © 2021 Pearson Education, Inc.

30) The Federal Reserve System is divided into how many districts? A) 1 B) 5 C) 7 D) 12 Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 31) Control of the money supply is handled by A) Congress. B) the Federal Reserve System. C) all commercial banks. D) Congress and all member commercial banks. Answer: B Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 32) Depository institutions must A) use and pay for the services of the Federal Reserve System. B) set their interest rates according to schedules established by the Federal Reserve System. C) keep a certain percentage of their deposits as reserves. D) turn over a percentage of their profits to the Federal Reserve System as payment for services provided by the Fed. Answer: C Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

33) The Fed A) is responsible for minting coins. B) distributes Federal Reserve notes, which are paper currency. C) is responsible for conducting U.S. fiscal policy. D) has 15 Federal Reserve banks and governing boards in New York and Chicago. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 34) Which of the following is responsible for the distribution of paper currency in the United States? A) the U.S. Treasury B) the Office of the Comptroller of the currency C) the Federal Reserve D) all of these Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 35) Check collection and clearing happen A) at the bank where the check was written. B) only at private clearing centers. C) at the Fed and at private clearing centers. D) only at the Fed. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

36) Which of the following is NOT true about the duties the Fed performs for the federal government? A) The Federal Reserve is the banker and fiscal agent of the federal government. B) The U.S. Treasury controls the Fed. C) The Federal Reserve aids in the purchase and sale of certain government securities. D) The U.S. Treasury has a checking account at the Fed. Answer: B Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 37) As a "lender of last resort," the Fed A) is obligated to bail out any depository institution in the country that is in financial difficulty. B) protects the deposits of $100,000 or less in all commercial banks in the country. C) provides loans to banks experiencing temporary liquidity problems. D) bails out any corporation the government has decided should not fail. Answer: C Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 38) The most important function of the Fed is to A) provide a system for collecting and clearing checks. B) collect taxes. C) support the federal government's deficit spending by buying government securities. D) regulate the money supply. Answer: D Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

39) All of the following are functions of the Fed EXCEPT A) providing paper currency. B) enforcing international trade agreements. C) serving as a mechanism for clearing checks. D) the banker and fiscal agent for the government. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 40) Which of the following depository institutions is NOT regulated by a government agency? A) savings and loan associations B) credit unions C) commercial banks that are not part of the Federal Reserve System D) None of these: All depository institutions are regulated by some government agency. Answer: D Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 41) Which of the following is solely responsible for determining changes in the money supply in the United States? A) the U.S. Treasury B) the Comptroller of the Currency C) the Federal Open Market Committee D) the chairman of the Federal Reserve Answer: C Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

42) Which one of the following is a function of the Federal Reserve System? A) providing the economy with currency B) providing a system for check clearing C) serving as a lender of last resort D) all of these Answer: D Diff: 3 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 43) Why might the Federal Reserve intervene in foreign currency markets? A) to ensure the safety of overseas investments for banks B) to ensure the safety of overseas investments for private investors C) to ensure the safety of overseas investments for pension funds D) to maintain a desired exchange rate for the dollar Answer: D Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 44) The Federal Reserve Bank was first established in the U.S. by an Act of Congress passed in A) 1776. B) 1939. C) 1913. D) 1965. Answer: C Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 45) The Board of Governors of the Federal Reserve System has A) 7 members serving 14 year terms. B) 7 members serving 4 year terms. C) 12 members serving 14 year terms. D) 12 members serving 4 year terms. Answer: A Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 97 Copyright © 2021 Pearson Education, Inc.

46) The Federal Reserve System has A) 7 district banks. B) 12 district banks. C) 24 district banks. D) 50 district banks. Answer: B Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 47) How many Federal Reserve district banks are there in the United States? A) 12 B) 5 C) 48 D) none of these Answer: A Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 48) The fiscal agent for the U.S. federal government is A) the United States Treasury. B) the Internal Revenue Service. C) the Comptroller of Currency. D) the Federal Reserve System. Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

49) A major function of the Federal Reserve System is A) the implementation of fiscal policy for the federal government. B) the control of the money supply. C) the control of government spending. D) the control of taxing policy. Answer: B Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 50) Which of the following is NOT a function of the Federal Reserve System? A) supply fiduciary currency to the economy B) provide a system for check collection and clearing C) implement fiscal policy D) regulate the money supply Answer: C Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 51) Who appoints the chair of the Federal Reserve System? A) the Senate and Congress B) member banks of the Federal Reserve System C) the President of the United States D) the Federal Open Market Committee (FOMC) Answer: C Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 52) The part of the Federal Reserve System (the Fed) that sets reserve requirements is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors. Answer: D Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 99 Copyright © 2021 Pearson Education, Inc.

53) The part of the Federal Reserve System (the Fed) that holds the reserve balances of depository institutions is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors. Answer: C Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 54) The part of the Federal Reserve System (the Fed) that directs the buying and selling of U.S. government securities is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors. Answer: A Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 55) The part of the Federal Reserve System (the Fed) that supervises and regulates member banks is A) the Federal Open Market Committee. B) the Federal Advisory Committee. C) the Federal Reserve district banks. D) the Board of Governors. Answer: D Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

56) All of the following are functions of the Federal Reserve System (the Fed) EXCEPT A) supplying currency. B) check clearing. C) regulation of the money supply. D) lender of last resort for consumers. Answer: D Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 57) Federal Reserve notes are A) a liability of the Federal Reserve System. B) an asset to the Federal Reserve System. C) both an asset and a liability to the Federal Reserve System. D) a liability to the United States Treasury. Answer: A Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 58) The potential for a financial breakdown at large institutions to spread throughout the financial system is called A) a systemic risk. B) a too-large-to-fail problem. C) an averse selection problem. D) a moral hazard. Answer: A Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

59) After the financial crisis of the late 2000s, President Obama and Congress considered adding to the Federal Reserve's functions by making it the nation's primary regulator of A) systemic risk. B) default risk. C) credit risk. D) investment risk. Answer: A Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 60) What is the typical role of a central bank? A) It serves as a bank for the national treasury. B) It regulates depository institutions. C) It serves as a lender of last resort. D) all of these Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 61) The potential for a financial breakdown at one financial institution to spread throughout the financial system is known as a A) lending risk. B) moral hazard. C) liquidity risk. D) systemic risk. Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

62) In 2010, President Obama signed into law that made the Federal Reserve as the nation's A) largest private bank. B) federal income tax collector. C) fiscal policy making unit. D) regulator of systemic financial risk. Answer: D Diff: 1 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 63) The members of the Federal Open Market Committee are A) the Treasury secretary, the head of the Federal Deposit Insurance Corporation, and the Comptroller of the Currency. B) the seven members of the Fed's Board of Governors and five of the Federal Reserve bank presidents. C) the President, the Speaker of the House of Representatives, and the Senate Majority Leader. D) the five top officials at the Federal Reserve Bank of New York's Trading Desk. Answer: B Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 64) The Fed is the bankers' bank. What functions of the Fed are involved in this role? What are the other important functions of the Fed? Answer: The Fed holds reserves of banks, lends to banks when their reserves are low, and provides a system for check collecting and clearing. Other important functions include providing fiduciary currency, acting as the government's fiscal agent, supervising member banks, and regulating the money supply. Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

65) In the United States, who determines monetary policy? What is the major tool used to determine monetary policy? Answer: The Federal Reserve Bank's Federal Open Market Committee determines monetary policy. The committee is made up of the Board of Governors and 5 reserve bank presidents. Their main tool is buying and selling existing U.S. government securities in open markets. Diff: 2 Topic: 15.3 The Federal Reserve System: The U.S. Central Bank Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply 1) Goldsmiths were able to practice an early form of fractional reserve banking because they knew that A) people were relatively unsophisticated in their financial transactions. B) gold was the major form of money. C) not all depositors would claim their gold at the same time. D) gold did not serve as a unit of account. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 2) A system in which depository institutions hold reserves that are less than the amount of total deposits is called A) fiat money banking. B) fractional reserve banking. C) central banking system. D) required reserve banking. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

3) Fractional reserve banking refers to a banking system in which A) bank deposits are less than bank reserves. B) bank reserves are only a fraction of total deposits. C) bank reserves are only a fraction of required reserves. D) bank loans are less than bank reserves. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 4) If banks engage in fractional reserve banking, it means that A) they never run short of currency. B) they hold less than 100 percent of their deposits as reserves. C) a fraction of their legal reserves are held as top-grade government securities. D) they do not hold any excess reserves. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 5) Fractional reserve banking can be thought of as a bank A) withholding a portion of its total deposits that are not loaned out. B) holding deposits equal to its net worth. C) paying a fraction of its profit to depositors. D) loaning out all of its reserves. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 6) In the United States, where do depository institutions hold their reserves? A) in their own vaults in the form of precious metals such as gold and silver B) in accounts with the U.S. Department of the Treasury C) either as vault cash or on reserve with Federal Reserve district banks D) All reserves must be held at a Federal Reserve district bank. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 105 Copyright © 2021 Pearson Education, Inc.

7) A fractional reserve banking system is a system whereby A) banks keep at least 100 percent of their deposits on hand as reserves. B) banks keep only a fraction of their deposits on hand as reserves. C) a central bank tells all banks what fraction of the population they can serve. D) banks specialize so that one type of bank handles one kind of deposit and another type of bank handles another type of deposit. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 8) With fractional reserve banking, A) banks cannot generate profits. B) monetary policy will be ineffective. C) banks retain only a portion of their deposits in their vaults or at Federal Reserve banks. D) banks can act as securities brokers. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 9) A bank with $200 million in transaction deposits keeps $20 million in cash in the bank vault, $10 million in deposits at the Fed, and $10 million in government securities in the bank vault. Its total reserves equal A) $200 million. B) $20 million. C) $30 million. D) $235 million. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

10) Banks do NOT need to keep all of their deposits on hand as reserves because A) only a fraction of deposits are withdrawn at any one time. B) FDIC protects banks from excessive withdrawal demands. C) there is too much risk of bank robberies. D) they can always generate new reserves through the money creation process. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 11) Total reserves are A) deposits held by Federal Reserve district banks for depository institutions, plus depository institutions' vault cash. B) reserves that a depository institution must hold in the form of vault cash. C) reserves that depository institutions are allowed to claim as reserves. D) any item that legally functions as money. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 12) Deposits held by Federal Reserve district banks for depository institutions, plus depository institutions' vault cash are known as A) reserves. B) a sweep account. C) adverse selection. D) the discount rate. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

13) Total reserves of private banks are A) all customer deposits. B) deposits held at the Fed and vault cash. C) the minimum amount banks need to hold against time deposits. D) federal reserve notes. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 14) Total reserves are A) required reserves plus vault cash. B) required reserves plus excess reserves. C) required reserves. D) excess reserves. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 15) The reserve ratio is 10% and a bank has $500,000 in transaction deposits. The amount of reserves equals A) $5,000. B) $50,000. C) $500,000. D) undeterminable without information on cash reserves. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

16) A bank with $200 million in deposits has $15 million of cash in the bank and $10 million in deposits with the Fed. Its total reserves equal A) $10 million. B) $15 million. C) $25 million. D) $225 million. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 17) Under a fractional reserve banking system A) banks keep a fraction of their deposits on hand as reserves. B) banks keep a fraction of their reserves on hand as deposits. C) banks keep all of their deposits on hand as reserves. D) banks keep all of their reserves on hand as deposits. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 18) A system in which depository institutions hold reserves that are less than the amount of total deposits is A) the Federal Reserve System. B) the federal funds market. C) sweep accounts. D) fractional reserve banking. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

19) Sarah has just deposited $1,000 in her checking account. She knows that the bank will keep part of these funds on hand and loan out the rest. This is an example of A) the Federal Reserve System. B) a sweep account. C) fractional reserve banking. D) excess reserves. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 20) In a fractional reserve banking system, A) banks are required to keep all deposits on hand so that they can pay their depositors when they desire to withdraw funds. B) banks are required to keep a fraction of deposits in bonds. C) banks are required to keep a fraction of all deposits on hand and send the rest to the Fed. D) banks do not keep sufficient reserves on hand to cover 100 percent of their depositors' accounts. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 21) Fractional reserve banking began A) in the early twentieth century. B) in the early nineteenth century. C) in the Middle Ages. D) in ancient Greece. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

22) A system in which depository institutions hold reserves that are less than the amount of total deposits is A) a fractional reserve banking system. B) a percentage reserve banking system. C) a ratio reserve banking system. D) a legal reserve banking system. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 23) The concept of holding reserves, such as gold, that are less than the value of the total deposits A) is known as fractional reserve banking. B) has been illegal since the passage of the Financial Services Modernization Act of 1999. C) is known as non-credit banking. D) None of these are correct. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 24) Fractional reserve banking is a system in which A) depository institutions pay a fraction of advertised interest rates. B) a fraction of banking services must be provided by depository institutions. C) depository institutions hold a fraction of total deposits in reserve. D) the money supply is a set fraction of the U.S. gold reserves. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

25) Fractional reserve banking refers to a system in which the depository institution A) holds reserves equal to its deposits. B) holds reserves greater than its deposits. C) holds reserves less than its deposits. D) holds zero reserves. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 26) A statement of assets and liabilities of any business entity is called A) an income statement. B) a cash flow statement. C) a balance sheet. D) a statement of net worth. Answer: C Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 27) Which of the following would NOT be an asset on a bank's balance sheet? A) loans outstanding B) bank building C) cash in the vault D) transactions deposits Answer: D Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 28) Which of the following actions has no effect on the total money supply? A) The Federal Open Market Committee buys government securities. B) The Federal Open Market Committee sells government securities. C) There is a transfer of deposits from one bank to another bank. D) There is change in the money multiplier. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 112 Copyright © 2021 Pearson Education, Inc.

29) Given a required reserve ratio of 20 percent, a commercial bank that has received a new deposit of $1000 can make additional loans of A) $0. B) $200. C) $800. D) $1000. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 30) Following a new deposit of $500, the loans of a commercial bank increase by $400. In this situation, the reserve ratio is most likely A) 9 percent. B) 20 percent. C) 80 percent. D) 10 percent. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 31) The reserve ratio is 10 percent. If the bank receives a customer deposit of $100,000, then an immediate effect is A) a reduction in the bank's total assets of exactly $10,000. B) a reduction in the bank's total liabilities of exactly $10,000. C) no change in the bank's total assets or total liabilities. D) an increase in the bank's reserves of exactly $10,000. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

32) Other things being equal, if the reserve ratio is raised from 10 percent to 20 percent, A) minimum potential value of the money multiplier rises from 0.10 to 0.20. B) minimum potential value of the money multiplier falls from 10 to 20. C) maximum potential value of the money multiplier rises from 10 to 20. D) maximum potential value of the money multiplier falls from 10 to 5. Answer: D Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 33) To reach the maximum money multiplier, it is assumed that A) commercial banks keep the amount of reserves equal to total bank deposits. B) all loans get redeposited in a checkable account. C) there is insufficient loan demand. D) loans are diverted into circulating currency. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 34) Which of the following will limit the expansion of the money supply following a new deposit? A) failure of banks to voluntarily hold excess reserves B) a strong demand for new loans C) a re-depositing of all loan proceeds D) a strong demand for holding currency outside of commercial banks Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

35) A statement of assets and liabilities of any business entity is A) a sweep account. B) a balance sheet. C) net worth. D) legal reserves. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 36) The difference between assets and liabilities is A) a sweep account. B) a balance sheet. C) net worth. D) legal reserves. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 37) A bank currently has $50 million in deposits, $6 million in cash in the vault, $4 million on deposit with the Fed, and $5 million in government securities. The reserve ratio is 20 percent. A new deposit is made of $1 million. What is the maximum size loan the bank can make once the check clears? A) 0 B) $800,000 C) $1 million D) $5.8 million Answer: B Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

38) The reserve ratio is 20 percent. A check for $1 million is deposited in Bank A, written on an account from Bank B. After the check clears what are the new excess reserves at Bank A, and by how much does the money supply change if all banks make loans so that they have zero excess reserves? A) $200,000; $800,000 B) $200,000; $1 million C) $800,000; $800,000 D) $800,000; 0 Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 39) If all of a bank's depositors showed up on one day requesting cash withdrawals of all their deposited funds A) the bank would pay them all, although reluctantly. B) the bank would likely fail to have sufficient reserves to honor their requests. C) the bank could lawfully refuse their demands. D) the bank would immediately call all outstanding loans. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 40) Among the liabilities of a bank are its A) transaction deposits. B) total reserves. C) excess reserves. D) loans. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

41) The balance sheet of a bank shows its A) profits and losses. B) assets and liabilities. C) earnings and expenses. D) revenues and costs. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 42) If a bank receives a new transaction deposit of $10,000 and the reserve ratio is 5 percent, then the bank could expand its loans by as much as A) $500. B) $9,500. C) $10,000. D) $200,000. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 43) If a check written on one bank is deposited in another bank, A) the money supply increases. B) the money supply remains unchanged. C) the money supply decreases. D) new reserves are created for the banking system. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

44) Which of the following is a liability to a bank? A) total reserves B) transaction deposits C) government securities D) loans Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 45) If a check was written on Bank X for $500 and Bank Y presented the check to Bank X for payment, what will happen to the required reserves for each respective bank after payment is made? A) Bank X's required reserves increase; Bank Y's decrease. B) Bank Y's required reserves increase; Bank X's decrease. C) Both banks will see an increase in their required reserves. D) Both banks will see a decrease in their required reserves. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 46) Which of the following is NOT an asset of a bank? A) cash B) loans C) total reserves D) transaction deposits Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

47) Based on the above table, the reserve ratio for the banking system is A) 20 percent. B) 10 percent. C) 15 percent. D) 1 percent. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 48) Based on the above table, an open market operation in which the Fed purchased $200,000 of government securities would A) create a reserve deficiency for the banking system. B) lead to a maximum potential expansion of the money supply of $200,000. C) lead to a maximum potential expansion of the money supply of $2 million. D) cause demand deposits to fall by $200,000. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 49) The potential money multiplier for the banking system in the above table is A) 5. B) 9. C) 1. D) 10. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

50) When the Federal Reserve sells a government security to a commercial bank A) the cash reserves of the commercial bank decrease. B) the net worth of the commercial bank increases. C) the loans of the commercial bank will increase. D) the balance sheet of the commercial bank is thrown off balance. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 51) If a $1 million open market purchase by the Fed generates a new deposit at a bank that immediately causes the bank's reserves held at the Fed to increase by $1 million, then the Taccount effects are that the bank's assets and liabilities ________ by $1 million and that the Fed's assets and liabilities ________ by $1 million. A) decline; decline B) increase; decline C) decline; increase D) increase; increase Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 52) The Fed sells a U.S. government security and a bank dealer writes a check for the amount. When the check clears, A) reserves remain unchanged because the decrease of reserves at the dealer's bank is offset by an increase in the reserves at the Fed. B) reserves have fallen by the amount of the check because the Fed clears the check by reducing the bank's deposits at the Fed. C) reserves increase by the amount of the check because the Fed clears the check by increasing the amount of the bank's deposits with the Fed. D) reserves have fallen by the amount of the reserves times the reserve ratio, and the money supply falls by the difference between the amount of the check and the fall in the reserves. Answer: B Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

53) The reserve ratio is 20 percent and all loan proceeds are deposited in transactions accounts. A bond dealer has $100 million in deposits, $8 million in vault cash, and $7 million in deposits at the Fed. The Fed sells $1 million in securities to the bond dealer, who subsequently deposits the $1 million into a bank. As a result of this transaction alone, A) the money supply falls by $1 million and total reserves fall by $1 million. B) the money supply falls by $1 million and total reserves rise by $1 million. C) the money supply rises by $1 million, total reserves fall by $800,000. D) the money supply rises by $1 million, but reserves do not change. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 54) Suppose that the actual money multiplier equals the maximum potential money multiplier. If the reserve ratio is 10 percent, in order for the banking system to increase deposits by $2.5 million, the Fed must A) permit the system to have prolonged reserve deficiencies. B) sell $2.5 million of government securities to the general public. C) sell $250,000 of government securities to the general public. D) buy $250,000 of government securities from the public. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 55) The Federal Open Market Committee has responsibility for A) appointing members to the Board of Governors of the Federal Reserve system. B) printing money. C) issuing orders to buy or sell government securities for the Fed. D) advising the Treasury Department on monetary policy. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

56) When the Fed wants to undertake open market operations, it A) can require all commercial banks to buy from or sell to it. B) can require all member banks to buy from or sell to it. C) buys or sells securities through the trading desk at the New York Federal Reserve Bank. D) buys from or sells to the U.S. Treasury. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 57) Open market operations are A) the buying of existing corporate securities in secondary markets by private citizens, banks and the Fed. B) the buying and selling of existing U.S. government securities in open private markets by the Fed. C) the actions of the Fed that are used to finance deficit financing by the government. D) the selling of new government securities in order to increase the money supply. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 58) The level of reserves in the banking system is determined by A) the American Banking Association. B) the Federal Open Market Committee. C) bond dealers. D) the Treasury Department. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

59) When the Fed buys a U.S. bond in the open market, A) its action has no effect on the total reserves or the money supply because the check it writes increases reserves at one bank but they fall at another. B) total reserves increase by the amount of the purchase but the money supply stays the same. C) its action expands total reserves and the money supply. D) its action contracts total reserves and the money supply. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 60) Open market operations are conducted by the Fed A) in the private secondary U.S. securities market. B) in the New York Stock Exchange. C) through the Bureau of Engraving. D) through the Washington location of the Federal Reserve's Bank of Governors. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 61) The initial impact of the Fed's open market sale of government securities by the Federal Reserve is A) an increase in the money supply by some multiple of the dollar volume of the sale. B) an increase in commercial bank deposits at the Fed. C) a fall in the money supply by some multiple of the dollar volume of the sale. D) a reduction of the commercial banking system's reserve deposits at the Fed. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

62) A sale of securities by the Fed causes A) a contraction of the money supply equal to the amount of the securities sold. B) an expansion of the money supply equal to the amount of the securities sold. C) a multiple expansion of the money supply greater than the amount of the securities sold. D) a multiple contraction of the money supply greater than the amount of the securities sold. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 63) If the actual money multiplier equals the potential money multiplier and if the Federal Reserve wishes to increase the money supply by $500 when the reserve ratio is 20 percent, it should A) sell $100 of government bonds. B) buy $100 of government bonds. C) sell $1,000 of government bonds. D) buy $1,000 of government bonds. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 64) If the actual money multiplier equals the potential money multiplier, and if the Fed wishes to reduce the money supply by $1 million when the reserve ratio is 10 percent, then the Fed should A) sell $100,000 of government securities. B) buy $100,000 of government securities. C) sell $10,000 of government securities. D) buy $10,000 of government securities. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

65) When the Fed buys U.S. government securities, the money supply A) increases because there is an increase in transaction deposits at the bank of the bond dealer but there is no decrease in transaction deposits at any other bank. B) decreases because there is an increase in the reserves of the bond dealer's bank. C) remains unchanged because the increase in transaction deposits at the bond dealer's bank is offset by a reduction in transaction deposits at the Fed. D) remains unchanged because the increase in transaction deposits at the bond dealer's bank is offset by a fall in transaction deposits at another bank. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 66) Open market operations are A) the buying and selling of existing U.S. government securities in open private markets by the Fed in order to change the money supply. B) the buying and selling of existing U.S. government securities in open private markets by citizens. C) the selling of new government securities by banks in order to increase the money supply. D) the selling of new government securities in open private markets by banks in order to finance the deficit. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 67) Assuming a reserve ratio of 10 percent, if a bank sells $200,000 in securities how much can the bank loan out? A) $20,000 B) $180,000 C) $100,000 D) $2,000,000 Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

68) Assuming a reserve ratio of 25 percent, if a bank receives $100,000 in deposits how much can the bank loan out? A) $75,000 B) $100,000 C) $400,000 D) $25,000 Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 69) The Federal Reserve will engage in open market operations when A) it wants to punish private banks because they are not keeping the required level of reserves. B) it wants to change the money supply. C) it wants to change the reserve ratio. D) it wants to increase the total amount of reserves since government securities are considered a reserve. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 70) The level of reserves in the monetary system is determined by A) the Federal Open Market Committee. B) the Treasury Department. C) Congress. D) the President of the United States. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

71) When the Fed sells a U.S. bond in the open market, A) total reserves will increase. B) total reserves will decrease. C) total reserves do not change but the money supply increases. D) total reserves do not change but the money supply decreases. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 72) When the Fed buys a U.S. bond in the open market, A) total reserves will increase. B) total reserves will decrease. C) total reserves do not change but the money supply increases. D) total reserves do not change but the money supply decreases. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 73) The Fed sells $1 million in bonds to a bond dealer. The bond dealer's bank experiences A) a decrease in assets of $1 million as its reserves decrease and an increase in liabilities of $1 million as its deposits rise. B) a decrease in assets of $1 million as its reserves decrease and a decrease in liabilities of $1 million as its deposits fall. C) an increase in assets of $1 million as its deposits fell by $1 million, and a decrease in liabilities as its reserves fell by $1 million. D) no change in assets or liabilities. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

74) If a bank's deposits at the Fed increase by $10 million, then A) both the bank's assets and the Fed's assets increase by $10 million. B) both the bank's liabilities and the Fed's liabilities increase by $10 million. C) the bank's assets increase by $10 million and the Fed's liabilities increase by $10 million. D) the bank's assets increase by $10 million, but there is no change at the Fed since it does not really have assets or liabilities. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 75) The Fed buys securities and gives a bond dealer a check for the amount. After the check has cleared, A) reserves remain unchanged because the increase of reserves at the dealer's bank are offset by an increase in reserves at the Fed. B) reserves have fallen by the amount of the check because the Fed clears the check by reducing the bank's deposits at the Fed. C) reserves have risen by the amount of the check because the Fed clears the check by increasing the amount of the bank's deposits with the Fed. D) reserves have fallen by the amount of the reserves times the reserve ratio and the money supply increases by the difference between the amount of the check and the increase in the reserves. Answer: C Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 76) When the Fed sells government securities, A) reserves increase, leading to a decrease in the money supply by an amount more than the sale of the government securities. B) reserves decrease, leading to an increase in the money supply by an amount more than the sale of the government securities. C) reserves increase, leading to an increase in the money supply by an amount more than the sale of the government securities. D) reserves decrease, leading to a decrease in the money supply by an amount more than the sale of the government securities. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 128 Copyright © 2021 Pearson Education, Inc.

77) When the Fed buys government securities, A) reserves increase, leading to a decrease in the money supply by an amount more than the purchase of the government securities. B) reserves decrease, leading to an increase in the money supply by an amount more than the purchase of the government securities. C) reserves increase, leading to an increase in the money supply by an amount more than the purchase of the government securities. D) reserves decrease, leading to a decrease in the money supply by an amount more than the purchase of the government securities. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 78) Tanner decides to buy a bond from Joe for $1,000. The money supply will A) neither increase nor decrease. B) increase by $1,000. C) increase by more than $1,000. D) decrease by $1,000. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 79) The reserve ratio is 2 percent. If the Fed buys $1 million of U.S. government securities and the check is deposited in Bank A, but Bank A increases its vault cash by the entire amount, then the money supply A) does not increase. B) increases by $980,000. C) increases by $1 million. D) increases by more than $1 million. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

80) A purchase of U.S. government securities by the Fed causes A) an expansion of the money supply equal to the amount of the securities purchased. B) a contraction of the money supply equal to the amount of the securities purchased. C) an expansion of the money supply of more than the amount of the securities purchased. D) a contraction of the money supply of more than the amount of the securities purchased. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 81) A sale of U.S. government securities by the Fed causes a(n) A) expansion of the money supply equal to the amount of the securities sold. B) contraction of the money supply equal to the amount of the securities sold. C) expansion of the money supply of more than the amount of the securities sold. D) contraction of the money supply of more than the amount of the securities sold. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 82) The reserve ratio is 10 percent. If the Fed buys $1 million of U.S. government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank ABC, then A) Bank ABC can make no additional loans. B) Bank ABC can make additional loans up to $900,000. C) Bank ABC can make additional loans up to $1 million. D) Bank ABC cannot make any additional loans, but the system as a whole can make additional loans up to $1 million. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

83) The reserve ratio is 10 percent. After the Fed buys $1 million in U.S. government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank A, Bank A lends a construction company an amount equal to its excess reserves. The construction company spends the entire amount on lumber from a lumber yard, which deposits the construction company's check in its deposit account with Bank A. The maximum loan Bank A can now make is A) $900,000. B) $100,000. C) $810,000. D) $1 million. Answer: C Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 84) The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank A. Bank A loans the maximum amount possible to a construction company, which buys materials from a lumber yard. The lumberyard deposits the construction company's check in Bank B. What is the maximum loan Bank A can now make and the maximum loan Bank B can now make? A) Bank A: 0; Bank B: $640,000 B) Bank A: 0; Bank B: $800,000 C) Bank A: $800,000; Bank B: $640,000 D) Bank A: $800,000; Bank B: 0 Answer: A Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

85) The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank A. Bank A makes the maximum loan possible to a construction company, which buys materials with the loan. The check is deposited in Bank B, which loans out all it can to a car dealership. To this point, the money supply has increased by A) $1 million. B) $1.8 million. C) $2.44 million. D) $3 million. Answer: C Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 86) Suppose that the reserve ratio is 5 percent. A bank's customer deposits into her account $100,000 in funds from a check written on an account at another bank. The maximum potential increase in the money supply resulting from this transaction is equal to A) $0. B) $5,000. C) $100,000. D) $20,000,000. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 87) When the Fed buys a $100,000 bond from a bond dealer, A) reserves of the banking system increase by $100,000, but the money supply will only be able to increase by something less than this amount. B) reserves of the banking system increase by $100,000, but the money supply can increase by more than $100,000. C) reserves of the banking system remain unchanged, but the money supply increases by $100,000. D) reserves of the banking system remain unchanged, but the money supply decreases by $100,000. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

88) If a bond dealer sells a government bond to the Fed for $100,000, and the reserve ratio is 10 percent, then the bank that receives a $100,000 deposit from the dealer can expand its loans by ________, and the money supply can increase by as much as ________. A) $80,000; $800,000 B) $10,000; $100,000 C) $90,000; $1,000,000 D) $90,000; $900,000 Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 89) For the money expansion process to produce the maximum potential multiplier effect, A) all loans of a given bank have to be deposited in that bank. B) the required reserve ratio has to be 100 percent. C) the Fed has to sell government bonds to back up the loans. D) all loans from banks have to be redeposited throughout the banking system. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 90) Open market operations are A) the procedures for approving loans at commercial banks. B) the procedures of applying for loans at commercial banks. C) the Federal Reserve's purchase and sale of existing U.S. government securities. D) steps a bank must complete before it can invest in stocks on the open market. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

91) When the Fed buys U.S. government securities on the open market, A) the reserves of the banking system expand. B) the reserves of the banking system contract. C) the money supply contracts. D) the total reserves of the banking system will fall below required reserves. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 92) Which one of the following would increase reserves for the banking system? A) The Fed sells government securities on the open market. B) The Fed buys government securities on the open market. C) You take $100 out of a checking account and then deposit the same amount in a savings account. D) You purchase a U.S. Treasury bond from a bond dealer. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 93) Open market operations involve A) the buying and selling of existing corporate bonds. B) the buying and selling of existing corporate stocks. C) the buying and selling of existing federal government bonds. D) the buying and selling of Federal Reserve bonds. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

94) If the Fed purchases $100,000 in government bonds from a bank, then the A) liabilities of the bank rise by $100,000. B) reserves of the bank fall by $100,000. C) assets of the bank rise by $100,000. D) reserves of the bank rise by $100,000. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 95) If the FOMC decides to engage in the selling of government bonds, what is the effect on the money supply? A) a decrease B) an increase C) no change D) an initial increase followed by an additional rise when the bonds mature Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 96) The Fed's buying and selling of existing government securities is called A) market interventions. B) open market operations. C) changes in the reserve requirement ratio. D) changes in the difference between the discount rate and the federal funds rate. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

97) When a bank sells a bond to the Fed, A) its liabilities decrease. B) its liabilities increase. C) its reserves initially decrease. D) its reserves initially increase. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 98) When a bank buys a bond from the Fed, A) its liabilities decrease. B) its liabilities increase. C) its reserves initially decrease. D) its reserves initially increase. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 99) If the FOMC decides that the Fed should buy bonds it A) instructs the New York Federal Reserve Bank's trading desk to buy them. B) asks the Congress for permission to buy them. C) requires the President's signature on the buy order. D) requires the permission of the Financial Oversight Committee. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

100) If the money multiplier is 2.5 and the Fed buys $8 million in securities on the open market, transaction deposits could potentially A) increase by $20 million. B) increase by $25 million. C) decrease by $20 million. D) decrease by $25 million. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 101) Suppose that the reserve ratio is 25%. What is the value of the potential money multiplier? A) 2 B) 5 C) 2.5 D) 4 Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 102) The Fed buys $1 million in bonds from a bond dealer. The bond dealer's bank experiences A) an increase in assets of $1 million as its reserves increase and a decrease in liabilities as its transactions deposits fall. B) no change in assets or liabilities. Assets both increased and decreased by the amount of the check. C) a decrease in assets of $1 million as the checking account of the bond dealer increased, and a decrease in liabilities as the bank's deposits with the Fed increased by $1 million. D) an increase in assets of $1 million as its reserves increase and an increase in liabilities of $1 million as the deposits in the bond dealer's transactions account increases by $1 million. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

103) Other things being equal, when the Fed buys U.S. government securities, A) the U.S. Treasury must immediately issue new securities to replace the securities that the Fed has removed from the market. B) the Fed's total assets and total liabilities immediately expand by exactly the amount of the Fed's purchase. C) the quantity of deposits in the U.S. banking system expands by less than the amount of the Fed's purchase. D) the quantity of paper currency and coins in circulation expands by more than the amount of the Fed's purchase. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 104) A purchase of U.S. government securities by the Fed causes A) a multiple contraction of the money supply because deposits fall by more than the amount of the securities purchased. B) a contraction of the money supply equal to the amount of the securities because all other transactions occur within the banking system. C) a multiple expansion of the money supply because the reserve ratio is less than one. D) an expansion of the money supply equal to the amount of the securities because all other transactions occur within the banking system. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 105) The reserve ratio is 10 percent. Depositors regularly keep 10 percent of their deposits as cash. If the Fed buys $1 million of U.S. government securities, excess reserves A) increase by $800,000. B) increase by $810,000. C) increase by $900,000. D) increase by $1 million. Answer: C Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

106) To expand the money supply, the Fed should A) buy U.S. government securities. B) sell U.S. government securities. C) raise the required reserve ration. D) cut taxes. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 107) To contract the money supply, the Fed should A) reduce the differential between the discount rate and the federal funds rate. B) increase government spending and cut taxes. C) lower the required reserve ratio. D) sell U.S. government securities. Answer: D Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 108) The reserve ratio equals 10 percent. The Fed buys $1 million in U.S. government securities. The most the money supply can increase is A) $90 million. B) $0.1 million. C) $10 million. D) $100 million. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

109) To increase the money supply, A) the Federal Reserve should sell government securities. B) the commercial banks should reduce their loans. C) the Federal Reserve should buy government securities. D) the Federal Reserve should reduce its loans to banks. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 110) A decrease in the reserve ratio will A) cause the money supply to decrease. B) cause the money supply to increase. C) not affect the money supply. D) decrease the money multiplier. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 111) The reason that the commercial banking system can generate a multiple expansion or contraction of the money supply is that A) banks are required to hold only a fraction of their deposit liabilities as reserves. B) most banks maintain a relatively large stock of reserves. C) banks hold reserves equal to their net worth. D) banks generally are required to hold surplus funds on deposit with other banks. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

112) If the reserve ratio is raised, the money multiplier A) is lowered. B) is increased. C) stays the same. D) is doubled. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 113) The maximum potential money multiplier is equal to A) the reserve ratio. B) the inverse of the required reserve ratio. C) one minus the reserve ratio D) the number of dollars on reserve. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 114) If the reserve ratio is 100 percent, the maximum potential money multiplier is A) 0. B) 1. C) 10. D) 100. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 115) With a reserve ratio of 0 percent, the maximum potential money multiplier is A) 0. B) 1. C) 100. D) infinitely large. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 141 Copyright © 2021 Pearson Education, Inc.

116) For the past several decades, the U.S. M1 multiplier has been between A) 0.5 and 2.5. B) 1.0 and 3.0. C) 3.0 and 6.0. D) 0 and 10.0. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 117) The larger is the reserve ratio A) the greater is the increase in the money supply for an increase in bank deposits. B) the more likely it is there will be currency drains. C) the smaller is the maximum potential money multiplier. D) the more difficult it is for the Federal Reserve to control the money supply. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 118) By affecting the amount of reserves in the banking system, the Fed can A) affect the size of the money supply. B) change the marginal tax rates. C) increase government purchases. D) reduce government purchases. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

119) Initially, the reserve ratio is 10 percent. Now banks decide they want an additional 10 percent of deposits as reserves. There are no currency drains. If the Fed buys $1 million of U.S. government securities, the money supply will A) not change because of the excess reserves banks keep on hand. B) increase by $1 million. C) increase by $5 million. D) increase by $10 million. Answer: C Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 120) Following a new deposit of $500 at a bank, drawn on funds previously held on deposit at another bank, when the reserve ratio is 10 percent, the maximum potential increase in the money supply will be A) $0. B) $500. C) $400. D) $5,000. Answer: A Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 121) If the reserve ratio is 20 percent and reserves in the commercial banking system increase by $20,000, the maximum possible expansion of demand deposits is A) $4,000. B) $40,000. C) $100,000. D) $500,000. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

122) When the Federal Reserve sells a government security to a bond dealer, which transmits payment from a transactions deposit account at a bank, A) the cash of the Federal Reserve will decrease. B) the net worth of the commercial bank will decrease. C) the loans of the commercial bank will increase. D) the money supply will decrease. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 123) If the Federal Reserve sells $200 of securities through a commercial bank when the reserve requirement is 10 percent, the maximum potential change in the money supply is A) a $200 increase. B) a $2,000 increase. C) a $200 decrease. D) a $2,000 decrease. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge 124) If the Federal Reserve buys $500 of government securities when the required reserve ratio is 50 percent, the maximum potential change in the money supply is a(n) A) increase by $500. B) increase by $1,000. C) decrease by $500. D) decrease by $1,000. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

125) Which of the following would reduce the money multiplier? A) reducing the reserve ratio B) bond purchases by the Fed C) cash drains from banks D) bank reductions in desired reserve holdings Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 126) Which of the following would reduce the money multiplier? A) the purchase of bonds by the Fed B) lowering the reserve ratio C) increases in the reserve ratio D) a flow of currency into the banking system Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 127) According to the text, the actual M1 multiplier in the U.S. today is A) between 0 and 1. B) between 1.0 and 3.0. C) negative. D) over 4. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 128) According to the text, the actual M2 multiplier in the United States today is A) about 1. B) about 4. C) negative. D) over 10. Answer: B Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 145 Copyright © 2021 Pearson Education, Inc.

129) The formula

is the

A) federal funds rate. B) discount rate. C) potential money multiplier. D) actual change in the money supply. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 130) The actual money multiplier multiplied by the change in total reserves is the A) federal funds rate. B) discount rate. C) potential money multiplier. D) actual change in the money supply. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 131) The potential money multiplier gives us A) the growth in real national income when the money supply increases. B) the growth in the money supply when income increases. C) the maximum potential change in the money supply due to a change in reserves. D) the maximum potential change in the money supply due to a change in income. Answer: C Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

132) When people decide to increase the amount of currency they are currently holding, A) the potential money multiplier will increase. B) the potential money multiplier will decrease. C) the actual money multiplier will increase. D) the actual money multiplier will decrease. Answer: D Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 133) When banks reduce the reserve ratio, the potential money multiplier A) increases. B) decreases. C) remains unchanged. D) sometimes increases, and sometimes decreases depending on the rate of inflation. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 134) If proceeds from loans are NOT deposited back in the banking system, then A) the magnitude of the multiplier process is reduced. B) there is no effect on the magnitude of the multiplier process. C) the magnitude of the multiplier process is increased. D) the Fed intervenes by selling more Federal government bonds. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 135) The value of the money multiplier depends on A) the reserve ratio. B) the ratio of total assets to total liabilities for the banking system as a whole. C) the interest rate offered on bonds currently being sold by the Fed. D) the interest rate offered on bonds currently being purchased by the Fed. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 147 Copyright © 2021 Pearson Education, Inc.

136) If the reserve ratio decreases from 20 percent to 10 percent, then the potential money multiplier A) increases from 5 to 10. B) decreases from 10 to 5. C) does not change. D) decreases from 20 to 10. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 137) An increase in the reserve ratio A) has an expansionary effect on the money supply. B) has a contractionary effect on the money supply. C) increases the money multiplier. D) will cause banks to make more loans. Answer: B Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 138) Suppose that the Fed purchases $1,000,000 worth of bonds and that the reserve ratio is 100 percent. Then, the maximum potential expansion of deposits is A) $1,000,000. B) $0. C) $100 million. D) none of these. Answer: A Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Application of knowledge

139) What is a fractional reserve banking system? How long has the fractional reserve banking system been in existence? Answer: A fractional reserve banking system is a system in which depository institutions hold reserves that are less than the amount of total deposits. They have been in existence at least 2,500 years. Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 140) What are reserves? Discuss the various types of reserves used in the U.S. banking system. Answer: Reserves are assets held by a depository institution that are used to meet withdrawal demands. In the U.S. Federal Reserve System, reserves include deposits held by Federal Reserve district banks for depository institutions plus the vault cash in the depository institution. Total reserves are anything that the law allows banks to claim as reserves. Required reserves are the value of reserves the depository institution must hold and excess reserves are the reserves the institution holds in excess of the required reserves. Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 141) As far as reserves and deposits are concerned, describe the assets and liabilities of a bank. Answer: The major liabilities of a bank are the deposits they hold. Transaction deposits are drawn down every time a depositor writes a check. The assets are the reserves the bank has and any loans they have made. Diff: 1 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 142) Explain what happens to the money supply when the Fed sells bonds on the open market. What happens to the assets and liabilities of the Fed? Answer: The money supply falls when the Fed sells bonds on the open market, because the purchaser pays for the bonds by transmitting funds from a transactions deposit. The reserves of the bank fall by the amount of the funds transfer. The assets of the Fed fall, because the bonds sold had been assets and the liabilities of the Fed. The liabilities of the Fed decrease, because the purchaser's bank's reserves declined by the amount of the transfer. Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 149 Copyright © 2021 Pearson Education, Inc.

143) Suppose the Fed purchases $1 million in bonds in the open market. Explain how the money supply can increase by more than $1 million. Answer: Transaction deposits and reserves increase by $1 million as a result of the purchase. Since the reserve ratio is less than one, the bank now can loan some of the reserves to someone. If it does, then the transaction deposits of the borrower increase by the amount of the loan, so the money supply has increased further. Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 144) Why does the money supply increase when the Fed buys a bond but does NOT change when a business buys a bond? Answer: The reserves in the banking system increase when the Fed buys bonds but remain unchanged when a business buys bonds. When a business buys bonds, a check is written on one bank and deposited in another. The reserves of one bank increase but fall in the other, so there is no net change. When the Fed buys bonds, reserves increase in a bank but don't decrease anywhere else since the Fed can add to the reserves of a member bank. Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 145) Explain how the Fed increases the money supply when it buys bonds in the open market. Answer: The Fed buys bonds in the open market and pays for the bonds by transmitting funds to the bond dealer's deposit account in a bank, at which point it becomes part of the money supply. The Fed has just created money, because it has added to the reserve account of the bond dealer's bank, and the money supply increases by the amount of the purchase. Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

146) How are the assets and liabilities changed for a bond dealer, the bond dealer's bank, and the Fed when the Fed buys $100,000 in bonds? Answer: The bond dealer trades a bond for a transactions deposit of $100,000. That is, the form of the assets change but not the total value. Assets and liabilities of the bank increase by $100,000 since transaction deposits increase when the Fed deposits the funds, and the bank's reserves increase by the same amount. The assets of the Fed increase by $100,000 when it buys the bond and its liabilities increase by $100,000 because reserves of the bank on deposit with the Fed increase. The money supply increases as the bond is converted into money. Diff: 3 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 147) Suppose a person deposits a paycheck in a bank. The transaction deposits are money, so has the money supply increased? Explain. Answer: No. The check was drawn on the person's account. Transaction deposits fell in that bank by the same amount transaction deposits increased in this bank, so the total money supply has not changed. Diff: 2 Topic: 15.4 Fractional Reserve Banking, the Federal Reserve, and the Money Supply Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 15.5 Federal Deposit Insurance 1) The Federal Deposit Insurance Corporation insures A) banks against lawsuits. B) the federal funds market. C) the deposits held in member banks. D) the deposits held in the Fed. Answer: C Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

2) The FDIC was created because A) banks failed to create money the way the Fed wanted them to. B) people worried about bank failures after World War I, even though very few banks actually failed. C) there were so many bank failures in the 1930s. D) the Fed kept the required reserve ratio too low. Answer: C Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 3) Which of the following has been a problem faced by the FDIC in its provision of federal deposit insurance? A) moral hazard arising from the tendency for the highest-risk banks to be those most interested in obtaining deposit insurance in the first place B) adverse selection arising from the tendency for banks to take on more risk after they receive deposit insurance C) moral hazard arising from the tendency for banks to take on more risk after they receive deposit insurance D) a relatively low number of bank failures each year, which has reduced the need for deposit insurance Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 4) Which of the following statements about the FDIC is correct? I. The deposit insurance premiums charged by the FDIC to a member bank fully reflect the riskiness of that bank's assets. II. The manner in which the FDIC is set up helps protect depository institutions from the rigors of true market competition. A) I only B) II only C) Both I and II D) Neither I nor II Answer: B Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

5) Bank runs are a possibility because A) the FDIC is inefficient. B) bankers are often poor businesspeople. C) in difficult times people want currency instead of demand deposits. D) banks do not keep enough reserves to cover all their depository liabilities. Answer: D Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 6) The manner in which FDIC deposit insurance is set up in the United States encourages banks to A) be too conservative in their lending practices. B) maintain excess reserves that are too great. C) make riskier loans than they otherwise would. D) reject some loans that probably would be profitable. Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 7) If the FDIC eliminated its insurance program for deposits, then A) the banking system would probably fail. B) individual depositors would have more incentive to ascertain the soundness and solvency of the bank. C) banks would probably hold fewer reserves. D) moral hazard would be increased. Answer: B Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

8) Asymmetric information before a transaction takes place generates the problem of A) flawed bank regulation. B) intermediation. C) adverse selection. D) bank runs. Answer: C Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 9) Deposit insurance shields depositors from the adverse effects of risky decisions and thereby A) encourages riskier behavior on the part of managers of depository institutions. B) encourages depositors to monitor the managers of depository institutions more closely. C) encourages moral hazard on the part of depositors. D) generates a more efficient banking system. Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 10) The fact that individuals whose credit worthiness is less than it appears to be are those who are most willing to borrow funds at any given interest rate is an example of A) adverse selection. B) symmetric information. C) moral bonuses. D) diverse origins. Answer: A Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

11) Which of the following statements is/are correct? I. Depository institution managers undertake riskier actions than they otherwise would because of the existence of deposit insurance. II. Because of the existence of deposit insurance, depositors in savings and loans and other banks have little incentive to investigate the financial stability of these institutions. A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 12) Lenders generally want borrowers to agree to invest prudently, yet once a loan is made borrowers may use the funds in a highly risky fashion. This leads to the problem of A) critical mass. B) deposit insurance. C) investor selection. D) moral hazard. Answer: D Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 13) The Federal Deposit Insurance Corporation A) insures the deposits held by the Fed. B) insures the deposits held in banks. C) insures banks against lawsuits by depositors. D) insures the open market operations of the Fed. Answer: B Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

14) As of 2020, the FDIC insured deposit accounts up to which of the following amounts? A) $10,000 B) $25,000 C) $100,000 D) $250,000 Answer: D Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 15) The FDIC helps prevent A) risky behavior on the part of bankers. B) inflation. C) bank runs. D) risky behavior on the part of depositors. Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 16) The FDIC fee system encourages depository institutions to A) make riskier loans than they would otherwise. B) reject loans that probably would have been profitable. C) seek only a modest rate of return. D) operate their institutions in too conservative a fashion. Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 17) Asymmetric information before a transaction takes place generates the problem of A) bank runs. B) irrational behavior. C) moral hazard. D) adverse selection. Answer: D Diff: 1 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 156 Copyright © 2021 Pearson Education, Inc.

18) If depository insurance exists, bank managers may make riskier loans than they would have otherwise, which is an example of A) regulatory lag. B) irrational behavior. C) moral hazard. D) adverse selection. Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 19) Which of the following is NOT a potential problem due to federal depository insurance? A) Banks have an incentive to make riskier loans than they would otherwise. B) Depositors have little incentive to monitor the behavior of the managers of the depository institutions. C) Depositors demand greater interest rates on their deposits to compensate them for the riskier behavior of the managers of the depository institutions. D) Lenders have less incentive to investigate the credit-worthiness of borrowers. Answer: C Diff: 3 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 20) Bank examinations by the FDIC help reduce the ________ problem, by preventing bank managers from allocating funds already obtained from depositors to non-creditworthy loans. A) moral hazard B) principled hazard C) adverse selection D) contrary selection Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

21) In addition to insuring accounts, the FDIC today has the additional power of A) setting reserve requirements. B) establishing FOMC goals. C) establishing the discount rate. D) establishing higher capital requirements for banks. Answer: D Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 22) The Federal Deposit Insurance Corporation A) increases the stability of the banking system by reducing the likelihood of bank runs. B) discourages banks from engaging in excessive risk taking. C) only insures deposits in money-center banks. D) was established after the Panic of 1907. Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 23) Because deposits are insured by the FDIC, most of us do NOT look at the lending behavior of our banks. This creates a(n) ________ problem. A) moral hazard B) principled hazard C) adverse selection D) contrary selection Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

24) Bank A had a reputation for asking few questions when it provided loans. Two years later, the majority of the loans were not repaid. This is because the bank had failed to address the A) adverse selection problem. B) moral hazard problem. C) contrary selection problem. D) free-rider problem. Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 25) Which of the following represents a preventative measure against bank runs? A) The President of the United States can order banks to pay depositors. B) The Federal Reserve can lower reserve requirements to ensure that banks have sufficient funds. C) The FDIC provides deposit insurance. D) None of these is correct. Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 26) What would cause a bank run? A) Depositors feel that the bank does not have sufficient assets to cover their deposits. B) Depositors feel that they are earning too low of a return on their deposits. C) Borrowers feel that they are being charged too high of an interest rate on their loans. D) Bank managers choose to hold more excess reserves. Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

27) What effect has the presence of federal deposit insurance had on the banking industry? A) Banks now hold more excess reserves. B) Banks have made it more difficult for customers to qualify for loans. C) Banks have made riskier loans. D) Depositors have become more vigilant in monitoring the decisions made by managers of their banks. Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 28) The government agency that insures deposits held in banks in the United States is A) the Federal Reserve System. B) the Federal Bank Insurance Corporation. C) the Federal Asset Insurance Corporation. D) the Federal Deposit Insurance Corporation. Answer: D Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 29) Due to the existence of the FDIC, banks A) may make riskier loans knowing that their depositors are insured. B) have not changed their behavior even with the existence of insurance. C) become more cautious in making loans. D) are no longer concerned about net worth. Answer: A Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

30) In which year was the Federal Deposit Insurance Corporation (FDIC) established? A) 1913 B) 1929 C) 1933 D) 1951 Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 31) The primary purpose of the FDIC is to reduce the potential for A) government regulations. B) reserve cheating. C) bank runs. D) excessive interest rates. Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking 32) Beginning in late 2000s, the FDIC sought to increase the public's confidence in depository institutions by A) lowering insurance premiums for bank deposits. B) eliminating insurance premiums for bank deposits. C) assessing insurance premiums on banks' total liabilities. D) changing the scope of insurance to banks' assets. Answer: C Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

33) Explain the forces that caused the savings and loan debacle in the latter half of the 1980s. Answer: Deposit insurance created a moral hazard problem in which savings institutions had an incentive to make riskier loans than they would have made in the absence of deposit insurance. In addition, because their deposits were federally insured, depositors of savings institutions had less incentive to monitor the risks incurred by the managers. As a result, the institutions extended large amounts of high-risk loans, many of which generated losses that resulted in failures by numerous institutions. Diff: 2 Topic: 15.5 Federal Deposit Insurance Learning Outcome: Macro-10: Describe the functions of different types of banks in the monetary system AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 16 Domestic and International Dimensions of Monetary Policy 16.1 The Demand for Money 1) What are the two features of money that distinguish it from all other assets in the economy? A) Money is government issued and it is redeemable for gold or silver. B) Money is accepted as a medium of exchange and it is the common unit of account used to express prices. C) Money is part of every barter transaction and it is divisible. D) Money is a common unit of account and it can also be traded for other currencies at a guaranteed exchange rate. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 2) Which of the following is a factor influencing the demand for money? A) transactions demand B) precautionary demand C) asset demand D) All of these are correct. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 3) Holding money to meet unplanned expenditures and emergencies is known as A) transactions demand. B) precautionary demand. C) speculative demand. D) aggregate demand. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

4) Money is a ________ and a transaction is a ________. A) stock; stock B) flow; flow C) flow; stock D) stock; flow Answer: D Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 5) According to the text, the main reason for people to hold money is A) that they have money illusion. B) to tell other people how rich they are. C) to guard themselves against inflation. D) to use it to buy goods and services. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 6) What is the most common reason people demand money? A) Each bill and coin is a reflection of important people and events in a nation's history. B) People desire to use money as a medium of exchange when they buy goods and services. C) Since very few of us engage in a flow of transactions, money is our financial safety net. D) They demand money to ensure that the nation's government will not spend too much. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 7) When households hold money for unplanned expenditures and emergencies, it is called A) the speculative demand for money. B) the transactions demand for money. C) the irrational demand for money. D) the precautionary demand for money. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) A person puts a $100 bill in the glove compartment of his car in case of an emergency. This is an example of A) the precautionary demand for money. B) the transaction demand for money. C) the emergency investment demand for money. D) the irrational demand for money. Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 9) The demand for money to cover unexpected expenditures and to meet emergencies is known as A) the transactions demand for money. B) the precautionary demand for money. C) the asset demand for money. D) the terminal demand for money. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 10) Precautionary demand for money will fall when A) the interest rate rises. B) the interest rate falls. C) the money supply increases. D) government spending falls. Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

11) The precautionary demand for holding money arises because A) people want be able to make unexpected purchases or to meet emergencies. B) credit cards charge low interest rates, which makes money more attractive than credit. C) people would rather hold money in the form of time deposits than in the form of hard currency. D) expected transactions are completed more easily with debit cards than with credit cards. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 12) The transactions demand for money exists because households A) are insensitive to interest rate changes. B) must save for unexpected emergencies. C) do not like the fact that money is a liquid asset. D) do not receive their incomes at the same time they wish to make purchases. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 13) When people want to hold money to make regular planned expenditures, this is A) the transaction demand for money. B) the asset demand for money. C) the precautionary demand for money. D) the spending demand for money. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

14) As people's income rises, they wish to A) hold less money for transactions. B) hold more money for transactions. C) spend less. D) invest only in stocks. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 15) The transactions demand for money A) varies negatively with nominal Gross Domestic Product (GDP). B) varies inversely with nominal Gross Domestic Product (GDP). C) varies directly with nominal Gross Domestic Product (GDP). D) is unrelated to nominal Gross Domestic Product (GDP). Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 16) When interest rates rise, the transactions demand for money usually A) decreases. B) increases. C) decreases initially and then increases to the original position. D) does not change. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 17) As nominal Gross Domestic Product (GDP) rises, the transactions demand for money A) increases, and the money demand curve shifts to the left. B) decreases, and the money demand curve shifts to the left. C) increases, and the money demand curve shifts to the right. D) remains constant, and the money demand curve remains the same. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 5 Copyright © 2021 Pearson Education, Inc.

18) The transactions demand for money A) varies inversely with the precautionary demand for money. B) varies directly with the rate of interest. C) is a function of nominal Gross Domestic Product (GDP). D) is determined by the Federal Reserve System. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 19) The transactions demand for money will increase when A) the rate of interest increases. B) the price level falls. C) nominal Gross Domestic Product (GDP) increases. D) nominal Gross Domestic Product (GDP) decreases. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 20) The transactions demand for money A) varies directly with nominal Gross Domestic Product (GDP). B) varies inversely with nominal Gross Domestic Product (GDP). C) sometimes directly and sometimes inversely with nominal Gross Domestic Product (GDP). D) has no relationship with nominal Gross Domestic Product (GDP). Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

21) The transactions demand for money refers to A) the desire for wealth. B) the demand to hold money for use in planned purchases. C) the desire for income. D) the demand to hold money as a long-term store of value. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 22) The asset demand for money is related to which function of money? A) medium of exchange B) unit of accounting C) store of value D) standard of deferred payment Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 23) When households choose to hold money as a store of value, rather than holding assets such as certificates of deposit, stocks, and bonds, ________ demand for money results. A) liquidity B) transactions C) precautionary D) asset Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

24) Suppose a typical household holds $500 when the interest rate is 2 percent. When the interest rate rises to 3 percent, the household would most likely hold A) more money because the opportunity cost of holding money is lower. B) less money because the opportunity cost of holding money is lower. C) more money because the opportunity cost of holding money is higher. D) less money because the opportunity cost of holding money is higher. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 25) What is a primary determinant of the asset demand for money? I. the interest rate II. the opportunity cost of holding money III. the supply of money A) I only B) III only C) both I and II D) both II and III Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 26) One of the economic costs of holding currency is that A) it fulfills no precautionary role. B) it fulfills no transactions role. C) it earns no interest income. D) its real value always increases. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

27) The money demand function implies that money demand is A) positively related to interest rates. B) negatively related to bond prices. C) negatively related to interest rates. D) negatively related to transactions in the economy. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 28) Both the precautionary and asset demand for money are influenced by A) the U.S. Treasury. B) the interest rate. C) gold prices. D) none of these. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 29) Using the interest rate as a measure of the opportunity cost of holding money, the demand for money curve A) slopes upward with respect to the rate of interest. B) is not affected by the price level. C) slopes downward with respect to the rate of interest. D) is vertical. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

30) When the rate of interest in the economy increases A) the market price of existing bonds will fall. B) the transaction demand for money will increase. C) real Gross Domestic Product (GDP) will increase. D) the asset demand for money will increase. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 31) When the rate of interest in the economy falls, there will be A) an increase in the market price of existing bonds. B) a decrease in the transaction demand for money. C) less investment by businesses. D) an increase in nominal Gross Domestic Product (GDP). Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 32) The opportunity cost of holding money refers to A) the service fees associated with checking accounts. B) the service fees associated with checking accounts plus the costs undertaken to prevent theft. C) the interest that could have been earned if the money balances had been transferred to an interest-bearing asset. D) the pleasure that would have been received if the money balances had been used to buy a good or service. Answer: C Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

33) The demand for money curve is drawn with A) the interest rate on the vertical axis and the curve sloping down. B) the interest rate on the vertical axis and the curve sloping up. C) nominal Gross Domestic Product (GDP) on the vertical axis and the curve sloping up. D) nominal Gross Domestic Product (GDP) on the horizontal axis and the curve sloping down. Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 34) Money's use in non-barter transactions relates to its role as a A) store of value. B) medium of exchange. C) unit of accounting. D) standard of deferred payment. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 35) Asset demand for money is holding money A) to meet unplanned expenditures and emergencies. B) as a medium of exchange to make payments. C) as a store of value instead of other assets. D) to speculate on the stock market and bonds. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

36) Something that affects the amount of money in existence will A) have no particular effect. B) not affect the economy as a whole but may affect certain key markets such as the market for loans. C) have an effect only if the change in money is large. D) affect all markets. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 37) Which of the following is a TRUE statement? A) To demand money is to demand wealth. B) To demand money is to demand a higher income. C) To use money, one must hold money. D) To get more money, one must earn interest on money. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 38) The demand for money refers to the desire to A) hold a good that yields utility when it is consumed. B) a high income. C) spend money because money is used in all transactions. D) hold money because money is used in all non-barter transactions. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

39) The main reason people hold money is that A) money provides a standard of value. B) money is used to buy goods and services. C) money is intrinsically valuable. D) money is power. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 40) Which of the following is NOT a reason why people are motivated to hold money? A) asset demand B) precautionary demand C) liability demand D) transactions demand Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 41) People demand money for all of the following reasons EXCEPT A) it is a medium of exchange to make payments. B) it generates a rate of return. C) it can meet unplanned expenditures. D) it is a store of value. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 42) The transactions demand for money is the demand to hold money to A) make regular, expected purchases. B) meet unplanned expenditures. C) store one's wealth. D) purchase bonds when interest rates increase. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 13 Copyright © 2021 Pearson Education, Inc.

43) When a person holds money, they give up A) the pleasure associated with spending money. B) the pleasure associated with saving money. C) the interest that could have been earned if the money had been changed into an interestbearing asset. D) nothing, since the person can always use the money to buy goods or services or interestbearing assets. Answer: C Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 44) The transaction demand for money varies A) directly with the interest rate. B) directly with nominal GDP. C) inversely with nominal GDP and real GDP. D) inversely with nominal GDP only. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 45) As nominal Gross Domestic Product (GDP) decreases, people hold A) more money because they will want to increase the amount of savings. B) less money because they will want to collect interest. C) about the same amount of money since that has been enough in the past. D) less money since they will make fewer purchases. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

46) A major difference between the transactions demand for money and the precautionary demand is that the A) transactions demand means that people are foregoing interest but they are not foregoing interest in the precautionary demand. B) transactions demand leads to the purchase of assets while the precautionary demand does not. C) transactions demand involves expected expenditures while the precautionary demand involves unexpected expenditures. D) transactions demand is for emergencies while the precautionary demand is for every day expenditures. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 47) Holding money as a medium of exchange to make payments is A) the transactions demand for money. B) the capital demand for money. C) the precautionary demand for money. D) the asset demand for money. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 48) Alberto purchases ten cups of coffee a week. The amount of money that he holds to purchase ten cups of coffee is the A) precautionary demand for money. B) transactions demand for money. C) asset demand for money. D) money balance demand for money. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

49) Holding money to meet unplanned expenditures is A) the transactions demand for money. B) the capital demand for money. C) the precautionary demand for money. D) the asset demand for money. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 50) When the interest rate increases, people will adjust their precautionary demand for money A) upward. B) downward. C) not at all. D) downward or upward depending upon the actual supply of money. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 51) The precautionary demand for money is when people hold money A) for the interest it yields. B) as a store of value. C) as a medium of exchange. D) to meet unplanned expenditures. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 52) The relationship between the interest rate and the precautionary demand for money is A) positive. B) inverse. C) positive sometimes and inverse other times. D) nonexistent. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 16 Copyright © 2021 Pearson Education, Inc.

53) A person is preparing for a long automobile trip and cashes in a certificate of deposit for cash in case of emergencies along the way. This is an example of the A) transactions demand for money. B) precautionary demand for money. C) wealth demand for money. D) asset demand for money. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 54) Holding money as a store of value instead of other assets is A) the transactions demand for money. B) the capital demand for money. C) the precautionary demand for money. D) the asset demand for money. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 55) The asset demand for money is related to the function of money called A) medium of exchange. B) unit of account. C) store of value. D) standard of deferred payment. Answer: C Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

56) People hold money as an asset rather than other assets because A) it is highly liquid. B) it holds its value. C) it grows in value. D) there is no cost to holding money as an asset. Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 57) Henry has been thinking about purchasing a corporate bond but is afraid that the bond will lose value. He has decided to hold money instead. This is known as the A) precautionary demand for money. B) transactions demand for money. C) asset demand for money. D) money balance demand for money. Answer: C Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 58) People hold money because it is liquid and lacks risk under the A) money balance demand for money. B) asset demand for money. C) precautionary demand for money. D) transactions demand for money. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

59) The relationship between the interest rate and the asset demand for money is A) positive. B) inverse. C) positive sometimes and inverse other times. D) nonexistent. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 60) Jason gets paid monthly and pays for everything with cash. When he cashes his check he keeps $200 for food, $100 for utilities, $900 for rent, $50 for transportation, $100 for entertainment and $400 for unexpected expenditures. Which of the following statements is TRUE? A) The transactions demand for money is $1,350, the precautionary demand is $400 and the asset demand is $0. B) The transactions demand for money is $450, the precautionary demand is $400 and the asset demand is $900. C) The transactions demand for money is $350, the precautionary demand is $1,150 and the asset demand is $150. D) The transactions demand for money is $350, the precautionary demand is $950 and the asset demand is $0. Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

61) Brad earns $250 a week working as a student aid. When he cashes his check he takes $100 to the cashiers office to pay part of his tuition. $25 goes to paying off his books, $75 goes for entertainment and $50 he keeps for unexpected expenditures. Which of the following statements is TRUE? A) The transactions demand for money is $125, the precautionary demand is $75 and the asset demand is $50. B) The transactions demand for money is $0, the precautionary demand is $250 and the asset demand is $0. C) The transactions demand for money is $250, the precautionary demand is $0 and the asset demand is $0. D) The transactions demand for money is $200, the precautionary demand is $50 and the asset demand is $0. Answer: D Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 62) Liza earns $8,000 a month. Liza spends $2,500 on rent and related household expenses, $500 on food, $200 on clothes, $500 on entertainment and $600 on transportation. She always keeps $200 for things like the car breaking down. $3,500 is invested in the stock market. Which of the following statements is TRUE? A) The transactions demand for money is $4,300, the precautionary demand is $200 and the asset demand is $3,500. B) The transactions demand for money is $4,300, the precautionary demand is $3,500 and the asset demand is $200. C) The transactions demand for money is $4,300, the precautionary demand is $200 and the asset demand is $0. D) The transactions demand for money is $3,500, the precautionary demand is $200 and the asset demand is $4,300. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge

63) Suppose a family is holding $1000 in its checking account for normal transactions, $500 in cash for emergencies, and $1500 as a store of value when the interest rate is 4 percent. If the interest rate rises to 10 percent, which of the following patterns of holding money would be most likely and why? A) Transactions demand—$1000; Precautionary demand—$350; Asset demand—$500, because the opportunity cost of holding money has increased. The reduction money balances held as an asset is greatest in dollar terms because interest-bearing assets are much more attractive when interest rates are higher. B) Transactions demand—$500; Precautionary demand—$500; Asset demand—$1400, because the opportunity cost of holding money balances has risen. The reduction in money balances held for transaction purposes falls the most because people start using credit cards more when the opportunity cost of holding money increases. C) Transactions demand—$1000; Precautionary demand—$500; Asset demand—$500, because only the asset demand is responsive to changes in the interest rate. D) Transactions demand—$800; Precautionary demand—$600; Asset demand—$1500, because people can economize on their money balances for making transactions, but the possibility of an emergency increases with the interest rate. People will also expect rates to go higher, so they will hold money as an asset until the rates increase further. Answer: A Diff: 3 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Application of knowledge 64) The demand for money curve is drawn A) holding several things constant, including GDP and interest rates. B) holding several things constant, including the price level and interest rates. C) with interest rates on the horizontal axis, and the curve sloping up since the "price" of holding money varies directly with the interest rate. D) with interest rates on the vertical axis and the curve sloping down since lower interest rates mean the "price" of holding money has fallen. Answer: D Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

65) When considering the demand for money curve, the interest rate A) will have a positive relationship with the quantity of money demanded. B) varies negatively with the transactions demand for money. C) is the price of holding money. D) is independent of the opportunity cost of money. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 66) The opportunity cost of holding money is A) the interest income foregone. B) the transactions demand for money. C) contractionary monetary policy. D) the monetary rule. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 67) The relationship between the quantity of money balances demanded and the interest rate is A) determined by open market operations. B) negative. C) contractionary monetary policy. D) the reserve requirements. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

68) The demand for money curve A) shows the relationship between money demanded and open market operations. B) shows the relationship between the quantity of money balances demanded and the interest rate. C) is positively related to the interest rate. D) varies inversely with the supply of money. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 69) The reason that people may not want to hold money is A) the precautionary demand for money and the risk of being robbed. B) the opportunity cost. C) the transactions demand makes it unnecessary. D) due to the direct relationship between money demand and the interest rate. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 70) The demand for money for which the purpose is making unexpected purchases or meeting emergencies is considered to be part of A) precautionary demand. B) transactions demand. C) asset demand. D) savings demand. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

71) In economics, the demand for money is basically a demand for A) high returns. B) status. C) liquidity. D) investment. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 72) Holding money as a medium of exchange to purchase goods and services and make payments is known as the A) spending demand for money. B) transactions demand for money. C) precautionary demand for money. D) asset demand for money. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 73) The demand for money curve depicts A) an inverse relationship between the quantity of money demanded and the quantity of bonds demanded. B) a direct relationship between the quantity of money demanded and the quantity of bonds demanded. C) an inverse relationship between the quantity of money demanded and the interest rate. D) a direct relationship between the quantity of money demanded and the interest rate. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

74) Which of the following will tend to occur when the interest rate increases? A) The demand for money curve shifts leftward. B) The demand for money curve shifts rightward. C) There is a rightward movement along the demand for money curve. D) There is a leftward movement along the demand for money curve. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 75) Which of the following will cause a reduction in the amount of money individuals wish to hold? A) an increase in the interest rate B) an increase in income C) an increase in the price level D) all of these Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 76) The amount of money people wish to hold shows an inverse relationship to A) their planned near-term purchases. B) the money supply. C) the income tax rate. D) the interest rate. Answer: D Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

77) The amount of money that people wish to hold to use in transactions varies directly with A) their planned near-term purchases. B) the money supply. C) the income tax rate. D) the interest rate. Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 78) The downward slope of the demand for money curve reflects the fact that A) people hold more of their wealth in the form of money as the price level rises. B) people hold more of their wealth in the form of money as the price level falls. C) people hold more of their wealth in the form of money as the interest rate rises. D) people hold more of their wealth in the form of money as the interest rate falls. Answer: D Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 79) Which of the following is NOT a type of demand for holding money? A) transactions demand B) precautionary demand C) asset demand D) qualitative demand Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 80) Which of the following represents the opportunity cost of holding money? A) liquidity B) the interest rate C) the rate of inflation D) none of these Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 26 Copyright © 2021 Pearson Education, Inc.

81) The transactions demand for money is related to money functioning as a A) unit of accounting. B) medium of exchange. C) store of value. D) medium of deferred payment. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 82) The demand for money is based on A) the transactions demand, asset demand, and precautionary demand. B) the demand for cash, demand for securities, and the demand for real estate. C) the demand for consumption, demand for investment, and demand by government. D) a demand for liquidity and wealth. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 83) A person keeps $500 in his home in order to be prepared for some unforeseen future event. This reflects his A) speculative demand for money. B) asset demand for money. C) precautionary demand for money. D) liquidity demand for money. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

84) Asset demand for money is related to money functioning as a A) unit of accounting. B) medium of exchange. C) store of value. D) medium of deferred payment. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 85) The interest rate is the opportunity cost A) of investing in stocks. B) of investing in Treasury securities. C) of using credit cards. D) of holding money. Answer: D Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 86) If the interest rate increases, the A) quantity of money demanded will remain unchanged. B) money demand curve will shift to the right. C) money demand curve will shift to the left. D) quantity of money demanded will fall. Answer: D Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 87) William always carries a $20 dollar bill in case of emergencies. This is an example of the A) precautionary demand for money. B) asset demand for money. C) transactions demand for money. D) wealth demand for money. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 28 Copyright © 2021 Pearson Education, Inc.

88) Mia always carries $50 in her purse to pay for groceries. This is an example of the A) precautionary demand for money. B) asset demand for money. C) transactions demand for money. D) wealth demand for money. Answer: C Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 89) Bertha does not expect any unforeseen events but holds some of her savings as currency and coins placed in her sewing basket. This is an example of A) precautionary demand for money. B) asset demand for money. C) transactions demand for money. D) speculative demand for money. Answer: B Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 90) The demand for money is downward sloping, because at higher interest rates, A) the opportunity cost of holding cash is lower. B) the opportunity cost of holding money is higher. C) the opportunity cost of holding money is decreasing. D) the opportunity cost of holding money is constant. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

91) If the interest rate increases, there is a(n) A) increase in the demand for money. B) decrease in the demand for money. C) increase in the quantity of money demanded. D) decrease in the quantity of money demanded. Answer: D Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 92) Suppose Tim has $1,000 in cash on hand to buy collectable baseball cards at a swap meet. Tim often sells these cards at a profit. This is an example of the A) asset demand for money. B) transaction demand for money C) precautionary demand for money. D) wealth demand for money. Answer: A Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 93) The asset demand for money is A) greater at high interest rates as investors can earn more on their investments. B) greater at low interest rates, because the opportunity cost of holding money is low. C) greater at low interest rates, because the opportunity cost of holding money is high. D) lower at low interest rates, because the opportunity cost of holding money is high. Answer: B Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

94) As interest rates rise, the quantity of money demanded A) falls. B) rises. C) stays the same. D) does not react to interest rate changes. Answer: A Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 95) What is meant by the demand for money? Answer: Money is used to buy goods and services. So, if we want to purchase something, we must have some money. The demand for money is amount of desired money holdings based on a given income. Diff: 1 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 96) "The demand for money is infinite since everyone wants more money." Do you agree or disagree with this statement? Why? Answer: Disagree. The demand for money does not refer to the desire to have more wealth or income. It is a demand to hold money balances so that one can purchase goods and services, for emergencies, and as a store of value. Therefore, the demand for money is not infinite, but is downward sloping with respect to the cost of holding money balances—the interest rate. Diff: 3 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 97) What are three reasons people want to hold money balances? Answer: There are three reasons people hold money balances. The transactions demand for money is the demand to hold money to make regular, expected expenditures. The precautionary demand is the money held to meet unplanned expenditures and emergencies. The asset demand for money is to hold money as an asset that is a store of value. Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking

98) What does the demand curve for money look like? Why? Answer: If the quantity of money is on the horizontal axis and the interest rate on the vertical axis, the demand curve for money is a downward sloping curve or line. People hold money because of money's role as a medium of exchange and a store of value. The lower the interest rate the lower the cost to hold money balances since the forgone interest is lower. People will hold more balances when the price of doing so is less, so the demand curve for money slopes down. Diff: 2 Topic: 16.1 The Demand for Money Learning Outcome: Macro-11: Identify key sources of demand for money and explain how that demand can be influenced AACSB: Analytical thinking 16.2 How the Fed Influences Interest Rates 1) Which of the following actions by the Fed would lead to an increase in the money supply? A) an increase in the required reserve ratio B) an increase in the differential between the discount rate and the federal funds rate C) an increase in tax rates D) the purchase of government securities Answer: D Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 2) An increase in bond prices will most likely result in A) an increase in interest rates. B) a decrease in the quantity demanded of money. C) an increase in the quantity demanded of money. D) an increase in the opportunity cost of holding money. Answer: C Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

3) If a bond sells for $1,000 and pays $50 per year in interest, the interest rate on the bond is A) 20 percent. B) 5 percent. C) 50 percent. D) 2 percent. Answer: B Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 4) If you initially pay $1,000 for a bond with an annual interest rate of 6 percent, but then the market interest rate falls to 4 percent, A) the market price of the bond is still $1,000. B) the bond's annual interest payment falls to $40. C) the market price of the bond has increased. D) the market price of the bond has decreased. Answer: C Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 5) The price of bonds and the interest rate are A) inversely related. B) positively related. C) unrelated. D) related, but we are not sure how. Answer: A Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

6) An excess quantity of money demanded will lead to a rise in A) the interest rate. B) investment. C) income. D) bond prices. Answer: A Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 7) Which of the following will lead to a decrease in the price of existing bonds? A) a decrease in the rate of interest B) an inward shift in money demand C) a decrease in planned investment spending D) a reduction in the money supply Answer: D Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 8) An increase in the money supply typically leads to A) a reduction in the rate of interest. B) a decrease in the price level. C) a reduction in the velocity of money. D) an inward shift in money demand. Answer: A Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

9) If the Fed purchases U.S. government securities in the open market, all of the following would occur EXCEPT A) an expansion of the money supply. B) an increase in investment. C) a fall in bond prices. D) an increase in real Gross Domestic Product (GDP). Answer: C Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 10) If the Fed sells bonds through its open market operations, then there is A) an increase in the demand for bonds and a rise in the price of existing bonds. B) an increase in the supply of bonds and a fall in the price of existing bonds. C) a decrease in interest rates because of the increase in the supply of bonds. D) a decrease in interest rates because of the decrease in the demand for bonds. Answer: B Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 11) If the Fed decides to buy bonds, the result will be A) lower bond prices and lower interest rates. B) lower bond prices and higher interest rates. C) higher bond prices and lower interest rates. D) higher bond prices and higher interest rates. Answer: C Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

12) The market prices of existing bonds are A) not related to the interest rate. B) directly related to the interest rate. C) inversely related to the interest rate. D) stated in terms of the interest rate. Answer: C Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 13) Interest rates typically rise when A) bond prices increase. B) bond prices decrease. C) the coupon payout on existing bonds increase. D) the maturity date on existing bonds extends farther into the future. Answer: B Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 14) Which of the following is NOT a reason the Fed changes the rate of growth of the money supply? A) to influence aggregate demand B) to shift the demand for money curve C) to influence the amount of consumption D) to influence the amount of investment Answer: B Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

15) The market price of existing bonds is ________ to the rate of interest prevailing in the economy. A) inversely related B) directly related C) totally unrelated D) synonymous Answer: A Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 16) Open market operations by the Fed cause A) changes in the difference between the discount rate. and the federal funds rate. B) aggregate supply to change. C) the prices of bonds to change. D) changes in the required reserve ratio. Answer: C Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 17) When the Fed conducts open market operations, it A) purchases or sells government bonds issued by the U.S. Treasury. B) is engaging in fiscal policy. C) also raises taxes at the same time. D) shifts the demand for money curve. Answer: A Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

18) A sale of bonds by the Fed generates A) an increase in the demand for money balances. B) a decrease in the demand for money balances. C) an increase in the demand for bonds and a rise in bond prices. D) an increase in the supply of bonds and a fall in bond prices. Answer: D Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 19) The purchase of government bonds by the Fed leads to a(n) A) increase in the supply of bonds and a decrease in bond prices. B) decrease in the supply of bonds and an increase in bond prices. C) increase in the demand of bonds and a decrease in the price of bonds. D) decrease in the demand of bonds and an increase in the price of bonds. Answer: B Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 20) An increase in the interest rate will A) decrease the price of bonds. B) increase the price of bonds. C) increase or decrease the price of bonds depending upon whether the money supply has increased or decreased. D) leave the price of bonds unchanged. Answer: A Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

21) Refer to the above figure. Which panel is consistent with the Fed selling bonds? A) Panel A B) Panel B C) Panel C D) Panel D Answer: A Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 22) Refer to the above figure. Which panel is consistent with the Fed buying bonds? A) Panel A B) Panel B C) Panel C D) Panel D Answer: B Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge

23) Refer to the above figure. Which panels could represent the situation if the Fed had engaged in open market operations? A) Panels A and B B) Panels A and C C) Panels B and C D) Panels C and D Answer: A Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 24) A bond that pays a yearly interest rate of $100 is for sale. The interest rate was 10 percent and now is 5 percent. The price of the bond has A) decreased from $1000 to $500. B) increased from $1000 to $2000. C) increased from $500 to $2000. D) decreased from $2000 to $1000. Answer: B Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 25) A bond is selling for $1000 and it pays $150 in interest a year. If the interest rate changes to 20 percent, then A) the interest payment rises to $175. B) the interest payment falls to $75. C) the price of the bond falls to $750. D) the price of the bond rises to $1250. Answer: C Diff: 3 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge

26) Which of the following is a TRUE statement about the relationship between the price of bonds and the interest rate? A) The prices of bonds are directly related to the interest rate. B) The prices of bonds increase when the interest rates rise. C) The prices of bonds are unrelated to the interest rate. D) The prices of bonds are inversely related to the interest rate. Answer: D Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 27) The Fed engages in open market operations and sells government securities. The result is A) lower interest rates. B) higher interest rates. C) interest rates remain unchanged since there is no reason to think bond prices changed. D) uncertain since more information is needed. Answer: B Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 28) How does the Fed increase the level of reserves in the banking system? A) by lowering interest rates B) by raising interest rates C) by selling bonds D) by buying bonds Answer: D Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

29) When the Fed purchases federal government bonds in the open market, A) there is no change in the money supply. B) the money supply expands. C) the money supply contracts. D) the demand for money expands. Answer: B Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 30) When interest rates in the bond market go up, A) there is no impact on the price of existing bonds. B) the price of existing bonds goes up. C) the price of stocks goes up. D) the price of existing bonds goes down. Answer: D Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 31) The prices of all fixed-income assets (bonds) A) vary directly with the interest rate. B) are independent of the interest rate. C) vary inversely with the interest rate. D) are determined by the U.S. Treasury. Answer: C Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 32) The asset demand for money is A) greater at high interest rates as investors can earn more on their investments. B) greater at low interest rates, because the opportunity cost of holding money is low. C) greater at low interest rates, because the opportunity cost of holding money is high. D) lower at low interest rates, because the opportunity cost of holding money is high. Answer: B Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 42 Copyright © 2021 Pearson Education, Inc.

33) In the above figure, if we begin at S1 and the Fed sells bonds, A) the price of bonds falls, and the interest rate rises. B) the price of bonds falls, and so does the interest rate. C) the price of bonds rises, and so does the interest rate. D) the price of bonds rises, and the interest rate falls. Answer: A Diff: 3 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 34) In the above figure, if we begin at S2 and the Fed buys bonds, A) the price of bonds falls, and the interest rate rises. B) the price of bonds falls, and so does the interest rate. C) the price of bonds rises, and so does the interest rate. D) the price of bonds rises, and the interest rate falls. Answer: D Diff: 3 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

35) Suppose the Fed conducts an open market sale of bonds. This monetary policy action will tend to cause A) the price of bonds to increase and the interest rate to increase. B) the price of bonds to increase and the interest rate to decrease. C) the price of bonds to decrease and the interest rate to increase. D) the price of bonds to decrease and the interest rate to decrease. Answer: C Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 36) If the Fed sells U.S. government securities, the A) money supply increases, and the money supply curve shifts to the right. B) money supply increases, and the money supply curve shifts to the left. C) money supply decreases, and the money supply curve shifts to the right. D) money supply decreases, and the money supply curve shifts to the left. Answer: D Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 37) Suppose the Fed conducts an open market purchase of bonds. This monetary policy action will tend to cause A) the price of bonds to increase, and the interest rate to increase. B) the price of bonds to increase, and the interest rate to decrease. C) the price of bonds to decrease, and the interest rate to increase. D) the price of bonds to decrease, and the interest rate to decrease. Answer: B Diff: 1 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

38) What happens to the price of bonds when the Fed is selling bonds? What happens to the interest rate? What happens to the money supply? Answer: If the Fed sells bonds, the supply of bonds in the market increases, causing the price of bonds to fall. Since the price of bonds is inversely related to the interest rate, the interest rate increases. The Fed sells bonds to reduce the money supply. Diff: 2 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 39) Describe and explain the relationship between the price of bonds and the interest rate. Answer: There is an inverse relationship between the price of a bond and the interest rate. If a bond pays interest of $100 a year and the price of the bond is $1000, the interest rate is 10 percent. If the interest rate falls to 5 percent, then the price of a bond paying $100 a year interest would rise to $2000. The interest rate is the amount of interest paid per year divided by the price of the bond, so the interest rate and the price of the bond are inversely related. Diff: 3 Topic: 16.2 How the Fed Influences Interest Rates Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 16.3 Effects of an Increase in the Money Supply 1) Other things being equal, an increase in the supply of money A) reduces the amount of money balances. B) increases the price level. C) reduces aggregate demand. D) generates significant changes in relative prices. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

2) The direct effect of an increase in the money supply is to A) raise interest rates as people increase their saving. B) increase interest rates as people anticipate higher inflation in the future. C) increase aggregate demand as people try to spend their excess money balances. D) decrease aggregate demand as people anticipate future economic problems. Answer: C Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 3) The short-run effect of an increase in the supply of money is A) an increase in both real Gross Domestic Product (GDP) and the price level. B) an increase in the price level but not in real Gross Domestic Product (GDP). C) an increase in real Gross Domestic Product (GDP) but not in the price level. D) an increase in the price level, a decrease in real Gross Domestic Product (GDP), but an increase in nominal national income. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 4) The indirect effect of an increase in the money supply is to A) raise interest rates so people will save more. B) lower interest rates, which stimulates both investment and consumption spending. C) put more cash in people's pockets, thereby increasing aggregate demand. D) pay off a portion of the public debt. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

5) Look at the above figure. Suppose the economy was initially in equilibrium at point A. What point would represent the short-run equilibrium if the Fed makes an open market purchase of bonds? A) A B) B C) C D) D Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 6) In the long run, the effect of a reduction in the money supply is to A) decrease the price level only. B) decrease real Gross Domestic Product (GDP) only. C) decrease both the price level and real Gross Domestic Product (GDP). D) decrease the price level and increase real Gross Domestic Product (GDP). Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

7) To close a recessionary gap, the Fed would A) decrease the money supply. B) increase interest rates. C) sell bonds. D) increase the money supply. Answer: D Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 8) Expansionary monetary policy during periods of underutilized resources can cause A) real Gross Domestic Product (GDP) to increase without an increase in the price level. B) real Gross Domestic Product (GDP) to increase with a decrease in the price level. C) real Gross Domestic Product (GDP) to increase with an increase in the price level. D) nominal Gross Domestic Product (GDP) to increase but cannot affect real Gross Domestic Product (GDP). Answer: C Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 9) If the economy is underutilizing its economic resources, the Fed should A) discourage investment spending. B) expand the money supply to increase aggregate demand. C) decrease aggregate supply. D) contract the money supply to decrease aggregate demand. Answer: B Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

10) In the above figure, assume the economy starts out in equilibrium at point d. If the Fed increases the money supply so that the new aggregate demand curve is AD3, then the new shortrun equilibrium will be at point A) a. B) b. C) c. D) i. Answer: C Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 11) In the above figure, assume the economy starts out in equilibrium at point d. If the Fed increases the money supply so that the new aggregate demand curve is AD3, then the long-run equilibrium will be at point A) a. B) b. C) c. D) i. Answer: A Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge

12) In the above figure, assume the aggregate demand of the economy is AD2 and the Fed actions move aggregate demand to AD1. In this situation, the Fed has practiced A) contractionary monetary policy. B) expansionary monetary policy. C) irresponsible fiscal policy. D) Keynesian fiscal policy. Answer: A Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 13) In the above figure, assume the economy is in equilibrium at point d. Then the Fed decreases the money supply so that the new aggregate demand curve is AD1. In the long run, the new price level will be A) 100. B) 120. C) 130. D) 110. Answer: A Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

14) In the above figure, if the economy is in equilibrium at E1, then A) the economy is producing below its potential long-run equilibrium at full employment. B) the economy is producing above its potential long-run equilibrium at full employment. C) there is an inflationary gap in the economy. D) the economy is in a period of high inflation. Answer: A Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 15) In the above figure, if the economy is at equilibrium at E1, the Fed would most likely A) adopt a contractionary monetary policy. B) adopt an expansionary monetary policy. C) attempt to lower the aggregate demand in the economy. D) attempt to lower the price level below 120. Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

16) In the long run, an increase in the money supply will A) decrease real Gross Domestic Product (GDP). B) increase real Gross Domestic Product (GDP). C) increase the price level. D) decrease the price level. Answer: C Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 17) One result of a contractionary monetary policy would be A) a decline in the price level. B) an increase in the money supply. C) an increase in business investment. D) lower interest rates. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 18) The "direct effect" of an increase in the money supply is to A) increase aggregate demand as people spend their excess money balances. B) increase aggregate demand as interest rates fall and investment spending increases. C) increase aggregate supply as producers anticipate higher future profits. D) decrease the rate of inflation. Answer: A Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 19) The "indirect effect" of an increase in the money supply is to A) increase aggregate demand as people try to spend their excess money balances. B) increase aggregate demand as interest rates fall and investment spending increases. C) increase aggregate supply as firms anticipate future profits. D) decrease the price level. Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 52 Copyright © 2021 Pearson Education, Inc.

20) Which of the following will NOT occur in the short run when the money supply decreases? A) People will buy fewer goods and services. B) The interest rate will increase. C) Aggregate supply decreases. D) The price level decreases. Answer: C Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 21) An increase in the money supply will A) increase aggregate supply. B) decrease aggregate supply. C) increase aggregate demand. D) decrease aggregate demand. Answer: C Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 22) The short-run effect of an increase in the money supply is to A) increase real GDP only. B) increase the price level only. C) increase both real GDP and the price level. D) increase nominal GDP but decrease the price level. Answer: C Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

23) Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new short-run equilibrium is given by point A) A. B) B. C) C. D) D. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 24) Refer to the above figure. Suppose point A is the original equilibrium. If there is an increase in the money supply, the new long-run equilibrium is given by point A) A. B) B. C) C. D) D. Answer: C Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

25) The long-run effect of an increase in the money supply when starting from full employment is to A) increase real GDP only. B) increase the price level only. C) increase both real GDP and the price level. D) increase real GDP as the price level increases too. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 26) An expansionary monetary policy is one that A) stimulates aggregate supply. B) reduces aggregate supply and aggregate demand. C) stimulates aggregate demand. D) reduces aggregate demand while stimulating aggregate supply. Answer: C Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 27) Suppose the economy currently has some underutilized resources. The Fed engages in expansionary monetary policy. The impact of expansionary monetary policy will be to A) increase aggregate demand, increase prices and increase real GDP. B) increase aggregate demand, increase prices and decrease real GDP. C) increase short-run aggregate supply, decrease in prices and decrease in real GDP. D) increase short-run aggregate supply, decrease prices and increase real GDP. Answer: A Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

28) Suppose the economy currently has an inflationary gap. The Fed engages in contractionary monetary policy. The impact of contractionary monetary policy will be to A) increase short-run aggregate supply, decrease in prices and decrease in real GDP. B) increase short-run aggregate supply, decrease prices and increase real GDP. C) decrease aggregate demand, decrease prices, and increase real GDP. D) decrease aggregate demand, decrease prices, and decrease real GDP. Answer: D Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 29) When the Federal Reserve conducts open market purchases to increase bank reserves without trying to alter the interest rate that is already close to zero, the policy action is called A) qualitative easing. B) quantitative easing. C) qualitative tightening. D) quantitative tightening. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 30) If the economy is operating below its full employment level, the Fed can A) increase aggregate demand by increasing the rate of growth of the money supply. B) increase aggregate demand by stimulating the demand for money. C) increase aggregate demand by selling bonds and raising interest rates. D) increase aggregate supply by raising the price level. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

31) Suppose the economy has a recessionary gap. By using an expansionary monetary policy, the Fed can A) raise real GDP without increasing the price level. B) raise real GDP and the price level. C) raise real GDP and decrease the price level. D) raise the price level alone, but cannot increase real GDP. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 32) Suppose the economy is operating below its full employment level. The Fed A) is powerless to affect either aggregate demand or aggregate supply. Fiscal policy is needed. B) can move the economy toward the full employment level by expanding the money supply to increase aggregate supply. C) can move the economy toward the full employment level by expanding the money supply to increase aggregate demand and to hold prices constant. D) can move the economy toward the full employment level by expanding the money supply to increase aggregate demand through both its direct and its indirect effects. Answer: D Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 33) Quantitative easing refers to a policy action in which a central bank A) sells government securities to directly decrease bank reserves. B) buys government securities to directly increase bank reserves. C) increases interest rates directly without altering bank reserves. D) decreases interest rates directly without altering bank reserves. Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

34) The Federal Reserve conducted the policy of quantitative easing primarily when A) the interest rate was close to zero. B) the interest rate was relatively high. C) the interest rate was too erratic to be controlled. D) the interest rate was very sensitive to the change in the money supply. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 35) During a period of contractionary monetary policy A) the price level is increased, which leads to an increase in the money supply. B) the price level is decreased, which leads to a decrease in the money supply. C) the rate of growth of the money supply is increased, leading to an increase in the price level. D) the rate of growth of the money supply is reduced, leading to a decrease in the price level. Answer: D Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 36) During a period of expansionary monetary policy, A) the price level is increased, which leads to an increase in the money supply. B) the price level is decreased, which leads to a decrease in the money supply. C) the rate of growth of the money supply is increased, leading to an increase in the price level. D) the rate of growth of the money supply is reduced, leading to a decrease in the price level. Answer: C Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

37) As a result of an increase in the money supply, some banks may end up with excess reserves. What is the likely result? A) Banks will make more loans, thereby contributing to an increase in aggregate demand. B) Banks will make more loans, thereby contributing to a decrease in aggregate demand. C) Banks will raise interest rates. D) Banks will spend the excess reserves by paying their employees more. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 38) How is the effect of expansionary monetary policy depicted in an aggregate supplyaggregate demand graph? A) The aggregate supply curve shifts leftward. B) The aggregate supply curve shifts rightward. C) The aggregate demand curve shifts rightward. D) The equilibrium level of income increases, but neither curve shifts. Answer: C Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 39) In the real world, contractionary monetary policy would be used to A) combat a recession. B) reduce the rate of inflation. C) increase nominal GDP. D) increase long-run aggregate supply. Answer: B Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

40) How would expansionary monetary policy affect the AD curve? A) It would shift to the right. B) It would shift to the left. C) It would become more static. D) It would fall. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 41) The appropriate monetary policy in the event of a recessionary gap would be to A) increase the difference between the discount rate and the federal funds rate. B) engage in an open market purchase of U.S. government securities. C) increase the difference between the federal funds rate and the required reserve ratio. D) raise the required reserve ratio. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 42) The direct effect of an increase in the money supply is A) people will spend the extra money, causing the aggregate demand curve to shift to the right and prices to rise, and causing the economy to go into recession. B) people will save the money, causing an increase in bank deposits, causing interest rates to fall, and loans to expand. C) people will save more money, causing a decrease in economic activity and a fall in prices. D) people will spend the extra money, causing the aggregate demand curve to shift to the right, creating an increase in economic activity. Answer: D Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

43) An indirect effect of monetary policy is that as the money supply A) increases, interest rates fall, and borrowing and spending increase. B) increases, interest rates rise, and borrowing and spending decrease. C) decreases, interest rates fall, and borrowing and spending increase. D) decreases, interest rates rise, and borrowing and spending increase. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 44) Suppose the Fed increases the money supply. As a result of this, people go out and spend more money on consumer goods, increasing aggregate spending. This is known as a(n) A) direct effect of monetary policy. B) indirect effect of monetary policy. C) direct effect of fiscal policy. D) indirect effect of fiscal policy. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 45) Suppose the Fed increases the money supply. As a result of this, people deposit excess funds into their bank accounts, causing banks to have excess reserves. As a result, the banks lower the interest rates that they charge on loans, and investment rises, causing an increase in aggregate spending. This is known as a(n) A) direct effect of monetary policy. B) indirect effect of monetary policy. C) direct effect of fiscal policy. D) indirect effect of fiscal policy. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

46) An expansionary monetary policy results in lower interest rates, which in turn A) increases foreign demand for U.S. financial instruments, raising the international price of the dollar and reducing net exports. B) increases the foreign demand for U.S. financial instruments, lowering the international price of the dollar and decreasing net exports. C) reduces the international price of the dollar and increases net exports. D) reduces the foreign demand for U.S. financial instruments and reduce net exports. Answer: C Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 47) An appreciation of the U.S. dollar is most likely a result that A) the Fed has pursued an expansionary monetary policy. B) U.S. interest rates have increased. C) U.S. bond prices have increased. D) more dollars are required to obtain foreign currencies. Answer: B Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 48) As the world economy becomes more integrated through globalization, A) the Fed will find it easier to conduct monetary policy. B) the Fed will have a more difficult time reaching its money supply growth rate targets. C) the Fed will rely less on open market operations and more on changing the required reserve ratio when conducting monetary policy. D) U.S. interest rates will determine world interest rates. Answer: B Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

49) A contractionary monetary policy causes A) higher interest rates, which increases the international price of the dollar and decreases net exports. B) higher interest rates, which decreases the foreign demand for U.S. financial instruments, raising the international price of the dollar and increasing net exports. C) lower interest rates, which decreases the foreign demand for U.S. financial instruments, raising the international price of the dollar and increasing net exports. D) higher interest rates, which increases the foreign demand for U.S. financial instruments, which causes interest rates to decrease. There is no effect on net exports. Answer: A Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 50) It has been observed that a change in monetary policy in the United States A) impacts net exports. B) has little or no effect on foreign markets. C) leads to corresponding changes in other countries. D) has only short run influences. Answer: A Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 51) An appreciation of the U.S. dollar occurs when A) the international price of the dollar falls. B) the international price of the dollar rises. C) the U.S. demand for foreign currencies increases. D) the supply of dollars in international markets increases. Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

52) When the U.S. dollar appreciates, A) foreign residents demand more of U.S. goods, and U.S. residents desire to purchase more foreign goods. B) foreign residents demand more of U.S. goods, and U.S. residents desire to purchase fewer foreign goods. C) foreign residents demand fewer of U.S. goods, and U.S. residents desire to purchase more foreign goods. D) foreign residents demand fewer of U.S. goods, and U.S. residents desire to purchase fewer foreign goods. Answer: C Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 53) An appreciation of the U.S. dollar A) makes our exports more expensive in terms of foreign currency and imports cheaper in terms of the dollar, increasing net exports. B) makes our exports less expensive in terms of foreign currency and imports cheaper in terms of the dollar, increasing net exports. C) makes our exports less expensive in terms of foreign currency and imports cheaper in terms of the dollar, decreasing net exports. D) makes our exports more expensive in terms of foreign currency and imports cheaper in terms of the dollar, decreasing net exports. Answer: D Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 54) A depreciation of the U.S. dollar A) makes U.S. exports more expensive in terms of foreign currency and imports less expensive in terms of the dollar, increasing net exports. B) makes U.S. exports less expensive in terms of foreign currency and imports more expensive in terms of the dollar, increasing net exports. C) makes U.S. exports less expensive in terms of foreign currency and imports more expensive in terms of the dollar, decreasing net exports. D) makes U.S. exports more expensive in terms of foreign currency and imports less expensive in terms of the dollar, decreasing net exports. Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

55) As a result of contractionary monetary policy, A) interest rates fall, the dollar depreciates, and domestic goods become cheaper, thereby reducing net exports. B) interest rates rise, the dollar appreciates, and domestic goods become more expensive, thereby reducing net exports. C) interest rates rise, the dollar appreciates, and domestic goods become cheaper, thereby reducing net exports. D) interest rates rise, the dollar appreciates, and domestic goods become cheaper, thereby increasing net exports. Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 56) The net-export effect of contractionary monetary policy is A) the depreciation of the value of the dollar and a resulting increase of U.S. net exports. B) the depreciation of the value of the dollar and a resulting decrease of U.S. net exports. C) the appreciation of the value of the dollar and a resulting increase of U.S. net exports. D) the appreciation of the value of the dollar and a resulting decrease of U.S. net exports. Answer: D Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 57) What effect does a contractionary monetary policy in the U.S. have on the foreign trade sector? A) The lower value of the dollar will decrease exports and increase imports. B) The lower value of the dollar will decrease imports and increase exports. C) The higher value of the dollar will decrease exports and increase imports. D) The higher value of the dollar will decrease imports and increase exports. Answer: C Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

58) What effect does an expansionary monetary policy in the U.S. have on the foreign trade sector? A) The lower value of the dollar will decrease exports and increase imports. B) The lower value of the dollar will decrease imports and increase exports. C) The higher value of the dollar will decrease exports and increase imports. D) The higher value of the dollar will decrease imports and increase exports. Answer: B Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 59) Which of the following would NOT be a result of a contractionary monetary policy? A) Interest rates would rise. B) Foreign goods would become more expensive to U.S. residents. C) Net exports would decline. D) Imports would rise. Answer: B Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 60) The net-export effect of expansionary monetary policy is a(n) A) depreciation of the value of the dollar and the increase of U.S. net exports. B) depreciation of the value of the dollar and the decrease of U.S. net exports. C) appreciation of the value of the dollar and the increase of U.S. net exports. D) appreciation of the value of the dollar and the decrease of U.S. net exports. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

61) The net-export effect of contractionary monetary policy is a(n) A) depreciation of the value of the dollar and the increase of U.S. net exports. B) depreciation of the value of the dollar and the decrease of U.S. net exports. C) appreciation of the value of the dollar and the increase of U.S. net exports. D) appreciation of the value of the dollar and the decrease of U.S. net exports. Answer: D Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 62) As global financial markets become more intertwined, the Fed has A) less control over monetary policy. B) more control over monetary policy. C) more control over fiscal policy. D) less control over fiscal policy. Answer: A Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 63) Which of the following is associated with a contractionary monetary policy? A) lowering the differential between the discount rate and the federal funds rate B) selling bonds C) lowering the required reserve ratio D) raising bond prices Answer: B Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 64) The Fed would be pursuing a contractionary monetary policy if it was A) lowering the differential between the discount rate and the federal funds rate. B) lowering the reserve requirement. C) selling dollars in foreign exchange markets. D) selling bonds in the open market. Answer: D Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 67 Copyright © 2021 Pearson Education, Inc.

65) The Federal Open Market Committee engages in contractionary monetary policy by A) lowering interest rates. B) creating excess reserves. C) selling bonds. D) buying bonds. Answer: C Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 66) What are the direct and indirect effects of an increase in the money supply? Answer: The direct effect of more money in the economy is to induce people to buy more goods and services, causing consumption expenditures to increase and aggregate demand to increase. The indirect effect is to increase reserves as people put some of the extra funds into transactions accounts. Banks want to make more loans, causing interest rates to fall. Consumer expenditures and business investment spending increase indirectly as the rise in reserves raises the money supply and pushes down the interest rate. Either way, the aggregate demand curve would shift out. Diff: 1 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

67) Using a graph above, show the short-run and long-run effects of an expansionary monetary policy. Answer: In the above figure, E1 is the original equilibrium. The increase in the money supply causes the aggregate demand to increase due to the direct and indirect effects. Real GDP increases in the short run to $15 trillion and the price level increases to 120. Once input owners revise their expectations about prices, the short-run aggregate supply curve shifts to SRAS2, real GDP returns to $14 trillion, and the price level increases to 140. The long-run effect of the expansionary monetary policy is to increase the price level. Diff: 3 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 68) Why is it more difficult for the Fed to control the money supply today than it was fifty years ago? Answer: The international financial markets are more global today. If the Fed decides to reduce the money supply, people can obtain dollars in international markets, offsetting the actions of the Fed. People can borrow in other currencies if they want more liquidity. The globalization of international money markets makes it more difficult for the Fed to control the rate of growth of the money supply in the United States. Diff: 2 Topic: 16.3 Effects of an Increase in the Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

16.4 Monetary Policy and Inflation 1) According to the equation of exchange, if M = $400, P = 8, and Y = $200, then V equals A) 40. B) 4. C) 32. D) 16. Answer: B Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 2) According to the equation of exchange, if M = $100, V = 4, and Y = $200, then P equals A) 500. B) 20. C) 2. D) 40. Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 3) Which of the following best represents the equation of exchange? A) M * P = V * Y B) M * V = P * Y C) M * Y = P * V D) M * Y * V = P Answer: B Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

4) The hypothesis that changes in the money supply lead to an equiproportional change in the price level is called A) the quantity theory of money. B) the classical theory of money. C) the Keynesian theory of money. D) the fractional theory of money. Answer: A Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 5) According to the quantity theory of money, the price level decreases in equal proportion to A) an increase in the income velocity of money. B) a decrease in the nominal interest rate. C) an increase in the real interest rate. D) a decrease in the money supply. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 6) Other things being equal, the quantity theory of money suggests that any increase in the money supply A) causes a reduction in the demand for money. B) results in a decrease in the aggregate price level. C) causes the aggregate level of nominal Gross Domestic Product (GDP) to fall. D) results in a proportionate increase in the price level. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

7) According to the quantity theory of money, increases in the money supply lead to A) decreases in nominal Gross Domestic Product (GDP). B) increases in the price level. C) decreases in the price level. D) increases in taxes. Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 8) According to the quantity theory of money, A) a change in the money supply can lead only to a proportionate change in the price level. B) the velocity of money is the least stable factor in monetary analysis. C) the rate of inflation is not related to changes in the money supply. D) price level changes can best be explained by Keynesian analysis. Answer: A Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 9) The formula of the equation of exchange is A) MS = Y. B) MS = V ∗ P ∗ Y. C) MS ∗ V = P ∗ Y. D) MS/P = Y. Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 10) According to both the equation of exchange and the quantity theory of money, A) an increase in the money supply will increase real Gross Domestic Product (GDP). B) an increase in the money supply will decrease real Gross Domestic Product (GDP). C) a decrease in the money supply will decrease the velocity of money. D) a decrease in the money supply will decrease the price level. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 72 Copyright © 2021 Pearson Education, Inc.

11) The velocity of money A) is, according to the equation of exchange, equal to P/M. B) indicates the number of times per year a dollar is spent on final goods and services. C) is, according to the equation of exchange, equal to M/Y. D) indicates the speed with which the U.S. Treasury can mint new coins. Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 12) According to the equation of exchange, if V = 10, P = 3, and Y = $100, then the money supply equals A) $10. B) $15. C) $30. D) $150. Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 13) According to the quantity theory of money, an excess quantity of money supplied will lead to A) a reduction in spending and higher interest rates. B) a reduced level of real Gross Domestic Product (GDP). C) a higher level of employment. D) a higher price level. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

14) A decrease in the supply of money will, according to the quantity theory of money, lead to A) a higher price level. B) a higher nominal Gross Domestic Product (GDP). C) a lower real Gross Domestic Product (GDP). D) a lower price level. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 15) The income velocity of money is A) the time it takes to produce money. B) the time lag from when the Fed decides to increase the money supply until the effect takes place. C) the number of times per year a dollar is spent on final goods and services. D) the time it takes for monetary policy to have an effect on world financial markets. Answer: C Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 16) According to the equation of exchange, if real Gross Domestic Product (GDP) is $25 billion, the money supply is $10 billion, and the price index equals 2, then the income velocity of money is A) 5. B) 10. C) 25. D) 50. Answer: A Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge

17) The equation of exchange is A) an assumption that is not always true. B) true in the short run but not always in the long run. C) an accounting identity and therefore is always true. D) a theory developed at the Federal Reserve. Answer: C Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 18) An assumption used in the quantity theory of money is that A) the price level is constant. B) velocity is constant. C) nominal Gross Domestic Product (GDP) is constant. D) the money supply is constant. Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 19) According to the quantity theory of money, A) real Gross Domestic Product (GDP) is directly related to changes in the money supply in the long run. B) velocity varies indirectly with the rate of growth of the money supply. C) a proportionate increase in the money supply leads to a less than proportionate increase in real Gross Domestic Product (GDP), at least in the long run. D) a given proportionate increase in the money supply leads to an equal proportionate increase in the price level. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

20) An increase in the money supply, other things being constant, A) causes interest rates to rise. B) generates an increase in the demand for money. C) causes the price level to increase. D) causes the purchasing power of money to increase. Answer: C Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 21) The income velocity of money is the absolute number of times, on average, that A) people purchase goods and services during a year. B) each monetary unit is spent on final goods and services. C) each unit of real Gross Domestic Product (GDP) is produced by business firms. D) each one-unit increase in the price level occurs. Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 22) Empirical evidence across numerous countries indicates that changes in the ________ are associated with nearly equiproportional changes in ________. A) money supply; real Gross Domestic Product (GDP) per year B) money supply; price level C) price level; money supply D) real Gross Domestic Product (GDP) per year; income velocity of money Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

23) The number of times per year, on average, that a dollar is spent on final goods and services is known as A) the money supply. B) the equation of exchange. C) the price of money. D) the income velocity of money. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 24) According to the equation of exchange, nominal Gross Domestic Product (GDP) equals A) the amount of actual money balances times the income velocity of money. B) the amount of actual money balances divided by the income velocity of money. C) the price level divided by the income velocity of money. D) the price level times the income velocity of money. Answer: A Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 25) The equation of exchange is a formula indicating that the number of monetary units times A) the number of times each monetary unit is spent on final goods and services is identical to the price level times real Gross Domestic Product (GDP). B) the price level is identical to the number of times each monetary unit is spent on final goods and services times real Gross Domestic Product (GDP). C) real Gross Domestic Product (GDP) is identical to the price level times the number of times each monetary unit is spent on final goods and services. D) nominal Gross Domestic Product (GDP) is identical to the price level times the number of times each monetary unit is spent on final goods and services. Answer: A Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

26) The identity stating that the total amount spent on final output equals the amount received for final output is known as the A) fundamental law of economics. B) circular flow identity. C) equation of exchange. D) identity equation. Answer: C Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 27) In words, the equation of exchange says that A) the total amount spent on final output equals the amount received for final output. B) the amount of money in circulation equals the velocity of the price level. C) changes in the money supply will have no impact on the amount spent on final output. D) when velocity equals 1, nominal Gross Domestic Product (GDP) equals the price level. Answer: A Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 28) If the total money supply is $6 trillion, real Gross Domestic Product (GDP) is $9 trillion and the price level is 2, then the equation of exchange tells us that velocity equals A) 27. B) 18. C) 3. D) 13.5. Answer: C Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge

29) If velocity is equal to 1, this means that A) the rate of growth of the money supply is 1. B) each dollar of the money supply is spent on the average one time per year. C) for every 2 dollars of the money supply, nominal Gross Domestic Product (GDP) will increase by 1. D) an increase in the money supply will lead to an increase in aggregate supply of 1. Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 30) If nominal Gross Domestic Product (GDP) is $5 trillion and velocity is 5, then A) actual money balances held by the nonbanking public are $5 trillion. B) actual money balances held by the nonbanking public are $1 trillion. C) real Gross Domestic Product (GDP) equals $100 trillion. D) real Gross Domestic Product (GDP) equals $500 trillion. Answer: B Diff: 3 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 31) The equation of exchange is an ________ while the quantity theory of money is a theory that ________. A) accounting identity; assumes the money supply is constant B) accounting identity; assumes velocity is held constant C) accounting theory; assumes the price level is constant D) accounting theory; economists use to explain changes in real Gross Domestic Product (GDP) Answer: B Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

32) The quantity theory of money is based on the formula that A) V = P * Y * Ms. B) Y = P * V/Ms. C) Ms= P * V/Y. D) P = Ms * V/Y. Answer: D Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 33) The quantity theory of money and prices assumes A) velocity is constant. B) velocity is increasing at a constant rate. C) the price level is constant. D) the price level is increasing at a constant rate. Answer: A Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 34) The quantity theory of money and prices A) is derived from the equation of exchange assuming that prices remain constant. B) shows how a change in the price level leads to a change in the money supply. C) shows how the demand for money is inversely related to the price level. D) is the hypothesis that changes in the money supply leads to proportional changes in the price level. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

35) According to the quantity theory of money and prices, a 10 percent increase in the money supply ultimately leads to A) a 10 percent increase in real Gross Domestic Product (GDP). B) a 10 percent increase in wages. C) a 10 percent increase in the price level. D) a 10 percent decrease in velocity. Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 36) An increase in the price level means that A) long-run aggregate supply has increased. B) monetary policy has been contractionary. C) the value of the dollar has increased. D) the purchasing power of money has fallen. Answer: D Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 37) Which of the following is a variable in the equation of exchange? A) the price level B) the money supply C) real Gross Domestic Product (GDP) D) all of these Answer: D Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

38) The equation of exchange can be written as A) MsP = VY. B) MsV = PY. C) MsY = VP. D) None of these are correct. Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 39) The "V" in the equation of exchange MsV = PY refers to A) a variable. B) income velocity of money. C) the velocity of inflation. D) a vector that links P to Y. Answer: B Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 40) If V is constant and Y is fixed, any change in M A) leads to a smaller change in P. B) leads to a larger change in P. C) leads to a proportionate change in P. D) does not lead to change in P. Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

41) By saying that the equation of exchange is an accounting identity, we mean that A) it is useful for accountants, but not for economists. B) it identifies the key national income accounts. C) it is always true. D) it explains the effect of questionable accounting practices on macroeconomic performance. Answer: C Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 42) The quantity theory of money and prices asserts that A) increases in the money supply lead to inflation. B) increases in the money supply lead to an increase in the velocity of money. C) increases in the money supply lead to a decrease in the velocity of money. D) increases in the money supply will increase real GDP. Answer: A Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 43) The quantity theory of money and prices rests on the assumption that A) the velocity of money is constant. B) the minimum wage is constant. C) the nominal interest rate is constant. D) the foreign exchange rate is constant. Answer: A Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 44) The number of times per year that a dollar is spent on final goods and services defines A) the money supply. B) the income velocity of money. C) the price index. D) GDP. Answer: B Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 83 Copyright © 2021 Pearson Education, Inc.

45) Which of the following best describes the income velocity of money? A) V = PMs B) V = Y C) V = PY/Ms D) V = Ms/PY Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 46) According to the simple quantity theory of money, which of the following variables are considered either constant or relatively stable? A) V and Y B) Y and Ms C) P and Ms D) P and Y Answer: A Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 47) The hypothesis that changes in the money supply lead to proportional changes in the price level is called A) the equation of exchange. B) the Keynesian multiplier. C) the theory of empirical relativity. D) the quantity theory of money and prices. Answer: D Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

48) The equation of exchange specifies that A) MsV = PY. B) velocity and money supply are directly related. C) MsP = VY. D) Ms = PVY. Answer: A Diff: 1 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 49) In an economy that is at full employment, an increase in money supply will result in inflation, unless A) velocity increases. B) velocity decreases. C) real GDP falls. D) tax reduction is proportional to increases in the money supply. Answer: B Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 50) In the equation of exchange, if the money supply is $2 billion, the price level is 2, and the real Gross Domestic Product (GDP) is $6 billion, the velocity is A) 1. B) 2. C) 6. D) 36. Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge

51) If we assume that velocity is constant, and if the money supply increases by 5 percent, we would expect, ceteris paribus, that the price level would A) increase by 1 percent. B) increase by 5 percent. C) decrease by 1 percent. D) decrease by 5 percent. Answer: B Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge 52) If both nominal and real Gross Domestic Product (GDP) are increasing when the money supply is constant, than we can conclude that A) velocity has increased. B) velocity has decreased. C) interest rate has fallen. D) interest rate has increased. Answer: A Diff: 3 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 53) If a nation's nominal Gross Domestic Product (GDP) is $20 billion, its money supply is $8 billion, and its price level is 2, then the velocity of money is A) 16. B) 2. C) 2.5. D) 10. Answer: C Diff: 2 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Application of knowledge

54) What is the equation of exchange? How can the equation of exchange be converted into the quantity theory of money? Answer: The equation of exchange is MSV = PY, where MS is the money supply, V is the velocity of money, and PY is the nominal GDP. It is an accounting identity, so is not a theory. The equation of exchange becomes the quantity theory of money and prices by assuming that velocity is constant and that real GDP (Y) is stable. Then we have P = (MS)V/Y or that a change in the money supply will lead only to a proportionate change in the price level. Diff: 3 Topic: 16.4 Monetary Policy and Inflation Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed 1) In the interest-rate-based transmission mechanism, a decrease in the money supply will A) increase the price level. B) reduce the rate of interest and the level of investment. C) reduce investment, shift the aggregate demand function inward, and lower real Gross Domestic Product (GDP). D) shift the aggregate supply function inward and increase real Gross Domestic Product (GDP). Answer: C Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 2) The monetary transmission mechanism that assumes that money supply growth stimulates the economy primarily by encouraging investment is A) the interest-rate-based transmission mechanism. B) the classical transmission mechanism. C) the post-Keynesian transmission mechanism. D) pre-Keynesian transmission mechanism. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

3) The linkages of the interest-rate-based transmission mechanism of monetary policy are summarized as follows: A) change in the money supply → change in speculative balances → change in transactions balances → change in planned investment → change in aggregate demand. B) change in the money supply → change in planned investment → change in government spending → change in aggregate demand. C) change in the money supply → change in interest rates → change in planned investment → change in aggregate demand. D) change in the money supply → change in interest rates → change in transactions balances → change in government spending → change in aggregate demand. Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 4) Assume (other things constant) that the Fed increases the money supply. The mechanism through which aggregate demand increases is, according to interest-rate-based transmission mechanism, summarized as follows: A) the money supply increases → there is a drop in money balances held → interest rates increase → planned investment spending decreases → aggregate demand increases. B) increase in money supply → increase in money balances held → decrease in interest rates → decrease in planned investment spending → increase in aggregate demand. C) increase in money supply → decrease in money balances held → decrease in interest rates → increase in planned investment spending → increase in aggregate demand. D) increase in money supply → decrease in interest rates → increase in planned investment spending → increase in aggregate demand. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 5) According to the interest-rate-based monetary policy transmission mechanism A) an increase in money supply will increase interest rates. B) an increase in money supply will decrease interest rates. C) a decrease in money supply will decrease interest rates. D) a decrease in money supply will not change interest rates. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 88 Copyright © 2021 Pearson Education, Inc.

6) According to the interest-rate-based monetary policy transmission mechanism A) an increase in the required reserve ratio will lower interest rates. B) a decrease in the required reserve ratio will lower interest rates. C) a decrease in the required reserve ratio will not affect interest rates. D) an increase in the required reserve ratio will not affect interest rates. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 7) The interest-rate-based transmission mechanism assumes that the Fed can stimulate investment by A) selling bonds. B) buying bonds. C) raising the discount rate relative to the federal funds rate. D) raising the required reserve ratio. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

8) In the above figure, suppose the economy is in short-run equilibrium at point D. Which of the following is the best policy option for the Fed? A) Increase the required reserve ratio. B) Increase government spending. C) Increase taxes. D) open market purchase of government securities Answer: D Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 9) In the above figure, suppose the economy is at a short-run equilibrium at point B and the interest rate is r2. Which of the following policy options for the Fed will help solve the short-run situation? A) lowering the differential between the discount rate and the federal funds rate B) open market purchase of government securities C) lowering the required reserve ratio D) open market sale of government securities Answer: D Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 90 Copyright © 2021 Pearson Education, Inc.

10) In the above figure, if the economy is initially at an equilibrium output at point A and the interest rate is r1, then an open market purchase of bonds by the Fed will A) cause interest rates to increase and output to decline. B) cause interest rates to decline to r2, investment to increase to I2, and the AD curve to shift upward to the right. C) cause interest rates to decline to r2, investment to decline, and aggregate demand to shift inward to the left. D) not have any impact on short- or long-run equilibrium real Gross Domestic Product (GDP). Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 11) According to proponents of the interest-rate-based monetary policy transmission mechanism, any increase in the money supply A) is effective in increasing Gross Domestic Product (GDP) only if it causes an outward shift of the aggregate supply curve. B) will increase Gross Domestic Product (GDP) only if interest rates fall and investment is sensitive to decreasing interest rates. C) causes velocity to increase, and so in the short run nominal Gross Domestic Product (GDP) must increase. D) will move the economy from the "liquidity trap" during times of recession if interest rates fall enough to stimulate private investment. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 12) Proponents of the interest-rate-based monetary policy transmission mechanism argue that when the Federal Reserve buys bonds, there will be A) an increase in investment spending. B) a decrease in the money supply. C) a decrease in nominal Gross Domestic Product (GDP), but not in real income. D) a decrease in the price of outstanding bonds. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

13) The interest-rate-based monetary policy transmission mechanism argues that an increase in the money supply A) has no effect on aggregate demand but reduces long-run aggregate supply. B) has no effect on aggregate demand but increases short-run aggregate supply. C) causes interest rates to fall, which causes an increase in planned investment, and an increase in aggregate demand. D) causes the inflation rate to decline, which causes an increase in household consumption spending and an increase in aggregate demand. Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 14) The interest-rate-based monetary policy transmission mechanism emphasizes the A) indirect effect of a change in the money supply that operates via a change in total planned expenditures generated by a change in the interest rate. B) direct effect of a change in the money supply that operates via a change in total planned production generated by a change in the price level. C) direct effect of a change in the money supply that operates via a change in total planned expenditures generated by a change in the interest rate. D) indirect effect of a change in the money supply that operates via a change in total planned production generated by a change in the price level. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 15) Which of the following statements is FALSE? A) Both monetary and interest rate targets cannot be pursued simultaneously. B) A reduction in the required reserve ratio increases the money supply and pushes down the equilibrium interest rate. C) An open market purchase reduces the money supply and pushes down the equilibrium interest rate. D) An open market sale decreases the money supply and pushes up the equilibrium interest rate. Answer: C Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

16) A key causal link in the interest-rate-based transmission mechanism for monetary policy is from A) investment to the interest rate. B) the money supply to excess reserves. C) a monetary policy action to excess reserves. D) real GDP to investment. Answer: C Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 17) If the source of economic instability is generally variations in spending, then the Fed should A) set money supply targets. B) print more money. C) buy gold. D) raise taxes. Answer: A Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 18) According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply generates A) lower interest rates, which causes an increase in planned real investment spending and an increase in aggregate demand. B) increased spending on consumer goods and services directly, which causes an increase in aggregate demand. C) an increase in nominal GDP and a change in the price level, but no change in real GDP. D) an increase in aggregate supply since the supply of money is part of aggregate supply. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

19) Which of the following is NOT a reason the Fed alters the rate of growth of the money supply? A) to influence aggregate demand B) to shift the demand for money curve C) to influence the amount of consumption D) to influence the amount of investment Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 20) The interest-rate-based approach to the monetary policy transmission mechanism says that a change in the money supply influences aggregate demand by A) a change in interest rates, which changes investment. B) a change in interest rates, which changes the money supply. C) changing consumer consumption behavior as they adjust to a change in the number of dollars available. D) leading to shifts of the short-run aggregate supply curve. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 21) According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply will A) lead to a decrease in investment spending and an increase in real GDP that is equal to the decrease in investment spending. B) lead to a decrease in investment spending and an increase in real GDP which is greater than the decrease in investment spending. C) lead to an increase in investment spending and a decrease in real GDP that is equal to the increase in investment spending. D) lead to an increase in investment spending and an increase in real GDP which is greater than the increase in investment spending. Answer: D Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

22) According to the interest-rate-based transmission mechanism, a decrease in the money supply will A) lead to a decrease in investment spending and an increase in real GDP that is equal to the decrease in investment spending. B) lead to a decrease in investment spending and a decrease in real GDP which is greater than the decrease in investment spending. C) lead to an increase in investment spending and a decrease in real GDP that is equal to the increase in investment spending. D) lead to an increase in investment spending and a decrease in real GDP which is greater than the increase in investment spending. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 23) An increase in the money supply will affect aggregate demand A) only if the increase in the money supply causes interest rates to rise. B) only if the increase in the money supply causes people to buy less goods and services. C) only if the increase in the money supply causes people to increase their saving. D) if the increase in the money supply causes interest rates to fall and/or causes people to buy more goods and services. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 24) According to the interest-rate-based perspective on the monetary policy transmission mechanism, A) key channels of monetary policy indirectly ultimately relate money supply changes to total planned spending through indirect effects on planned investment. B) changes in the money supply have little influence on macroeconomic variables. C) monetary policy leads to increases in the price level but will have no effect on the rate of output. D) inflation is always caused by excessive monetary growth and changes in the money supply offset aggregate demand only directly. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

25) The interest-rate-based approach to monetary policy says that a change in the money supply influences aggregate demand by A) a change in interest rates which changes investment. B) following the monetary rule. C) changing consumer consumption behavior as they adjust to a change in the number of dollars available. D) leading to shifts of the short-run aggregate supply curve. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 26) According to the interest-rate-based monetary policy transmission mechanism, an increase in the money supply will A) lead to a decrease in investment spending and an increase in real GDP that is equal to the decrease in investment spending. B) lead to a decrease in investment spending and an increase in real GDP which is greater than the decrease in investment spending. C) lead to an increase in investment spending and a decrease in real GDP that is equal to the increase in investment spending. D) lead to an increase in investment spending and an increase in real GDP which is greater than the increase in investment spending. Answer: D Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 27) According to the interest-rate-based monetary policy transmission mechanism, a decrease in the money supply will A) lead to a decrease in investment spending and an increase in real GDP that is equal to the decrease in investment spending. B) lead to a decrease in investment spending and a decrease in real GDP which is greater than the decrease in investment spending. C) lead to an increase in investment spending and a decrease in real GDP that is equal to the increase in investment spending. D) lead to an increase in investment spending and a decrease in real GDP which is greater than the increase in investment spending. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 96 Copyright © 2021 Pearson Education, Inc.

28) If the Fed has announced that it plans on lowering the interest rate, it will A) engage in expansionary open market operations, thereby decreasing the money supply. B) engage in expansionary open market operations, thereby increasing the money supply. C) engage in contractionary open market operations, thereby decreasing the money supply. D) engage in contractionary open market operations, thereby increasing the money supply. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 29) If the Fed has announced that it plans on increasing the interest rate, it will A) engage in expansionary open market operations, thereby decreasing the money supply. B) engage in expansionary open market operations, thereby increasing the money supply. C) engage in contractionary open market operations, thereby decreasing the money supply. D) engage in contractionary open market operations, thereby increasing the money supply. Answer: C Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 30) According to the interest-rate-based transmission mechanism for monetary policy, an increase in the money supply will cause the A) interest rate to fall, causing planned real investment spending to rise and leading to a decrease in aggregate demand. B) interest rate to rise, causing planned real investment spending to rise and leading to a decrease in aggregate demand. C) interest rate to fall, causing planned real investment spending to rise and leading to an increase in aggregate demand. D) interest rate to fall, causing planned real investment spending to fall and leading to an increase in aggregate demand. Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

31) According to the interest-rate-based transmission mechanism for monetary policy, a decrease in the money supply will cause the A) interest rate to fall, causing planned real investment spending to rise and leading to a decrease in aggregate demand. B) interest rate to rise, causing planned real investment spending to rise and leading to a decrease in aggregate demand. C) interest rate to fall, causing planned real investment spending to rise and leading to an increase in aggregate demand. D) interest rate to rise, causing planned real investment spending to fall and leading to a decrease in aggregate demand. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 32) The interest-rate-based transmission mechanism for monetary policy in the Keynesian system indicates that A) increases in the money supply lead to decreases in the interest rate, which decreases investment, which decreases the level of real GDP. B) decreases in the money supply lead to increases in the interest rate, which increases investment, which increases the level of real GDP. C) increases in the money supply cause people to spend more, leading to increases in real GDP. D) increases in the money supply lead to decreases in the interest rate, which increases investment, which increases the level of real GDP. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 33) According to the interest-rate-based monetary policy transmission mechanism, which of the following monetary policies would result in an increase in the level of planned real investment spending? A) contractionary B) expansionary C) reactionary D) Monetary policy has no effect on investment. Answer: B Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 98 Copyright © 2021 Pearson Education, Inc.

34) The interest-rate-based monetary policy transmission mechanism suggests that the changes in the money supply affect aggregate spending A) indirectly through interest rates and planned investment spending. B) directly through interest rates and planned consumption spending. C) indirectly through tax rates and planned consumption spending. D) directly through interest rates and planned government spending. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 35) Suppose the economy is initially in long-run and short-run equilibrium. If the Fed decides to pursue a contractionary monetary policy, we will see A) bond prices fall, interest rates fall, aggregate demand remains unchanged as consumption spending decreases, but investment spending increases. GDP remains constant in both the short run and the long run, but the price level falls in both. B) bond prices fall, interest rates rise, aggregate demand falls as investment and consumption spending decrease, and real GDP and the price level decreasing in the short-run, but only the price level decreasing in the long run. C) bond prices fall, interest rates rise, aggregate demand falls as investment spending decreases and consumption spending remains unchanged, and real GDP and the price level decrease in the short run, but only the price level falls in the short run. D) interest rates rise but no change in bond prices. Aggregate demand falls as consumption spending and investment spending decrease, and the price level and real GDP fall in both the short run and the long run. Answer: B Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

36) Suppose there is an increase in the money supply, but that people's demand for money balances increases by a greater amount at the same time. The net effect would be A) a lower price level in the long run. B) no change in aggregate demand or aggregate supply. C) an increase in aggregate demand due to the increase in the money supply, but a decrease in aggregate supply due to the increase in the demand for money. D) lower interest rates, greater real GDP, and a higher price level as aggregate demand increases because of the indirect effect of the increase in the money supply. Answer: A Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 37) The interest rate that the Fed charges banks to borrow funds from the Fed is the A) discount rate. B) federal funds rate. C) money market rate. D) nominal interest rate. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 38) One of the tools of monetary policy is to change the discount rate. Since 2003, A) the Fed has not changed the discount rate. B) the Fed has pegged the discount rate to the reserve requirement. C) the Fed has kept the discount rate a fixed amount above the federal funds rate. D) the Fed has kept the federal funds rate one percentage point above the discount rate. Answer: C Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

39) The tools of monetary policy are A) open market operations, differential between the discount rate and the federal funds rate, and tax rates. B) open market operations, government spending, and the required reserve ratio. C) open market operations, differential between the discount rate and the federal funds rate, and the required reserve ratio. D) government spending, tax rates, and the required reserve ratio. Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 40) To change the rate of growth of the money supply, the Fed can do all but which one of the following? A) Engage in open market operations. B) Change the discount rate. C) Shift the demand for money curve by changing the interest rate. D) Change the required reserve ratio. Answer: C Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 41) Typically, increasing the difference between the discount and federal funds rates causes A) an increase in market interest rates. B) no change in interest rates. C) a boom in the economy. D) high corporate profits. Answer: A Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

42) Changes in which of the following will cause changes in the equilibrium federal funds rate? A) the demand for excess reserves by banks B) the demand for required reserves by banks C) the supply of reserves created through past open market operations D) all of these Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 43) An open market purchase of government securities by the Fed will cause which of the following? A) a reduction in the federal funds rate B) an increase in the amount of excess reserves that banks will hold initially C) an increase in the equilibrium quantity of reserves D) all of these Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 44) In the market for bank reserves, the supply of reserves is A) an upward-sloping curve. B) a downward-sloping curve. C) a horizontal curve. D) none of these. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

45) If the Fed raises the interest rate paid on excess reserves while holding the federal funds rate unchanged, then banks will A) lend more reserves in the federal funds market and keep more excess reserves. B) lend fewer reserves in the federal funds market and keep more excess reserves. C) not keep excess reserves or lend reserves in the federal funds market. D) not react to it. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 46) Other things being equal, if the Fed raises the interest rate paid on excess reserves, A) the supply of reserves in the federal funds market will increase. B) the supply of reserves in the federal funds market will decrease. C) both the demand for reserves and the supply of reserves in the federal funds market will increase. D) both the demand for reserves and the supply of reserves in the federal funds market will decrease. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 47) Since October 2008, Congress has granted the Fed an authority to A) charge banks interest on both required reserves and excess reserves. B) pay banks interest on both required reserves and excess reserves. C) charge banks interest on required reserves but pay them interest on excess reserves. D) charge banks interest on excess reserves but pay them interest on required reserves. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

48) In the market for bank reserves, a reduction in the required reserve ratio will cause A) a reduction in the federal funds rate. B) an increase in the equilibrium quantity of reserves. C) a reduction in the demand for reserves. D) all of these. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 49) The opportunity cost of holding excess reserves is equal to A) the discount rate. B) the federal funds rate. C) the federal funds rate minus the discount rate. D) none of these. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 50) An open market sale of government securities by the Fed will cause which of the following? A) an increase in the federal funds rate B) an increase in the equilibrium quantity of reserves C) all of these D) none of these Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 51) An open market sale of government securities by the Fed will cause which of the following? A) an excess quantity of reserves supplied and an increase in the federal funds rate B) an excess quantity of reserves supplied and a reduction in the federal funds rate C) an excess quantity of reserves demanded and an increase in the federal funds rate D) an excess quantity of reserves demanded and a reduction in the federal funds rate Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 104 Copyright © 2021 Pearson Education, Inc.

52) An open market purchase of government securities by the Fed will cause which of the following? A) an excess quantity of reserves supplied and an increase in the federal funds rate B) an excess quantity of reserves supplied and a reduction in the federal funds rate C) an excess quantity of reserves demanded and an increase in the federal funds rate D) an excess quantity of reserves demanded and a reduction in the federal funds rate Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 53) The rate at which banks can borrow excess reserves from other banks is equal to A) the discount rate. B) the required reserve ratio. C) the interest rate paid on reserves held with the Fed. D) none of these. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 54) In the market for bank reserves, the supply of reserves is A) an upward-sloping curve. B) a downward-sloping curve. C) a vertical curve. D) none of these. Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

55) What happens when the Fed aims to change interest rates? A) It asks Congress to legislate new interest rates. B) It buys or sells government bonds on the open market to achieve the desired rate. C) It buys or sells dollars on the foreign exchange market to achieve the desired rate. D) It announces a new discount interest rate. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 56) The federal funds rate is A) the interest rate paid on reserves held with the Fed. B) the interest rate at which banks can borrow excess reserves from other banks. C) the interest rate on bonds issued by the federal government. D) none of these. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 57) The incentive of holding excess reserves is equal to A) the discount rate. B) the federal funds rate. C) the interest rate earned on excess reserves. D) none of these. Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 58) The rate at which banks can borrow excess reserves from other banks is equal to A) the discount rate. B) the federal funds rate. C) the interest rate paid on reserves held with the Fed. D) the Treasury bill rate. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 106 Copyright © 2021 Pearson Education, Inc.

59) The interest rate that the Fed charges banks to borrow funds from the Fed is the A) discount rate. B) federal funds rate. C) money market rate. D) nominal interest rate. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 60) Which of the following is NOT part of the FOMC directive? A) It lays out the FOMC's general economic objectives. B) It establishes short-term federal funds rate objectives. C) It specifies target ranges for money supply growth. D) It specifies who the chair of the Fed is. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 61) What is the maximum number of voting members of the FOMC? A) 4 B) 7 C) 48 D) 12 Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

62) The Trading Desk's open market operations A) are confined within a one-hour interval each weekday morning. B) are confined within a six-hour interval each weekday morning. C) occur throughout each day. D) occur once a week. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 63) The official Federal Reserve strategy for implementing its monetary policy objectives is spelled out in the A) Federal Reserve Board (FRB) Decree. B) Federal Reserve Bank Cooperative (FRBC) Proposal. C) Federal Advisory Committee (FAC) Statement. D) Federal Open Market Committee (FOMC) Directive. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 64) The office of the Federal Reserve Bank of New York charged with implementing Federal Reserve open market policy actions is known as the A) Open Market Coordination Office. B) Open Market Cooperation Office. C) Response Desk. D) Trading Desk. Answer: D Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

65) Which of the following institutions within the Federal Reserve System determines how many government securities the Fed should buy or sell on a given day? A) the Board of Governors B) Federal Advisory Committee C) the Federal Reserve Bank of Chicago's Board of Trade D) the Federal Reserve Bank of New York's Trading Desk Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 66) Which of the following policy tools is directly controlled by the Trading Desk at the Federal Reserve Bank of New York? A) the spread between the discount rate and the federal funds rate B) the spread between the federal funds rate and the interest rate on banks' required reserves C) the required reserve ratio D) open market sales and purchases Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 67) Under the Fed's current interest-rate-targeting approach to monetary policy, if the demand for federal funds by depository institutions increases today, then, other things being equal, A) the market federal funds rate decreases, and the Fed's Trading Desk responds by selling bonds. B) the market federal funds rate increases, and the Fed's Trading Desk responds by buying bonds. C) the market federal funds rate decreases, and the Fed's Trading Desk responds by buying bonds. D) the market federal funds rate increases, and the Fed's Trading Desk responds by selling bonds. Answer: B Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

68) It is the responsibility of the Trading Desk at the Federal Reserve Bank of New York to implement policies in the form of A) changes in the spread between the federal funds rate and the discount rate that are consistent with rules established by the twelve Federal Reserve bank presidents. B) variations in reserve requirements that are consistent with the announcements by the Chair of the Fed's Board of Governors. C) changes in foreign exchange rates that are consistent with policies established by the Secretary of the Treasury. D) buying or selling government securities that are consistent with the FOMC Directive. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 69) Operations of the Trading Desk of the Federal Reserve Bank of New York are typically conducted A) no more often than once per month. B) once a year. C) no more often than once per week. D) within a one-hour period during each day. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 70) In addition to open market operations and the required reserve ratio, another tool of monetary policy available to the Fed is A) fiscal policy. B) tax rates and the progressivity of the income-tax system. C) government spending and various transfer-payment programs. D) the difference between the discount rate and the federal funds rate. Answer: D Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

71) If the Fed thought the economy was experiencing a recessionary gap, and it wanted to correct this gap, it would A) sell bonds. B) lower the differential between the discount rate and the federal funds rate. C) raise the reserve requirement. D) increase aggregate supply. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 72) Suppose the economy is in long-run and short-run equilibrium. The Fed changes its policy by raising the difference between the discount rate and the federal funds rate. In the long run we would expect to observe A) a lower price level. B) a higher price level. C) a lower real national income. D) a higher real national income. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 73) Which of the following is NOT a basis for the Taylor-rule guideline for how the Federal Reserve should set its target value for the federal funds rate? A) an estimated long-run real interest rate B) the current deviation of the actual inflation rate from the Fed's inflation objective C) the present deviation of the actual unemployment rate from the Fed's unemployment objective D) the gap between actual real GDP and a measure of potential real GDP Answer: C Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

74) Suppose that the Fed has decided to utilize the Taylor rule to implement monetary policy. If the actual federal funds rate target is presently below the level specified by the Taylor rule and has been lower then this level for several weeks, then this would be a signal that A) monetary policy is very expansionary. B) monetary policy is very contractionary. C) the Fed should halt efforts to target the money supply. D) the Fed should switch to targeting the money supply instead of the federal funds rate. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 75) Suppose the actual equilibrium federal funds rate is above the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that A) fiscal policy is contractionary. B) fiscal policy is expansionary. C) monetary policy is expansionary. D) monetary policy is contractionary. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 76) According to the Taylor rule, the Fed will set the federal funds rate target based on which of the following? A) an estimated long-run real interest rate B) the current deviation of the actual inflation rate from the Fed's inflation objective C) the proportionate gap between actual real GDP and a measure of potential real GDP D) all of these Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

77) Which Federal Reserve Bank now regularly tracks target levels for the federal funds rate predicted by a basic Taylor-rule equation? A) Dallas B) Chicago C) New York D) St. Louis Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 78) Suppose the actual equilibrium federal funds rate is below the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that A) fiscal policy is contractionary. B) fiscal policy is expansionary. C) monetary policy is expansionary. D) monetary policy is contractionary. Answer: C Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 79) Between 2011 and 2019, the actual federal funds rate A) tended to be lower than the rates predicted by the Taylor rule. B) tended to higher than the rates predicted by the Taylor rule. C) followed closely the rates predicted by the Taylor rule. D) moved in directions opposite to the rates predicted by the Taylor rule. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

80) Suppose the actual federal funds rate is below the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that A) monetary policy is expansionary. B) monetary policy is contractionary. C) monetary policy is neither expansionary or contractionary. D) fiscal policy is contractionary. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 81) Suppose the actual federal funds rate is above the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that A) monetary policy is expansionary. B) monetary policy is contractionary. C) monetary policy is neither expansionary or contractionary. D) fiscal policy is expansionary. Answer: B Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 82) Suppose the actual federal funds rate is equal to the rate implied by a particular inflation goal. In this situation, the Taylor rule implies that A) monetary policy will tend to produce that inflation rate. B) monetary policy is contractionary. C) monetary policy is expansionary. D) fiscal policy will result in a balanced budget. Answer: A Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

83) The Taylor rule implies that the Fed should set the federal funds target based on which of the following? A) an estimated long-run real interest rate B) the current deviation of the actual inflation rate from the Fed's inflation objective C) the proportionate gap between actual real GDP and a measure of potential real GDP D) all of these Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 84) The Federal Reserve's credit policy refers to A) a direct credit on bank depositors' saving and checking accounts. B) regulations on terms on credit cards that banks issue. C) the Fed's direct lending to homeowners and students. D) the Fed's direct lending to financial and nonfinancial firms. Answer: D Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 85) Since 2008, the Fed has conducted a policy that involves direct lending to private firms. Those actions of the Fed are called A) open market operations. B) federal funds rate targeting. C) quantitative easing. D) credit policies. Answer: D Diff: 1 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

86) The Federal Reserve finances its credit policy with A) reserve deposits that private banks hold with the Fed. B) borrowing from the federal government. C) the insurance premiums collected by the FDIC. D) funding from the U.S. Treasury Department. Answer: A Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 87) If the Fed's credit policies induces banks to hold substantial excess reserves at the Fed, then A) financial markets will become more illiquid. B) the money multiplier will fall. C) the money supply will rise. D) the scope of asymmetric-information problem for banks will improve. Answer: B Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 88) Which of the following is TRUE of the Fed's credit policy? A) The Fed has implemented a credit policy since 1914. B) Today about 40 percent of the Fed's asset holdings are related to its conduct of credit policy. C) The Fed's credit policy is extended only to U.S. financial institutions. D) The Fed's objective for its credit policy is to reduce the federal funds rate. Answer: B Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

89) Which of the following has been the most likely effect of the Fed's credit policy? A) Banks and other financial institutions have taken more time to recover from the 2008-2009 financial meltdown. B) The federal funds rate and the discount rate have dropped to negative levels. C) The money multiplier and the link between the money supply and the economy have become unstable. D) The scope of asymmetric information problems in the banking industry has reduced. Answer: C Diff: 3 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 90) Briefly describe the effects of an open market sale by the Federal Reserve, according to the interest-rate-based approach to the monetary policy transmission mechanism. Answer: If the Fed decreases the money supply through an open market sale, then the money supply will decrease. People will then find themselves with too little cash, and so they will sell bonds. As a result, the prices of bonds will decrease, thereby raising the interest rate. A higher interest rate will decrease planned investment and thus aggregate demand. A decrease in aggregate demand will reduce equilibrium real GDP via the multiplier effect. Diff: 2 Topic: 16.5 Monetary Policy Transmission and Credit Policy at Today's Fed Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 16.6 Appendix E: Increasing the Money Supply 1) According to Keynes, the impact of an increase in the money supply is A) a lower interest rate and a larger growth in real GDP. B) a lower interest rate and a smaller growth in real GDP. C) a higher interest rate and a larger growth in real GDP. D) a higher interest rate and a smaller growth in real GDP. Answer: A Diff: 2 Topic: 16.6 Appendix E: Increasing Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

2) According to Keynes, the effect on planned real investment spending resulting from the interest-rate impact of an increase in the money supply A) impacts the economy through the multiplier. B) impacts the economy by increasing the amount of government spending. C) impacts the economy by reducing the deficit. D) does not impact the economy. Answer: A Diff: 1 Topic: 16.6 Appendix E: Increasing Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 16.7 Appendix E: Decreasing the Money Supply 1) According to Keynes, the impact of a decrease in the money supply is a A) lower interest rate and larger growth in real GDP. B) lower interest rate and smaller growth in real GDP. C) higher interest rate and larger growth in real GDP. D) higher interest rate and smaller growth in real GDP. Answer: D Diff: 2 Topic: 16.7 Appendix E: Decreasing Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 2) According to Keynes, contractionary monetary policy A) impacts the economy by an amount smaller than the change in investment. B) impacts the economy by an amount larger than the change in investment. C) will have no impact on the equilibrium nominal GDP. D) will have no impact on the equilibrium real GDP. Answer: B Diff: 2 Topic: 16.7 Appendix E: Decreasing Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

3) According to Keynes, the effect on planned real investment spending resulting from the interest-rate impact of a decrease in the money supply A) impacts the economy through the multiplier. B) impacts the economy by reducing the value of the U.S. dollar. C) impacts the economy by increasing the deficit. D) does not impact the economy. Answer: A Diff: 2 Topic: 16.7 Appendix E: Decreasing Money Supply Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 16.8 Appendix E: Arguments against Monetary Policy 1) According to traditional Keynesians, monetary policy is ineffective in affecting the economy during a recession because A) an increase in the money supply will have little impact on interest rates. B) an increase in the money supply will only lead to higher interest rates. C) an increase in the money supply will only lead to lower investment spending. D) an increase in the money supply will raise the amount of government debt. Answer: A Diff: 2 Topic: 16.8 Appendix E: Arguments against Monetary Policy Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 2) According to traditional Keynesians, when the central bank increases the money supply during a recession, A) people will spend all of the money on goods and services. B) people will borrow more from banks. C) people will keep most of it in their bank accounts. D) people will refuse to use the money. Answer: C Diff: 2 Topic: 16.8 Appendix E: Arguments against Monetary Policy Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

3) According to traditional Keynesians, monetary policy as a tool to fight a recession A) has an uncertain effect on the economy, depending on the direction of fiscal policy. B) is very effective because interest rates will fall immediately. C) is ineffective because interest rates will not fall. D) cannot be determined because traditional Keynesians do not consider monetary policy at all. Answer: C Diff: 2 Topic: 16.8 Appendix E: Arguments against Monetary Policy Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 17 Stabilization in an Integrated World Economy 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment 1) Active policymaking refers to A) actions taken by policy makers in response to a change in the overall economy. B) policy making that is carried out in response to a rule. C) relying on policies that act as automatic stabilizers. D) nondiscretionary policymaking. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 2) Active policymaking would include all of the following EXCEPT A) interest rate changes by the Fed. B) tax increases. C) unemployment insurance benefits. D) increased government spending by the Congress. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 3) Which of the following would be an example of passive policymaking? A) establishing a system of automatic tax stabilizers B) marginal rate tax cuts intended to increase real Gross Domestic Product (GDP) C) government spending decreases intended to decrease real Gross Domestic Product (GDP) D) raising the money supply when the unemployment rate increases. Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

4) Monetary and fiscal policymaking that is carried out in response to a pre-set rule and does NOT respond to changes in economic activity is known as A) active policymaking. B) discretionary policymaking. C) nondiscretionary policymaking. D) Keynesian policymaking. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 5) When policymakers make decisions in response to a pre-specified rule, they are undertaking A) active policy. B) discretionary policy. C) passive policy. D) irrational policy. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 6) With discretionary policymaking, fiscal and monetary policies are usually A) undertaken in response to or anticipation of some change in the overall economy. B) set according to pre-established standards that do not take into account any changes in the economy. C) immune to any political overtones. D) immune to any lag times that might counter their effectiveness. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 7) If a policymaker is convinced that time lags frequently negate the impact of short-run stabilization efforts, it is likely she would favor ________ policymaking. A) nondiscretionary B) discretionary C) active D) aggressive Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) When policymakers take actions in response to or in anticipation of some change in the overall economy, there is A) active policymaking. B) passive policymaking. C) rationalization policymaking. D) rational expectations policymaking. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 9) Proponents of passive policymaking believe that A) the existence of time lags makes active policy ineffective or even procyclical. B) time lags do not exist so the economy will adjust too rapidly with active policy. C) government should not follow any particular policy. D) fiscal policy is always better than monetary policy in stabilizing the economy. Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 10) Which of the following scenarios can be classified as passive policymaking? A) The Federal Reserve cuts the federal funds rate in order to increase economic activity. B) The federal government increases spending in order to create jobs. C) The Federal Reserve adjusts the money supply as appropriate to attain a target rate of inflation. D) Congress increases expenditures in an effort to stimulate economic activity. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 11) Actions on the part of monetary and fiscal policymakers that are undertaken in response to some change in the overall economy are known as A) nondiscretionary policymaking. B) passive policymaking. C) creative policymaking. D) active policymaking. Answer: D Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 3 Copyright © 2021 Pearson Education, Inc.

12) When policymakers base their actions on a rule there is A) active policymaking. B) passive policymaking. C) rationalization policymaking. D) rational expectations policymaking. Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 13) An example of nondiscretionary policymaking is A) a rule under which the Fed targets the inflation rate. B) expansionary fiscal policy. C) changes in the interest rate initiated by the Fed. D) a Congressional tax-rate cut aimed at boosting real GDP. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 14) If a policy is carried out by a rule, then we have an example of A) active policymaking. B) discretionary policymaking. C) nondiscretionary policymaking. D) natural policymaking. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 15) Suppose a constitutional amendment is passed that mandates a balanced federal budget every year and the President and Congress consistently carry this mandate out. This would be an example of A) active policymaking. B) decisive policymaking. C) nondiscretionary policymaking. D) cooperative policymaking. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

16) The Federal Reserve is anticipating a contractionary period in the economy. The Fed decides to engage in open market operations to stimulate the economy. This action is A) active policymaking. B) passive policymaking. C) the monetary rule. D) nondiscretionary rule. Answer: A Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 17) Which of the following statements has been proposed as a benefit of passive policymaking? A) Passive policymaking allows for making immediate changes in response to an anticipated change in economic performance. B) Passive policymaking utilizes the rational expectations hypothesis. C) When using passive policymaking there is no trade-off between price stability and unemployment. D) Passive policymaking does not wait for the time lag between recognition of a problem and policy action before engaging in economic policies to stabilize the economy. Answer: D Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18) Which one of the following is an example of passive policymaking? A) introducing expansionary monetary policy to combat a recession B) introducing expansionary monetary policy to combat inflation C) introducing expansionary fiscal policy to combat a recession D) following a predetermined monetary policy rule Answer: D Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 19) What best defines active policymaking? A) taking action to offset a change in economic performance B) taking action to increase long-term economic growth C) taking action to make markets more competitive so as to improve efficiency D) taking action to make markets less competitive so as to improve equity Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 5 Copyright © 2021 Pearson Education, Inc.

20) Policymaking that is carried out in response to a rule is A) active policymaking. B) passive policymaking. C) restrictive policymaking. D) determined policymaking. Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 21) The idea of policymaking taking place in response to a predetermined set of rules is referred to as A) active policymaking. B) discretionary policymaking. C) passive policymaking. D) Keynesianism. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 22) The idea of policymaking being undertaken as a response to a change in the economy is referred to as A) active policymaking. B) non-discretionary policymaking. C) passive policymaking. D) Keynesianism. Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 23) If the rate of growth in the money supply is predetermined on the basis of a monetary rule, this is known as A) direct policymaking. B) active policymaking. C) passive policymaking. D) fiscal policymaking. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

24) If the Fed engages in open market sales in direct response to an increase in the rate of inflation, this is known as A) direct policymaking. B) active policymaking. C) passive policymaking. D) fiscal policymaking. Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 25) Structural unemployment is likely to be affected by A) an economic recession or boom. B) the reservation wage curves of people. C) minimum wage laws in the economy. D) the amount of the money supply. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 26) Which of the following types of unemployment that occurs after all adjustments in the labor market have occurred? A) passive unemployment B) natural unemployment C) cyclical unemployment D) seasonal unemployment Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

27) What types of unemployment will still exist when the economy is at the natural rate of unemployment? A) none as there will be no unemployment B) frictional and structural unemployment only C) structural and cyclical unemployment only D) frictional, structural, and cyclical unemployment Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 28) The rate of unemployment tends to reach the natural rate of unemployment A) after real Gross Domestic Product (GDP) no longer increases. B) only when there are no "rigidities" in the labor market. C) when the economy returns to the long-run aggregate supply curve. D) when frictional unemployment and structural unemployment no longer exist. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 29) Structural unemployment may result from all of the following factors EXCEPT A) union wage contracts. B) a higher minimum wage. C) improved college education. D) welfare and unemployment benefits. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

30) You recently graduated from college and you are actively looking for employment. The economy has completely recovered from the last recession and you are taking your time looking for the "perfect" job. In the meantime, the unemployment you are experiencing is categorized as A) cyclical. B) structural. C) seasonal. D) frictional. Answer: D Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 31) The natural rate of unemployment is A) zero. B) the unemployment rate when there is no structural unemployment. C) the unemployment rate becomes negative. D) the unemployment rate that exists in long-run equilibrium, after adjustments to all changes have occurred. Answer: D Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 32) The natural rate of unemployment A) prevails in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy. B) prevails in the short-run macroeconomic equilibrium, before workers and employers have had a chance to adjust to an economic shock. C) exists due to welfare and unemployment benefits that reduce potential workers' incentives to find work. D) exists only during periods of recession or depression in the economy. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

33) The natural rate of unemployment includes A) frictional and cyclical unemployment. B) only cyclical unemployment. C) workers who are underemployed. D) frictional unemployment and structural unemployment. Answer: D Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 34) The difference between the actual unemployment rate and the natural unemployment rate is A) cyclical unemployment. B) frictional unemployment. C) the percentage of discouraged workers in the labor force. D) structural unemployment. Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 35) According to the text, minimum-wage laws cause increases in A) employment possibilities. B) structural unemployment. C) poverty. D) productivity. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 36) Frictional and structural unemployment both exist A) when inflation becomes very high. B) when the economy is in long-run equilibrium. C) only when the economy is at the peak of the business cycle. D) only when the economy is in recession. Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

37) An increase in unemployment insurance and other transfer payments may A) increase the natural rate of unemployment. B) increase the number of discouraged workers. C) reduce the rate of inflation at every level of unemployment. D) lead to less unanticipated inflation. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 38) From 1950 until the late 1980s, the natural rate of unemployment in the United States A) fell sharply as government retraining programs helped put the unemployed back to work. B) cycled up and down in tandem with the actual rate of unemployment. C) rose sharply, always exceeding the actual rate of unemployment. D) trended upward. Answer: D Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 39) From the late 1980s to 2000, the natural rate of unemployment A) climbed sharply. B) held constant. C) fluctuated up and down, following the path of the actual rate of unemployment. D) gradually declined. Answer: D Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

40) During a recession, the overall unemployment rate A) falls rapidly. B) exceeds the natural rate of unemployment. C) falls below the natural rate of unemployment. D) equals the inflation rate. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 41) Cyclical unemployment is A) the difference between the unemployment rate when the economy is in a recession and the unemployment rate when the economy is at the peak of an expansion. B) the difference between the actual unemployment rate and the natural rate of unemployment. C) the unemployment due to union activities and government-imposed restrictions to entry into specific occupations. D) the unemployment due to the unemployment benefits and welfare programs of the government. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 42) If cyclical unemployment is negative, then A) the actual unemployment rate is below the natural rate of unemployment. B) the natural rate of unemployment is getting smaller. C) there have been some errors in classifying the type of unemployment experienced by some people. D) structural unemployment must be increasing. Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

43) Which of the following unemployment rates can be negative? A) the cyclical unemployment rate B) the natural unemployment rate C) the seasonal unemployment rate D) the unemployment rate that includes underemployment Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 44) Which type of unemployment is associated with the slump in aggregate demand that accompanies a recession? A) expansionary unemployment B) cyclical unemployment C) frictional unemployment D) structural unemployment Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 45) An unexpected increase in aggregate demand typically causes A) frictional unemployment to increase but structural unemployment to decrease. B) the price level to increase but has no effect on the unemployment rate. C) the price level to increase and the unemployment rate to fall. D) the price level to increase and the unemployment rate to increase. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

46) In the above figure, start with the economy in equilibrium at point A. Then an unanticipated reduction in aggregate demand triggers a shift from AD1 to AD2. In the short run, this would cause A) the price level to fall from P1 to P2, real Gross Domestic Product (GDP) to fall from Y1 to Y2, and the rate of unemployment to increase. B) the price level to move from P1 to P2, but real Gross Domestic Product (GDP) would stay at Y1. C) the price level to fall by some amount less than P1 but greater than P2, and the rate of unemployment would decrease. D) no change in either the price level or real Gross Domestic Product (GDP), but a decrease in unemployment. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

47) Suppose the economy is initially operating at point A in the above figure. Which of the following statements is TRUE? A) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the long run. B) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the short run. C) An unexpected reduction in aggregate demand will cause the economy to move from point A to point C in the short run. D) none of these Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 48) One result of an unanticipated reduction in aggregate demand would be that A) fewer firms would be hiring. B) more firms would be hiring. C) there would be no change in hiring. D) the price level would rise. Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 49) On average, the greater the unexpected decline in aggregate demand, A) the weaker is the resulting deflation. B) the greater is the resulting deflation. C) the greater is the resulting inflation. D) the greater is the rise in the price level. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

50) In the above figure, if A is the initial equilibrium point and there is an unanticipated rise in aggregate demand from AD1 to AD2, then A) the new short-run equilibrium will be at point B. B) the new long-run equilibrium will be at point B. C) the new short-run equilibrium will be at point D. D) real Gross Domestic Product (GDP) per year will fall below Y1. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 51) In the above figure, if initial equilibrium is at point A and if there is an unanticipated increase in aggregate demand from AD1 to AD2, then A) in the short run real output will remain at Y1. B) in the short run real output will increase above Y1, but in the long run it will return to Y1. C) in the long run real output will increase above Y1. D) real output will increase above Y1 in both the short run and in the long run. Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

52) In the above figure, if initial equilibrium is at point A and there is a fully anticipated increase in aggregate demand from AD1 to AD2 due to an anticipated increase in the money supply, then A) the economy will move directly from point A to point C without passing through point B. B) the economy will move directly from point A to point B, and will remain at point B in the long run. C) the price level will shift to P2 in the short run. D) the price level will shift to P2 in the long run. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 53) Suppose that the inflation rate has been 2 percent per year for several years, and the unemployment rate has been stable at 4 percent. Unanticipated changes in government policy cause the inflation rate to increase to 4 percent. In the short run, we would expect the unemployment rate to A) remain constant. B) increase to 7 percent. C) increase, but the exact amount cannot be known for sure. D) decrease. Answer: D Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 54) In the short run, unanticipated inflation typically leads to A) higher rates of unemployment. B) decreases in aggregate demand. C) lower rates of unemployment. D) workers' thinking the real wage has been reduced. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

55) When the actual unemployment rate is greater than the natural rate of unemployment, the inflation rate A) tends to increase. B) tends to decrease. C) remains unchanged. D) falls to zero. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 56) Assume that the government decides to use fiscal or monetary policy to stimulate the economy and that this action comes as a surprise to most individuals and businesses. In the short run, the result will be A) a decrease in the average duration of unemployment and a decrease in the unemployment rate. B) an increase in the average duration of unemployment and an increase in the unemployment rate. C) a decrease in aggregated demand and a rise in the price level. D) an increase in aggregate demand and a fall in the price level. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 57) An important source of structural unemployment is A) seasonal variations in aggregate demand. B) unemployment insurance benefits. C) people looking for the right job decide to change jobs. D) recessions. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

58) Which of the following is NOT a possible cause of structural unemployment? A) individuals take the time to search for the best job opportunities B) a mismatch of worker training and skills with requirements of employers C) government-imposed minimum wage laws D) union activity that sets wages above the equilibrium level Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 59) The natural rate of unemployment is A) the unemployment rate when cyclical unemployment is the only type of unemployment. B) the unemployment rate when there is no frictional unemployment. C) the rate of unemployment associated with long-run equilibrium. D) zero. Answer: C Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 60) The natural rate of unemployment consists of A) unemployment associated with high inflation. B) only seasonal unemployment. C) only structural unemployment. D) structural and frictional unemployment. Answer: D Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 61) When the economy is in long-run equilibrium, there will be A) no unemployment. B) frictional and structural unemployment. C) cyclical unemployment only. D) cyclical and seasonal unemployment. Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

62) Suppose the natural rate of unemployment is 4 percent. If the actual unemployment is 5 percent, then the cyclical unemployment rate is A) -9 percent. B) -1 percent. C) 1 percent. D) 9 percent. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 63) Deviations of the actual unemployment rate from the natural rate of unemployment are called A) frictional unemployment. B) cyclical unemployment. C) seasonal unemployment. D) underemployment. Answer: B Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 64) When the economy is operating at a level of real Gross Domestic Product (GDP) that is greater than its potential level, we know that A) the actual unemployment rate is greater than the natural rate of unemployment. B) the structural rate of unemployment is negative. C) the frictional unemployment is zero. D) the cyclical rate of unemployment is negative. Answer: D Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

65) During a recession, the A) natural rate of unemployment has fallen. B) cyclical rate of unemployment is positive. C) cyclical rate of unemployment is zero. D) cyclical rate of unemployment is negative. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 66) Deviations of the actual unemployment rate away from the natural rate are A) cyclical unemployment. B) frictional unemployment. C) structural unemployment. D) the monetary rule. Answer: A Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 67) Suppose the natural rate of unemployment is 4 percent. If the actual unemployment rate is 4 percent, then the cyclical unemployment rate A) is 0 percent. B) is 4 percent. C) is 8 percent. D) cannot be determined given the information. Answer: A Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge

68) Suppose the natural rate of unemployment is 5 percent. If the actual unemployment rate is 4 percent, then the cyclical unemployment rate is A) 9 percent. B) 1 percent. C) -1 percent. D) 0 percent as cyclical unemployment cannot be less than zero. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Application of knowledge 69) We observe the duration of unemployment rising and wage rates falling. It is likely that A) the government has initiated expansionary fiscal policy but the policies haven't taken effect yet. B) summer has arrived. C) aggregate demand has decreased. D) aggregate supply has increased. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 70) Suppose the government abolished the minimum wage law and the law that requires union wage rates to be paid on all government contract jobs. We would expect to see A) a decline in the natural rate of unemployment. B) an increase in claims for unemployment benefits. C) the duration of unemployment to increase. D) a recession. Answer: A Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

71) Suppose there was an unexpected increase in aggregate demand. We would expect to observe A) frictional unemployment to increase. B) the duration of unemployment and the amount of unemployment to decrease. C) higher wages, with the duration of unemployment and the amount of unemployment unchanged. D) a decrease in aggregate demand. Answer: B Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 72) An unexpected increase in aggregate demand causes A) the unemployment rate to fall, with no change in the price level. B) the price level to rise, but the duration of unemployment will remain constant, so the unemployment rate remains constant. C) simultaneously the price level to rise and the unemployment rate to fall. D) simultaneously the price level to fall and the unemployment rate to fall. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

73) Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run A) real GDP will be Y1, and the price level will be P1. B) real GDP will be Y2, and the price level will be P2. C) real GDP will be Y1, and the price level will be above P2. D) real GDP will be between Y1 and Y2, and the price level will be between P1 and P2. Answer: B Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 74) Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run A) real GDP will be Y1, and the price level will be P1. B) real GDP will be Y2, and the price level will be P2. C) real GDP will be Y1, and the price level will be above P2. D) real GDP will be between Y1 and Y2, and the price level will be between P1 and P2. Answer: C Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

75) Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run A) the unemployment rate will be the same rate as before the expansionary monetary policy. B) the unemployment rate will be larger than the rate before the expansionary monetary policy. C) the unemployment rate will be smaller than the rate before the expansionary monetary policy. D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift. Answer: C Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 76) Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run A) the unemployment rate will be the same rate as before the expansionary monetary policy. B) the unemployment rate will be larger than the rate before the expansionary monetary policy. C) the unemployment rate will be smaller than the rate before the expansionary monetary policy. D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift. Answer: A Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

77) Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run A) real GDP will be Y1, and the price level will be P1. B) real GDP will be Y2, and the price level will be P2. C) real GDP will be between Y1 and Y2, and the price level will be above P1. D) real GDP will be between Y1 and Y2, and the price level will be below P2. Answer: B Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 78) Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run A) real GDP will be Y1, and the price level will be P1. B) real GDP will be Y2, and the price level will be P2. C) real GDP will be between Y1 and Y2, and the price level will be above P1. D) real GDP will be Y1, and the price level will be below P2. Answer: D Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

79) Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run A) the unemployment rate will be the same rate as before the expansionary monetary policy. B) the unemployment rate will be larger than the rate before the contractionary monetary policy. C) the unemployment rate will be smaller than the rate before the expansionary monetary policy. D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift. Answer: B Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 80) Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run A) the unemployment rate will be the same rate as before the contractionary monetary policy. B) the unemployment rate will be larger than the rate before the expansionary monetary policy. C) the unemployment rate will be smaller than the rate before the expansionary monetary policy. D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift. Answer: A Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 81) The inflation rate has been constant for several years at 2 percent, and the unemployment rate has been stable at 5 percent over the same time period. Changes in government policy that cause the inflation rate to rise to 4 percent will A) have no effect on the unemployment rate. B) cause the unemployment rate to fall in the short run. C) cause the unemployment rate to rise to 9 percent in the short run. D) cause the unemployment rate to rise in the short run, but we cannot tell by how much. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

82) When the economy is at its natural rate of unemployment, A) it is still experiencing frictional and cyclical unemployment. B) it is still experiencing structural and cyclical unemployment. C) it is still experiencing frictional, seasonal, and structural unemployment. D) it is still experiencing frictional, structural, and cyclical unemployment. Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 83) All of the following would increase the natural rate of unemployment EXCEPT A) union activity restricts the mobility of labor. B) government licensing of teachers restricts employment. C) a mismatch of skills and jobs. D) an economic recession. Answer: D Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 84) Which one of the following would likely reduce the level of structural unemployment? A) increasing the minimum wage to encourage more people to work B) increasing the level of union bargaining power C) reducing unemployment insurance benefits D) strengthening restrictions on who can be licensed to enter certain professions Answer: C Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 85) Cyclical unemployment is negative when A) the inflation rate is positive. B) the economy is at the peak of a business expansion. C) the inflation rate is negative. D) the actual unemployment rate exceeds the natural rate. Answer: B Diff: 2 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 28 Copyright © 2021 Pearson Education, Inc.

86) Expansionary fiscal policy can be used to reduce cyclical unemployment by A) increasing long-run aggregate supply so as to raise real Gross Domestic Product (GDP). B) increasing aggregate demand so as to raise real Gross Domestic Product (GDP). C) raising nominal wages so as to encourage workers to work more hours. D) eliminating inefficiencies from labor markets. Answer: B Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 87) Explain the difference between active and passive policymaking. Answer: Active policymaking, or discretionary policymaking, is a situation when fiscal and monetary policymakers act in response to or in anticipation of some change in the overall economy. They act so as to move the economy more quickly toward full employment and greater price stability. Passive, or nondiscretionary, policymaking is policy that follows some rule rather than one that tries to respond to or anticipate some change in economic activity. Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 88) What is meant by the natural rate of unemployment? Answer: The natural rate of unemployment the rate of unemployment estimated to prevail in long-run macroeconomic equilibrium, when all workers and employers have fully adjusted to any changes in the economy. Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 89) What kinds of unemployment are associated with the natural rate of unemployment? Answer: The natural rate of unemployment is associated with unemployment that would exist even in long-run equilibrium. Frictional unemployment and structural unemployment both exist even when the economy is in long-run equilibrium, so is part of the natural rate of unemployment. Diff: 1 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

90) The natural rate of unemployment has increased in the United States and Europe over the last twenty years. What are things that could account for this? Answer: The natural rate of unemployment is affected by various rigidities. These rigidities include unions, government-imposed licenses, and other restrictions in labor markets, minimum wage laws, and welfare, and unemployment insurance. If these rigidities have become more important, then the labor markets are likely to suffer from greater structural unemployment and the natural rate of unemployment would be greater. Diff: 3 Topic: 17.1 Active versus Passive Policymaking and the Natural Rate of Unemployment Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 17.2 The Phillips Curve: A Rationale for Active Policymaking? 1) The trade-off between unemployment and inflation is known as A) the Keynesian mechanism. B) the Phillips curve. C) an expansionary gap. D) the misery curve. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 2) The short-run Phillips curve relationship implies that the inflation rate A) is higher when the actual unemployment rate is also higher. B) is higher when the actual unemployment rate is lower. C) is higher when the natural unemployment rate is also higher. D) is constant regardless of the actual unemployment rate. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

3) The short-run Phillips curve relationship indicates that A) only an anticipated change in aggregate demand affects the inflation rate or the unemployment rate. B) an unanticipated increase in aggregate demand raises the inflation rate but lowers the unemployment rate. C) an unanticipated increase in aggregate demand lowers the inflation rate but raises the unemployment rate. D) an unanticipated increase in aggregate demand raises both the inflation rate and the unemployment rate. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 4) The Phillips curve reflects the relationship between A) unemployment and real GDP. B) unemployment and inflation. C) inflation and real GDP. D) the price level and inflation. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 5) At one time, many economists believed that A) the government could determine what the Phillips curve should be. B) the government could determine the slope of the Phillips curve. C) the government could make the Phillips curve horizontal. D) the government could decide at which point on the Phillips curve the economy should be. Answer: D Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

6) Refer to the above figure. Line ABCD is a(n) A) aggregate demand curve. B) Phillips curve. C) discretionary-policy curve. D) natural rate of unemployment curve. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 7) Refer to the above figure. Government policy that moved the economy from A to B would be accomplished by A) an expansionary fiscal policy combined with a contractionary monetary policy. B) a contractionary fiscal policy combined with an expansionary monetary policy. C) a contractionary policy that would reduce the rate of inflation and would cause workers to remain unemployed longer than they were before. D) raising the minimum wage. Answer: C Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

8) Refer to the above figure. Suppose the economy is at C. If the government tried to reduce the unemployment rate to 3 percent, the new long-run outcome will be at point A) A. B) C. C) D. D) H. Answer: D Diff: 3 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 9) Refer to the above figure. Suppose the natural rate of unemployment is 5 percent. If the government tried to reduce unemployment to 4 percent and keep it there, it must A) raise unemployment benefits. B) accept a permanent inflation rate of 1 percent. C) generate higher and higher inflation rates or else people will adjust their behavior and the unemployment rate will return to 5 percent. D) use contractionary fiscal and expansionary monetary policy. Answer: C Diff: 3 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 10) Policymakers' attempts to use the Phillips curve to reduce the unemployment rate below the natural rate A) will be successful since the Phillips curve shows the relationship between the inflation rate and the unemployment rate. B) will be successful if monetary policy is used. C) will be unsuccessful if monetary policy is used since monetary policy leads to higher prices. D) will be unsuccessful since workers' expectations adjust to attempts to reduce unemployment below the natural rate. Answer: D Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

11) Refer to the above figure. The economy initially is at point A. The Fed unexpectedly increases the money supply. Which of the following statements are TRUE? A) In the short run, the economy will move from point A to point C. In the long run, the economy will move to point B. B) In the short run, the economy will move from point A to point C. In the long run, the economy will move back to point A. C) In the short run, the economy will move from point A to point B. In the long run, the economy will stay at point B. D) In the short run, the economy will move from point A to point B. In the long run, the economy will move back to point A. Answer: D Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 12) If households and businesses correctly anticipate the inflation rate, the unemployment rate A) will be the natural rate of unemployment. B) will be the cyclical rate of unemployment. C) will be inversely related to the expected inflation rate. D) will be positively related to the expected inflation rate. Answer: A Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

13) Unemployment that deviates from the natural rate of unemployment is referred to as A) frictional unemployment. B) cyclical unemployment. C) seasonal unemployment. D) structural unemployment. Answer: B Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 14) Suppose the Fed permanently increases the money supply by a given amount. Which of the following is most likely to occur in the long run as a result of this monetary policy action? A) an increase in employment B) a reduction in the real interest rate C) a decrease in unemployment D) none of these Answer: D Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

15) In the above figure, what does the line U represent? A) the Phillips curve B) the natural rate of unemployment C) potential unemployment D) full inflation rate of unemployment Answer: B Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 16) Use the above figure. Assuming that policy actions are unanticipated, if the economy is at point A and the policy makers want to get to point B, they could A) increase the money supply. B) decrease taxation. C) decrease the money supply. D) increase government spending. Answer: C Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

17) According to A.W. Phillips, an inverse relationship has existed between A) unemployment and interest rates. B) the rate of growth of the money supply and the unemployment rate. C) the inflation rate and unemployment rate. D) the inflation rate and the money supply. Answer: C Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 18) Which of the following curves shows the relationship between the unemployment rate and the rate of change in the price level? A) the new Keynesian aggregate supply curve B) the real business cycle curve C) the aggregate demand curve D) none of these Answer: D Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 19) According to the Phillips curve, A) there is a direct relationship between price-level changes and the level of unemployment rate. B) the unemployment rate is not affected by changes in the price level. C) price-level changes are not affected by changes in the unemployment rate. D) there is an inverse relationship between price-level changes and the unemployment rate. Answer: D Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

20) The Phillips curve shows the relationship between A) the rate of growth in real Gross Domestic Product (GDP) and the unemployment rate. B) the inflation rate and the unemployment rate. C) aggregate demand and the unemployment rate. D) aggregate supply and the unemployment rate. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 21) The downward slope of the Phillips curve suggests that A) an increase in the price level will depress nominal wages. B) an increase in the price level will increase the money supply. C) a decrease in the money supply will stimulate aggregate demand. D) policy makers face a trade-off between inflation and unemployment. Answer: D Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

22) Use the above figure. This graph is known as A) the Laffer curve. B) the short-run Phillips curve. C) the NAIRU relationship. D) the Keynesian curve. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

23) Use the above figure. Graph ________ correctly depicts the short-run Phillips Curve. A) A B) B C) C D) D Answer: D Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 24) Use the above figure. The long-run Phillips curve is best depicted by graph A) A. B) B. C) C. D) D. Answer: C Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

25) According to economists who support passive policymaking, A) there is no difference between the effect of an anticipated change in aggregate demand and the effect of an unanticipated change in aggregate demand of an identical amount. B) workers always consider a change in nominal wages to be a change in real wages. C) expansionary policies can reduce unemployment without increasing the price level. D) policies that attempt to exploit the Phillips curve trade-off will eventually become ineffective for reducing unemployment. Answer: D Diff: 3 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 26) Historical evidence suggests that A) the Phillips curve is horizontal. B) once policy makers attempted to exploit a short-run Phillips curve trade-off, it disappeared. C) shifts in long-run aggregate supply do not affect real output. D) inflation rates are lowest when unemployment rates are also low. Answer: B Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 27) An unexpected decrease in aggregate demand A) causes the price level to fall and the unemployment rate to rise. B) causes the price level to fall and the unemployment rate to fall. C) causes the price level to rise and the unemployment rate to rise. D) causes the price level to rise and the unemployment rate to fall. Answer: A Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

28) An unexpected increase in aggregate demand A) causes the price level to fall. B) causes both the unemployment rate and the price level to rise. C) causes the unemployment rate to rise. D) causes the price level to rise. Answer: D Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 29) An unexpected increase in aggregate demand A) will reduce the price level. B) will increase the average duration of unemployment. C) will reduce the unemployment rate. D) will increase real GDP, but will not affect the rate and duration of unemployment. Answer: C Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

30) Refer to the above figure. Suppose the economy is at point B and the central bank adopts expansionary monetary policy. In the short run, this will result in A) the economy moving towards point A. B) the economy staying at point B. C) the economy moving towards point C. D) an outcome that cannot be predicted, as not enough information is given. Answer: A Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 31) Refer to the above figure. Suppose the economy is at point B and the central bank adopts contractionary monetary policy. In the short run, this will result in A) the economy moving towards point A. B) the economy staying at point B. C) the economy moving towards point C. D) an outcome that cannot be predicted, because not enough information is given. Answer: C Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

32) The short-run Phillips curve and the long-run Phillips curve are different because A) the expected rate of inflation is always zero in the long run, while it is a positive number in the short run. B) the expected rate of inflation is always zero in the short run, while it is a positive number in the long run. C) the actual and expected rate of inflation are equal in the short run. D) the actual and expected rate of inflation are equal in the long run. Answer: D Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 33) The Phillips Curve will shift downward if A) the expected inflation rate falls. B) the price level falls. C) the overall employment rate remains unchanged. D) the unexpected inflation rate rises. Answer: A Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 34) The Phillips Curve will shift when A) the expected inflation rate changes. B) the price level falls. C) the overall employment rate remains unchanged. D) none of these Answer: A Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

35) According to economist A.W. Phillips, A) there is no trade-off between inflation and unemployment. B) high inflation rates are associated with low unemployment rates. C) unemployment can be effectively combated by raising wages. D) higher rates of inflation are associated with higher rates of unemployment. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 36) The Phillips curve is A) a positive relationship in the long run between the rate of inflation and the rate of unemployment. B) a negative relationship between the inflation rate and the unemployment rate, at least in the short run. C) a positive relationship between the unemployment rate and the real Gross Domestic Product (GDP) level. D) a positive relationship between price stability and constant, small-increment changes in the fiscal policy on the part of the Fed. Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 37) What happens to the Phillips curve when future inflation is expected to rise? A) The curve shifts to the right. B) The curve shifts to the left. C) The curve becomes horizontal. D) The Phillips curve is unaffected. Answer: A Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

38) The short-run Phillips curve suggests what policymaking implications? A) Active policymaking does not yield any predictable results. B) Passive policymaking is more effective than active policymaking. C) Using discretionary policies, it may be possible to achieve just the right unemployment and inflation mix. D) Maintaining both the inflation and unemployment rates at low levels is possible if policymakers will rely solely on nondiscretionary policymaking. Answer: C Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 39) Critics of the Phillips curve argue that in the long run, A) there is a trade-off between unemployment and inflation. B) for any given unemployment level, there is a corresponding inflation rate to which the economy will automatically revert. C) employees are not able to anticipate future rates of inflation, and therefore unemployment can always be reduced by inflating the economy. D) there is no trade-off between inflation and unemployment because workers' expectations adjust to any systematic attempts to reduce unemployment below the natural rate. Answer: D Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 40) The Phillips curve shows A) the relationship between the rate of interest and planned investment. B) the relationship between the money supply and the price level. C) that an increase in government spending will decrease real national income. D) that when inflation is higher, the unemployment rate falls. Answer: D Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

41) The Phillips curve trade-off relationship implies that A) the government can fine-tune the economy and generate both the natural rate of unemployment and zero inflation. B) the government can fine-tune the economy and pick the most preferred combination of unemployment and inflation. C) low unemployment can be obtained only by generating rapidly increasing inflation. D) there is no relationship between inflation and unemployment, at least in the long run. Answer: B Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 42) A trade-off between unemployment and inflation is reflected in the A) natural rate of unemployment. B) Phillips Curve. C) economic stability. D) nonaccelerating inflation rate of unemployment (NAIRU). Answer: B Diff: 1 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 43) What is the Phillips curve? What does the Phillips curve suggest about optimal policy? Answer: The Phillips curve shows a trade-off between unemployment and inflation. With the unemployment rate on the horizontal axis and inflation on the vertical, the Phillips curve is pictured as a downward-sloping curve. If the curve is a suitable representation of the economy, in the short run policy makers can choose the combination of inflation and unemployment that they want. Diff: 2 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

44) Suppose the economy has been experiencing zero inflation and 5 percent unemployment for several years. The government decides to lower the unemployment by generating some inflation. Using a graph, show what the short-run effects would be and what would happen in the long run. What would the government have to do to keep the unemployment rate at 3 percent? Answer:

See above figure. The natural rate of unemployment is 5 percent. The government inflates by pursuing expansionary monetary policy and the economy moves to B, with an unemployment rate of 3 percent and inflation rate of 5 percent. In the long run, the Phillips curve shifts to the right and the unemployment rate goes back to 5 percent. For the government to maintain 3 percent unemployment, it would have to keep increasing the inflation rate (point D). Diff: 3 Topic: 17.2 The Phillips Curve: A Rationale for Active Policymaking? Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles 1) When Bono forms his future expectations for the economy using all available current data and his own judgment about future policy effects, this is known as A) the policy irrelevance proposition. B) rational expectations. C) irrational expectations. D) the new classical theory. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

2) Which of the following hypotheses states that people combine the effects of past policy changes on important economic variables with their own judgment about the future effects of future and current policy changes? A) policy irrelevance hypothesis B) rational expectations hypothesis C) life cycle hypothesis D) real business cycle hypothesis Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 3) According to the rational expectations hypothesis, monetary policy can have effects on such variables as real Gross Domestic Product (GDP) in the short run A) only when the policy is anticipated. B) only when the policy is unsystematic and unanticipated. C) regardless of whether the policy is anticipated or unanticipated. D) when the central bank implements policy actions as anticipated. Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 4) The rational expectations hypothesis is a theory that states that A) individuals can predict the future perfectly, at least with respect to macroeconomic variables like the interest rate and inflation. B) people make their economic plans by using all available past and present information and their understanding about how the economy operates. C) people make their economic plans in an irrational, intuitive manner. D) people make their economic plans by relying on the policy statements made by the President and by leaders in Congress. Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

5) According to the rational expectations hypothesis, an individual's assessment of future economic performance A) does not consider past performance. B) does not consider the impact of inflation. C) only considers past performance. D) considers both past performance and current economic policy actions. Answer: D Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 6) One economic hypothesis states that people form expectations by combining the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes, and then react accordingly. This is known as the A) relevance hypothesis. B) contrary opinion hypothesis. C) rational expectations hypothesis. D) structural hypothesis. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 7) The hypothesis that people combine the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes is the basis of the A) adaptive hypothesis. B) short-run Phillips curve hypothesis. C) rational expectations hypothesis. D) demand-pull inflation hypothesis. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

8) Rational expectations theory suggests that short-run stabilization policy A) is best achieved with monetary policy. B) is best achieved with fiscal policy. C) is equally easy to achieve with monetary or fiscal policy. D) is not effective in stabilizing the economy. Answer: D Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 9) If you accept the rational expectations hypothesis as accurate, what would you tell monetary policy makers who ask you how to more effectively manage the economy? A) Consumers do not understand the workings of monetary policy, so discretionary and nondiscretionary policies are equally effective. B) Individuals do understand how monetary policy works, so consistency and predictability are the keys to effective policy making. C) Individuals base their economic expectations solely on current information, so repeating policy decisions that have worked in the past is the most effective path to take. D) Only unanticipated policies will be effective once individuals understand how monetary policy works. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 10) Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy. According to the rational expectation hypothesis, the result is A) an increased price level in the short run, but no effect on price level in the long run. B) decreased real Gross Domestic Product (GDP) in the short run, but increased real Gross Domestic Product (GDP) in the long run. C) increased real Gross Domestic Product (GDP) and increased employment in the long run. D) an increased price level, but no change in real Gross Domestic Product (GDP) in the long run. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

11) In the above figure, suppose the economy is initially at a short-run equilibrium at point D and there is an unanticipated increase in the money supply. Which point represents the new short-run equilibrium? A) A B) B C) C D) D Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 12) In the above figure, suppose the economy is in equilibrium at point A. The Fed engages in an expansionary monetary policy that is fully anticipated by the public. Other things being equal, what point represents the new equilibrium according to the rational expectations theory? A) A B) B C) C D) D Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

13) In the above figure, suppose the economy is currently in equilibrium at point C. Applying rational expectations theory, what happens if the Fed announces that it is decreasing the money supply and follows through on its statement? A) The price level will increase. B) Real Gross Domestic Product (GDP) per year will increase. C) Real Gross Domestic Product (GDP) per year will decrease. D) The price level will decrease. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 14) Proponents of the policy irrelevance proposition believe that, under the assumption of rational expectations, the unemployment rate will A) go up whenever the Fed announces an anticipated monetary policy change. B) go down whenever the Fed announces an anticipated fiscal policy change. C) equal the natural rate of unemployment in the long run, regardless of any monetary policy actions. D) always be higher in the long run than the natural rate of employment. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 15) The idea that anticipated monetary policy cannot affect real variables such as real Gross Domestic Product (GDP) or employment is known as A) the Keynesian hypothesis. B) the policy irrelevance proposition. C) the job search model. D) the monetary velocity theory. Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

16) According to the policy irrelevance proposition, monetary policy can affect real variables A) in both the short run and the long run. B) in the long run only. C) only in the short run when the policy is unanticipated. D) as long as the policy is fully anticipated. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 17) One key implication of rational expectations is that A) anticipated monetary policy has no effect on the price level. B) anticipated monetary policy cannot affect the level of real Gross Domestic Product (GDP). C) unanticipated monetary policy has no effect on the economy but anticipated monetary policy does have an effect on the economy. D) both unanticipated monetary policy and anticipated monetary policy have an effect on the economy. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18) When workers and employers correctly anticipate the rate of inflation A) there will be no unemployment. B) there will be only underemployment. C) unemployment will be at the natural rate. D) workers will underestimate the real wage. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 19) In the aggregate supply-aggregate demand model, if every person in the economy correctly anticipates the inflation rate, the unemployment rate will A) be negative. B) be more than the natural rate of unemployment. C) equal the natural rate of unemployment. D) equal zero. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

20) In the absence of rational expectations, an expansionary monetary policy should in the short run A) shift the aggregate supply function. B) increase real Gross Domestic Product (GDP) and the price level. C) increase the rate of unemployment. D) generate stagflation. Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 21) In the short run, an unanticipated increase in the inflation rate would A) increase the unemployment rate. B) decrease the unemployment rate. C) unambiguously improve the misery index. D) lower the natural rate of unemployment. Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 22) If all the assumptions underpinning the policy irrelevance proposition are in place, fully anticipated monetary policy will A) affect the unemployment rate but have no impact on the level of real Gross Domestic Product (GDP). B) have an impact on real Gross Domestic Product (GDP) but cannot alter the level of unemployment. C) effectively alter both the rate of unemployment and the level of real Gross Domestic Product (GDP). D) not change either the level of real Gross Domestic Product (GDP) or the unemployment rate. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

23) According to the policy irrelevance proposition, A) monetary policy can effectively reduce the rate of unemployment in the short run. B) workers are not rational in the long run. C) the Phillips curve slopes upward, not downward as traditionally assumed. D) expansionary monetary policy will only lead to a higher rate of inflation in the long run. Answer: D Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 24) According to the policy irrelevance proposition, the impact of an anticipated expansionary monetary policy will be to A) increase the price level in the long run. B) increase the real Gross Domestic Product (GDP) in the long run. C) decrease the natural rate of unemployment. D) decrease the price level and the unemployment rate. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 25) According to the policy irrelevance proposition, real Gross Domestic Product (GDP) is determined by A) the economy's aggregate demand curve. B) the economy's long-run aggregate supply curve. C) the rate of inflation only. D) a combination of fiscal policy and monetary policy. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 26) One key assumption behind the policy irrelevance proposition is that A) wages are "sticky" downward. B) prices are "sticky" upward. C) the rational expectations hypothesis holds. D) markets are not purely competitive. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

27) The rational expectations hypothesis indicates that a monetary policy designed to alter real Gross Domestic Product (GDP) will fail unless A) there are unanticipated changes in the money supply. B) wages and prices are flexible. C) labor unions have long-term contracts. D) changes in the money supply are completely anticipated. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 28) A key implication of the policy irrelevance proposition is that A) only fully anticipated policy actions can influence real Gross Domestic Product (GDP). B) only unanticipated policy actions can influence real Gross Domestic Product (GDP). C) the rational expectations hypothesis is incorrect. D) none of these. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 29) Under the rational expectations hypothesis, if wages adjust rapidly to new information about intended policy actions, monetary policy can have an effect A) in both the short and the long run. B) in the long run, but not the short run. C) only in the short run and only if the policy is unanticipated. D) only in the long run and only if the policy is fully anticipated. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 30) Under the rational expectations hypothesis, if wages adjust rapidly to new information about intended policy actions, the only time that changes in government policies have real effects is when A) the changes are unanticipated. B) the changes involve fiscal policy. C) the changes involve monetary policy. D) the changes affect aggregate demand. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 56 Copyright © 2021 Pearson Education, Inc.

31) Suppose there is an oil supply shock to the U.S. economy due to an embargo by major oil producing nations. According to the real business cycle theory, the supply shock will, other things being equal, A) push real Gross Domestic Product (GDP) upward in the short run but downward in the long run. B) push the economy into an expansionary phase of the business cycle. C) cause real Gross Domestic Product (GDP) to decline both in the short run and in the long run. D) cause economy-wide deflation. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 32) The short run aggregate supply (SRAS) curve shifts left when oil supply shocks occur because A) fewer goods are produced at any given price level due to higher oil prices. B) oil consumption will increase at any given price level. C) average total cost will fall at any given output level. D) the price level will fall at any given output level. Answer: A Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 33) A reduction in world oil supplies is likely to cause A) an increase in aggregate demand and a decrease in the equilibrium price level. B) a decrease in equilibrium price level and an increase in real Gross Domestic Product (GDP). C) an increase in equilibrium price level and an increase in real Gross Domestic Product (GDP). D) a reduction in aggregate supply, a rise in the equilibrium price level, and a fall in real Gross Domestic Product (GDP). Answer: D Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

34) According to the real business cycle theory, an increase in energy prices will A) increase both real Gross Domestic Product (GDP) and the price level. B) increase real Gross Domestic Product (GDP) but not change the price level. C) decrease real Gross Domestic Product (GDP) but increase the price level. D) decrease both real Gross Domestic Product (GDP) and the price level. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 35) Real business cycle theory explains variations in prices, employment, and real Gross Domestic Product (GDP) by focusing on A) changes in real variables such as supply shocks, technological changes, and shifts in the composition of the labor force. B) anticipated monetary policies enacted by the Fed. C) the effects of the Phillips curve. D) anticipated changes in fiscal policy enacted by the government. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 36) The rational expectations hypothesis states that A) the government combines the effects of past policy changes on important economic variables with accepted views about the effects of current and future policy changes. B) people combine the effect of past policy changes on important economic variables with unpredictable views on what policy makers will do to determine what the economy will do in the future. C) people combine the effects of past policy changes on important economic variables with their own judgments about the future effects of current and future policy changes. D) people understand how the economy operates and use their knowledge in making expectations about the future, but are uninformed about how fiscal and monetary policies are made and carried out. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

37) Which of the following statements is consistent with the rational expectations hypothesis? A) When it comes to making personal economic decisions, people rarely behave in a rational manner. B) People combine the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes. C) When it comes to making personal economic decisions, people always behave in a rational manner. D) Every person in the economy is always correct in her predictions about current and future policy changes. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 38) According to the rational expectations hypothesis, individuals form their expectations about future values of economic variables by all of the following EXCEPT A) past information. B) current information. C) their understanding of how the economy operates. D) formal macroeconomic theories. Answer: D Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 39) People combining the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes is consistent with A) frictional unemployment. B) the rational expectations hypothesis. C) active policymaking. D) passive policymaking. Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

40) According to the rational expectations hypothesis, the attempt by the government to reduce unemployment below its natural rate through expansionary policies will A) succeed in the short run and can succeed in the long run as long as the government makes it clear what its goals are. B) succeed because the government knows how people will react to their policies and will adjust their policies accordingly. C) fail because people will figure out what the government is doing and alter their expectations and their behavior in ways that counteract the government policy. D) fail because the economy can never achieve an unemployment rate below the natural level. Answer: C Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

41) Refer to the above figure. Suppose the economy is in equilibrium at point A. If the Fed tries to stimulate the economy by undertaking an expansionary monetary policy action and this is NOT expected by the people in the economy, we would expect to see A) aggregate demand increases, real GDP increases, and the price level increases. In the long run, aggregate supply would increase and the new long-run equilibrium would be point B. B) aggregate demand increases, real GDP increases, and the price level increases in the short run. In the long run, people realize the real situation, causing the short-run aggregate supply curve to shift up. Real GDP returns to $14 trillion, and the price level increases to 150. C) aggregate demand increases but people would anticipate this, causing the short-run aggregate supply curve to shift up at the same time, with the new equilibrium of $14 trillion of real GDP and a price level of 100. D) aggregate supply shifts up as people anticipate the effects of the expansionary monetary system. In the short run, real GDP falls to $13 trillion and the price level rises to 120. In the long run, real GDP returns to $14 trillion, and the price level increases further, to 150. Answer: B Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

42) Refer to the above figure. Suppose the economy is in equilibrium at point A. If rational expectations exist, an increase in aggregate demand caused by an anticipated increase in the money supply will cause the economy to A) stay at point A. B) move to point B. C) move to point C. D) move to point D. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 43) Refer to the above figure. Suppose the economy is in long-run equilibrium at point A, and the government initiates an expansionary monetary policy to increase aggregate demand. Which of the following is a TRUE statement concerning the differences between what happens when the central bank action is unanticipated and when it is anticipated? A) The new long-run equilibrium when the increase in aggregate demand is unanticipated is point B while the new long-run equilibrium when the increase in aggregate demand is anticipated is point C. B) The new long-run equilibrium when the increase in aggregate demand is unanticipated is point B while the new long-run equilibrium when the increase in aggregate demand is anticipated is point A. C) The new long-run equilibrium will be point C in either case. When the increase in aggregate demand is unanticipated, the economy moves to B in the short run, but when the increase in aggregate demand is anticipated, short-run aggregate supply shifts when the aggregate demand curve shifts, and the economy moves immediately to point C. D) The new long-run equilibrium is point C in either case. When the increase in aggregate demand is unanticipated, the new short-run equilibrium is point B, but when the increase in aggregate demand is anticipated the new short-run equilibrium is point D. Answer: C Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

44) Suppose that the economy is in long-run equilibrium and the central bank decided to engage in unexpected expansionary policy by increasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of expansionary policy in the long run? A) The unemployment rate will increase, real Gross Domestic Product (GDP) will increase and the price level will increase. B) The unemployment rate will decrease, real Gross Domestic Product (GDP) will decrease and the price level will decrease. C) The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will increase. D) The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will decrease. Answer: C Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 45) Suppose that the economy is in long-run equilibrium and the government decided to engage in unexpected contractionary policy by decreasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of contractionary policy in the long run? A) The unemployment rate will increase, real Gross Domestic Product (GDP) will increase and the price level will increase. B) The unemployment rate will decrease, real Gross Domestic Product (GDP) will decrease and the price level will decrease. C) The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will increase. D) The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will decrease. Answer: D Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

46) Suppose that the economy is in long-run equilibrium and the government decided to engage in expected expansionary policy by increasing the money supply. If we assume rational expectations, which of the following statements is correct about the effect of expansionary policy in the long run? A) The unemployment rate will increase, real Gross Domestic Product (GDP) will increase and the price level will increase. B) The unemployment rate will decrease, real Gross Domestic Product (GDP) will decrease and the price level will decrease. C) The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will increase. D) The unemployment rate will remain unchanged, real Gross Domestic Product (GDP) will remain unchanged and the price level will decrease. Answer: C Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 47) Under the assumption of rational expectations, fiscal and monetary policy changes are effective in the short run A) all of the time. B) only when the short-run aggregate supply curve is the same as the long-run aggregate supply curve. C) only when the policy changes leave the position of the aggregate demand curve unaffected. D) only when the policy changes are unanticipated. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

48) If the economy is at long-run equilibrium and its central bank initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy, the result is A) decreased prices, but no change in real Gross Domestic Product (GDP). B) decreased prices and decreased real Gross Domestic Product (GDP) in the short run, but only decreased prices in the long run. C) decreased real Gross Domestic Product (GDP) in the short run and decreased prices in the long run. D) decreased real Gross Domestic Product (GDP) and prices in both the short run and the long run. Answer: A Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 49) Which statement is TRUE when rational expectations exist and there is a change in monetary policy which is expected? A) The change in monetary policy leads to a change in aggregate demand that leads to a temporary short-run equilibrium that is different from the long-run equilibrium. B) The change in monetary policy leads to a simultaneous shift of the short-run aggregate supply curve. C) The change in monetary policy lead to a simultaneous shift in the long-run aggregate supply curve. D) The change in monetary policy does not change equilibrium in either the short-run or longrun. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

50) Which statement is TRUE when rational expectations exist and there is a change in monetary policy which is unexpected? A) The change in monetary policy leads to a change in aggregate demand that leads to a temporary short-run equilibrium that is different from the long-run equilibrium. B) The change in monetary policy leads to a simultaneous shift of the short-run aggregate supply curve. C) The change in monetary policy lead to a simultaneous shift in the long-run aggregate supply curve. D) The change in monetary policy does not change equilibrium in either the short-run or longrun. Answer: A Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 51) Under the assumption of rational expectations, people's expectations about the economy are an important determinant of A) the short-run aggregate supply curve. B) the long-run aggregate supply curve. C) the short-run aggregate demand curve. D) the long-run aggregate demand curve. Answer: A Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 52) The idea that anticipated monetary policy changes cannot affect real Gross Domestic Product (GDP) or employment is known as A) the systematic policy hypothesis. B) the policy irrelevance theorem. C) the bounded rationality hypothesis. D) the Keynesian hypothesis. Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

53) Fully anticipated monetary policy actions cannot alter either the rate of unemployment or the level of real GDP. This statement is A) the policy irrelevance proposition. B) the nonaccelerating inflation rate of unemployment theory. C) the Phillips curve. D) not supported by any economic theory. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 54) Which of the following is NOT an inference of the rational expectations hypothesis? A) Government policy actions have no real effects in the short run unless the actions are unanticipated. B) Government policy actions have no real effects in the long run. C) Government policy actions that are anticipated have no real effects in the short run. D) Government policy actions that are unanticipated have no monetary effects in the short run. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 55) If people do NOT always make the same mistakes when forecasting the future, then A) rational expectations are irrational. B) the Fed can control monetary policy and determine real variables such as real GDP. C) the policy irrelevance theorem holds. D) fiscal policy is more effective than monetary policy at fine-tuning the economy. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 56) Under the assumption of rational expectations, real GDP is determined by A) the economy's aggregate demand curve. B) monetary policy but not by fiscal policy. C) a combination of monetary and fiscal policy. D) the long-run aggregate supply curve. Answer: D Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

57) Real business cycle theory explains changes in employment and output by focusing on A) real supply-side factors. B) changes in monetary policy. C) changes in fiscal policy. D) the interaction of fiscal and monetary policies. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 58) According to the real business cycle theory, which of the following would be a real disturbance to the economy? A) change in the required reserve ratio B) reduction in the money supply C) increase in the labor force D) increase in the price level Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 59) Suppose the economy is in equilibrium when there is a change in environmental policy that bans all pesticides and herbicides on farmland. We would expect to observe A) a decrease in aggregate supply and an increase in aggregate demand. B) a decrease in both real output and the natural rate of unemployment. C) a decrease in real output and an increase in the natural rate of unemployment. D) a decrease in real output and an increase in the price level. Answer: D Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 60) According to the real business cycle theory, which of the following is a TRUE statement about the effects of an oil shock in the 1970s? A) The shock affected real variables only and did not affect nominal variables. B) The shock shifted the short-run aggregate supply curve but not the long-run aggregate supply curve. C) The natural rate of unemployment remained unchanged, but employment levels did decline. D) Relative prices changed but there was no impact on the price level in general. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 68 Copyright © 2021 Pearson Education, Inc.

61) According to the real-business-cycle perspective, A) the economy cannot be stabilized by active policy actions. B) the Phillips curve is very important. C) active policymaking is important. D) passive policymaking is important. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 62) The rational expectations hypothesis suggests that A) unanticipated fiscal policy actions are more powerful than monetary policy actions. B) anticipated monetary policy actions are more powerful than fiscal policy actions. C) fiscal policy actions only work when accompanied by changes in the money supply. D) anticipated fiscal and monetary policy actions are not effective in stabilizing the economy. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 63) The rational expectations hypothesis states that A) individuals always behave irrationally. B) prices do not adjust in a downward direction. C) people incorporate past and present economic information into decision making. D) consumers do not understand the effects of monetary and fiscal policy. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

64) The policy irrelevance proposition implies that A) unanticipated monetary policy actions are equally effective in stimulating both aggregate demand and aggregate supply. B) anticipated monetary policy actions are effective in stimulating aggregate supply, but they are not effective in stimulating aggregate demand. C) anticipated monetary policy actions are effective in increasing real Gross Domestic Product (GDP), but they do not reduce unemployment. D) anticipated monetary policy actions are ineffective in generating changes in real Gross Domestic Product (GDP). Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 65) A hypothesis that assumes that people combine the effects of past policy changes on economic events and their own judgment about future effects of current and future policy changes is known as A) adaptive expectations. B) irrelevant expectations. C) rational expectations. D) active expectations. Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 66) Which of the following holds that economic decision making on all levels is unbiased and is based on all available information? A) Keynesian cycle theory B) rational expectations based theory C) adaptive expectations based theory D) bounded rationality theory Answer: B Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

67) Adding the assumption of pure competition and complete flexibility of all prices and wages to the rational expectations hypothesis yields a theory that provides support for A) passive policymaking. B) active policymaking. C) discretionary policymaking. D) irrelevant policymaking. Answer: A Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 68) The proposition that policy actions have no real effects in the short run if the policy actions are anticipated is known as A) the unemployment stabilization proposition. B) the policy irrelevance proposition. C) the policy illusion proposition. D) the Keynesian proposition. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 69) Those who accept both the rational expectations hypothesis and the assumption of flexibility of wages and price would likely argue that A) saving and investment do not contribute to economic growth. B) active policy making does not contribute to economic stability. C) if policy makers are willing to accept a high inflation rate, they can reduce unemployment to a point below the natural rate. D) policy makers can eliminate fluctuations in the level of business activity with careful planning of a widely publicized monetary policy. Answer: B Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

70) According to a theory that relies on the rational expectations hypothesis and the assumption that wages and prices are flexible, why do anticipated expansionary monetary actions NOT boost real GDP? A) Anticipated expansionary monetary policy actions do not increase aggregate demand. B) The short-run aggregate supply curve shifts upward simultaneously with the rightward shift of aggregate demand. C) The short-run aggregate supply curve shifts downward simultaneously with the upward shift of aggregate demand. D) The higher interest rates associated with anticipated expansionary monetary policy actions will dampen investment spending. Answer: B Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 71) One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that A) expansionary monetary policy will be effective in combating recessions. B) contractionary monetary policy will be effective in combating inflation. C) only predictable policy actions by the Fed will have an effect on the real economy. D) only unpredictable policy actions by the Fed will have an effect on the real economy. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 72) The rational expectations hypothesis suggests that if wages and prices are flexible, A) unanticipated monetary policy actions can shift the long-run aggregate supply curve but cannot shift the aggregate demand curve. B) anticipated monetary policy actions can affect nominal variables, but not real variables. C) unanticipated monetary policy actions can affect real variables, but not nominal variables. D) growth in the money supply can alter real variables only if the growth is anticipated. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

73) The hypothesis suggesting that people combine the effects of past policy changes on economic variables with their own judgment about the future effects of current and future economic policy is referred to as the A) active expectations hypothesis. B) passive expectations hypothesis. C) rational expectations hypothesis. D) adaptive expectations hypothesis. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 74) The idea that policy actions have no real effects in the short run if they are anticipated and no real effects in the long run is called the A) Keynesian proposition. B) policy irrelevance proposition. C) adaptive proposition. D) money illusion proposition. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 75) The rational expectations hypothesis is based on the assumption that A) individuals combine effects of past policy actions with their own judgment about future policy effects and changes when forming their expectations. B) individuals adapt in response to past policy actions and changes without looking ahead when forming their expectations. C) firms pay above equilibrium wages to their employees. D) most firms operate in a less than competitive environment. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

76) The policy irrelevance proposition suggests that the policy effects on the economy primarily occur as a result of A) fiscal policy measures. B) unanticipated changes in policy. C) nondiscretionary fiscal policy. D) illusion about the value of money. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

77) Refer to the above figure. The rational expectations hypothesis implies that an anticipated increase in aggregate demand from AD1 to AD2 will A) move the economy from c to b. B) move the economy from a to b. C) move the economy from a to c. D) shift the aggregate supply (AS) curve to the right. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

78) Refer to the above figure. The rational expectations hypothesis implies that an anticipated decrease in aggregate demand from AD2 to AD1 will A) move the economy from b to c. B) move the economy from b to a. C) move the economy from c to a. D) shift the aggregate supply (AS) curve to the left. Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 79) According to the theory based on rational expectations and flexible wages and prices, A) fiscal policy has less effect on real Gross Domestic Product (GDP) than monetary policy in the long run. B) monetary policy has less effect on real Gross Domestic Product (GDP) than fiscal policy in the long run. C) neither fiscal nor monetary policy influence real Gross Domestic Product (GDP) in the long run. D) only the combination of discretionary fiscal policy and conservative monetary policy can affect real Gross Domestic Product (GDP) in the long run. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 80) The rational expectations hypothesis is based on all the following assumptions EXCEPT A) use of judgment about effects of future policy actions. B) use of knowledge of effects of past policy actions. C) understanding of how the economy operates. D) understanding that prices are sticky. Answer: D Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

81) In the above figure, if we start at AD1 and SRAS1, and the money supply increases unexpectedly, what would be the short-run equilibrium even with rational expectations? A) E1 B) E2 C) E3 D) P1 Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 82) In the above figure, if we start at AD1 and SRAS1, and the money supply increases unexpectedly, what would be the long-run equilibrium? A) E1 B) E2 C) E3 D) P1 Answer: C Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking

83) In the above figure, if we start at AD1 and SRAS1, and the money supply increases unexpectedly, what causes the economy to get to the long-run equilibrium? A) People's expectations will revise after a short-run gain in output, wages will fall, and SRAS will shift leftward. B) People's expectations will revise after a short-run gain in output, wages will rise, and SRAS will shift rightward. C) People's expectations will revise after a short-run loss in output, wages will fall, and SRAS will shift leftward. D) People's expectations will revise after a short-run gain in output, wages will rise, and SRAS will shift leftward. Answer: D Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-12: Explain how monetary policy influences interest rates, aggregate demand, real GDP and inflation AACSB: Analytical thinking 84) The policy irrelevance proposition states that A) only relatively large expected changes in monetary policy impact the economy. B) anticipated changes in monetary policy are ineffective in changing real Gross Domestic Product (GDP). C) only statements from the White House have impact on the economy. D) in the short run unanticipated changes in monetary policy are ineffective in changing real Gross Domestic Product (GDP). Answer: B Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 85) Real business cycle theory emphasizes the effect of ________ on real Gross Domestic Product (GDP). A) government spending B) the money supply C) aggregate supply shocks D) aggregate demand shocks Answer: C Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

86) When "stagflation" occurs, A) the economy experiences higher inflation rates and lower unemployment rates at the same time. B) the economy experiences lower inflation rates and higher unemployment rates at the same time. C) the economy experiences lower inflation rates and lower unemployment rates at the same time. D) the economy experiences higher inflation rates and higher unemployment rates at the same time. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 87) The real business cycle theory A) indicates that supply side shocks cause most business cycles. B) indicates that demand side shocks cause most business cycles. C) indicates that unanticipated changes in the money supply cause most business cycles. D) indicates that frequent fiscal policy actions cause most business cycles. Answer: A Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 88) The real business cycle theory is based on all of the assumptions below EXCEPT A) the absence of rationality among people. B) flexible wages. C) pure competition. D) flexible prices. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

89) Which of the following holds that business cycles are primarily due to changes in technology and does NOT invoke any monetary or demand-side forces? A) the real business cycle theory B) the efficiency wage theory C) rational expectations hypothesis D) adaptive expectations hypothesis Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 90) Real business cycles are mostly a result of A) discretionary fiscal policy. B) abrupt changes in monetary policy. C) increases in the budget deficit and national debt. D) shocks to the aggregate supply side of the economy. Answer: D Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 91) Which of the following would NOT cause a real business cycle? A) a change in technology B) a change in the composition of the labor force C) a change in the money supply D) a sustained change in the price of oil Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 92) During the 1970s, the shocks to the United States' economy resulted in A) an increase in the unemployment rate, but a decrease in the inflation rate. B) a decrease in the unemployment rate, but an increase in the inflation rate. C) an increase in both the unemployment rate and the inflation rate. D) a decrease in both the unemployment rate and the inflation rate. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

93) The real business cycle theory A) is an extension of the Keynesian view of business cycles. B) is an extension of the adaptive expectations theory of business cycles. C) suggests that instability is caused by shifts in the long-run aggregate supply curve. D) suggests that instability is caused by shifts in the aggregate demand curve caused by changing consumer confidence in the economy. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 94) Stagflation means a A) high rate of inflation coupled with a high rate of unemployment. B) high rate of inflation coupled with a very low rate of unemployment. C) low rate of inflation coupled with a very high rate of unemployment. D) low rate of inflation coupled with a rate of unemployment below the natural rate. Answer: A Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

95) In the above figure, starting at E1, if there is a supply shock that is permanent, the A) aggregate supply would shift to SRAS1 and LRAS1 would shift to LRAS0. B) aggregate supply would shift to SRAS1 and LRAS0 would shift to LRAS1. C) aggregate supply would shift to SRAS2 and LRAS0 would shift to LRAS1. D) aggregate supply would shift to SRAS1 and then return to SRAS0. Answer: C Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 96) In the above figure, starting at E1, if there is a supply shock that is temporary, the A) aggregate supply would shift to SRAS0 and LRAS1 would shift to LRAS0. B) aggregate supply would shift to SRAS1 and LRAS0 would shift to LRAS1. C) aggregate supply would shift to SRAS2 and LRAS0 would shift to LRAS1. D) aggregate supply would shift to SRAS1 and then return to SRAS0. Answer: D Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

97) In the above figure, starting at E3, if there is an increase in technology that causes a permanent increase in production capabilities, A) aggregate supply would shift to SRAS0 and LRAS1 would shift to LRAS0. B) aggregate supply would shift to SRAS1 and LRAS0 would shift to LRAS1. C) aggregate supply would shift to SRAS2 and LRAS0 would shift to LRAS1. D) aggregate supply would shift to SRAS1 and then return to SRAS0. Answer: A Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 98) In the above figure, starting at E3, if there is an increase in technology that causes a temporary increase in production capabilities, A) aggregate supply would shift to SRAS0 and LRAS1 would shift to LRAS0. B) aggregate supply would shift to SRAS1 and LRAS1 would shift to LRAS1. C) aggregate supply would shift to SRAS2 and LRAS1 would shift to LRAS1. D) aggregate supply would shift to SRAS1 and then return to SRAS2. Answer: D Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 99) In the case of a permanent negative supply shock, A) only the long-run aggregate supply curve shifts leftward. B) only the short-run aggregate supply curve shifts leftward. C) both the long-run and short-run aggregate supply curves shift leftward. D) there are no shifts in either the long-run or short-run aggregate supply curve. Answer: C Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking

100) Using a graph, show and explain the difference between an anticipated and an unanticipated increase in aggregate demand. Answer:

In the above figure, an unanticipated increase in aggregate demand is shown by moving from A to B, along the short-run aggregate supply curve. An anticipated increase in aggregate demand implies that only the price level increases, and the economy moves from A to C as the short-run supply curve shifts to SRAS2. Diff: 3 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-7: Use the aggregate supply-aggregate demand model to explain aggregate fluctuations in output and inflation AACSB: Analytical thinking 101) Describe and explain the real business cycle theory. Answer: The real business cycle theory is a modification of the new classical theory that states that monetary policy is neutral in its impact on the economy and only real supply-side factors matter in influencing employment and real output. Real Gross Domestic Product (GDP) is determined by real variables such as the supply of inputs and technology and monetary policy only affects the price level. Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

102) Explain the rational expectations hypothesis. Answer: The rational expectations hypothesis assumes that people base their forecasts about the future values of economic variables on all available past and current information, and that these expectations incorporate their understanding about how the economy operates, including the operation of monetary and fiscal policy. If there is pure competition in all markets and all prices, including wages, are flexible, then the government cannot affect real GDP except by fooling people and fooling people cannot work for long. Diff: 1 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 103) Describe and explain the policy irrelevance proposition. Answer: The policy irrelevance proposition is the conclusion that policy actions have no real effects in the short run if the policy actions were anticipated and none in the long run even if the policy actions were unanticipated. The conclusion comes from rational expectations hypothesis. Prices and wages are assumed to be flexible and people form their expectations on a rational basis. Diff: 2 Topic: 17.3 Rational Expectations, the Policy Irrelevance Proposition, and Real Business Cycles Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 17.4 Modern Approaches to Justifying Active Policymaking 1) According to sticky-price theories, A) only fiscal policy is an effective stabilization policy. B) only monetary policy is an effective stabilization policy. C) both fiscal and monetary policy can be effective stabilization policies. D) neither fiscal nor monetary policy is an effective stabilization policy. Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 2) Costs that deter firms from changing prices in response to demand changes are known as A) sticky costs. B) menu costs. C) transaction costs. D) implicit costs. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 84 Copyright © 2021 Pearson Education, Inc.

3) During the 1960s, many Keynesian economists felt that by studying the Phillips curve, A) policymakers could dispense with the Federal Reserve's open-market operations. B) policymakers could fine-tune the economy by selecting policies that would produce the exact mix of unemployment and inflation that suited current government objectives. C) the President and Congress did not need to attempt to balance the budget. D) policymakers could eliminate even frictional unemployment in the economy. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 4) Which of the following can help explain why prices might be "sticky"? A) the rational expectations hypothesis B) the policy irrelevance proposition C) people are not rational D) menu costs Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 5) The menu cost theory states that A) prices are not fully flexible because it is costly for firms to change prices every time there is a demand change. B) economic agents quickly learn the likely responses of the Fed to changes in unemployment. C) prices depend only on the input costs. D) the economy is characterized by perfect competition. Answer: A Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 6) Some economists suggest that because of the costs of negotiating contracts, printing price lists, etc., it is costly for firms to change prices in response to demand changes. This hypothesis is known as the A) sticky wage theory. B) menu cost theory. C) Phillips theory. D) rational expectations theory. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 85 Copyright © 2021 Pearson Education, Inc.

7) The menu cost theory suggests that A) there will be no unemployment. B) wages and prices move freely and quickly. C) frequent price changes are costly for firms. D) perfect competition does not exist. Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 8) In new Keynesian theory, the pattern of inflation exhibited by an economy with growing aggregate demand known as inflation dynamics is A) initially sluggish upward adjustment of the price level and inflation in response to higher aggregate demand followed by higher inflation in the future. B) initially speedy upward adjustment of the price level and inflation in response to higher aggregate demand followed by lower inflation in the future. C) initially sluggish downward adjustment of the price level and inflation in response to higher aggregate demand followed by lower inflation in the future. D) initially speedy upward adjustment of the price level and inflation in response to higher aggregate demand followed by higher inflation in the future. Answer: A Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 9) The term for a pattern of initially sluggish adjustment of the equilibrium price level to a change in aggregate demand followed by a greater adjustment in the future is A) real-business-cycle inflation dynamics. B) New Keynesian inflation dynamics. C) passive price dynamics. D) active price dynamics. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

10) According to the new Keynesian sticky-price theory, a rise in aggregate demand results in ________ price level in the near term and in ________ price level in the longer term. A) a higher; an unchanged B) an unchanged; a higher C) a lower; an unchanged D) a lower; a higher Answer: B Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 11) The most important new Keynesian assumption that distinguishes this theory from the realbusiness-cycle theory is the new Keynesian assumption A) of a horizontal aggregate demand curve. B) of price flexibility. C) about the importance of interest rates in determining investment spending. D) of a horizontal short-run aggregate curve. Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 12) Which of the following is NOT associated with the new Keynesian economics? A) inflation dynamics B) small-menu cost theory C) policy irrelevance proposition D) sticky-price theories of real GDP determination Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 13) The costs associated with changing prices are called A) price costs. B) implicit costs. C) menu costs. D) market-clearing costs. Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

14) Which of the following statements concerning price rigidity is TRUE? A) Since the economy experiences continued inflation prices are not rigid. B) Prices will be rigid when there is unanticipated monetary policy but not when there is anticipated monetary policy. C) Data has clearly demonstrated that the long run aggregate supply curve is horizontal. D) When there are demand changes, firms will not change their price because of the costs associated with renegotiating contracts and informing customers of price changes. Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 15) A theory suggesting that price stickiness leads to sluggish short-run adjustment of the price level to variations in aggregate demand is known as A) new Keynesian flexible-price business cycles. B) new Keynesian inflation dynamics. C) real-business-cycle fixed-price business cycles. D) real-business-cycle inflation dynamics. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 16) The theory of new Keynesian inflation dynamics suggests that a fall in aggregate demand would A) immediately reduce the price level, followed by a more sluggish decline in real Gross Domestic Product (GDP). B) immediately raise the price level, followed by a more sluggish decline in real Gross Domestic Product (GDP). C) immediately reduce real Gross Domestic Product (GDP), followed by a more sluggish decline in the price level. D) immediately raise real Gross Domestic Product (GDP), followed by a more sluggish increase in the price level. Answer: C Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

17) According to the new Keynesian theory, the widespread importance of small menu costs results in variations in aggregate demand causing both A) greater short-run adjustments in real Gross Domestic Product (GDP) and delayed adjustment in the price level. B) greater short-run adjustments in the real Gross Domestic Product (GDP) and immediate adjustment in the price level. C) smaller short-run adjustments in real Gross Domestic Product (GDP) and delayed adjustment in the price level. D) smaller short-run adjustments in real Gross Domestic Product (GDP) and immediate adjustment in the price level. Answer: A Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18) New Keynesian inflation dynamics can account for sluggish responses of A) real Gross Domestic Product (GDP) to changes in aggregate supply. B) real Gross Domestic Product (GDP) to changes in aggregate demand. C) inflation to changes in aggregate supply. D) inflation to changes in aggregate demand. Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 19) If the price of sugar changed in the market from 20 cents to 23 cents per pound, and Sunharvest Grocery Market didn't change the price it charges for the sugar, this behavior is likely due to A) discretionary policy. B) irrational expectations. C) large menu costs. D) small menu costs. Answer: D Diff: 3 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking

20) Costs that tend to deter firms from changing their prices in response to changes in the market equilibrium price are referred to as A) large menu costs. B) small menu costs. C) real menu costs. D) burden costs. Answer: B Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 21) Which of the following factors strengthens the case for policy activism? A) sticky prices B) flexible wages C) flexible prices D) lack of real-business-cycles Answer: A Diff: 3 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 22) Menu costs are a possible reason for A) aggregate supply shocks. B) low levels of consumer confidence in response to aggregate supply shocks. C) sticky product prices. D) swings in the labor force participation rate. Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 23) Costs of renewing contracts or printing new price lists are known as A) implicit economic costs. B) menu costs. C) operating costs. D) opportunity costs. Answer: B Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 90 Copyright © 2021 Pearson Education, Inc.

24) Small menu costs are a common reason offered for the existence of A) sticky wages. B) sticky resource prices. C) sticky prices. D) sticky output adjustments. Answer: C Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 25) Economists who favor policy activism argue that the United States economy is NOT always in equilibrium because A) the national debt is too large. B) the Federal Reserve's monetary policy is too restrictive. C) the markets are overregulated. D) wage and price rigidities exist. Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 26) Menu costs are A) the constantly changing resource prices that make planning for firms difficult. B) the advertised prices for final products that firms guarantee for a certain period of time. C) the cost of compliance with government regulations. D) the costs that deter firms from changing prices in reaction to demand changes. Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 27) If a significant portion of firms in the economy does NOT immediately adjust product prices, then the short-run aggregate supply curve A) slopes upward. B) slopes downward. C) is horizontal. D) is vertical. Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-6: Explain the aggregate supply-aggregate demand model AACSB: Analytical thinking 91 Copyright © 2021 Pearson Education, Inc.

28) The new Keynesian sticky-price theory indicates that an increase in aggregate demand generates A) a speedy rise in real Gross Domestic Product (GDP) but a sluggish increase in the price level. B) a speedy rise in the price level but a sluggish increase in real Gross Domestic Product (GDP). C) sluggish increases in both real Gross Domestic Product (GDP) and the price level. D) rapid increases in both real Gross Domestic Product (GDP) and the price level. Answer: A Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 29) If a significant portion of firms in the economy does NOT adjust product prices, a predicted result according to new Keynesian theory is A) real business cycles. B) real inflation cycles. C) inflation dynamics. D) output dynamics. Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 30) New Keynesian inflation dynamics predicts that an increase in aggregate demand will generate, in chronological order A) a leftward movement along a horizontal short-run aggregate supply curve, a short-run decline in real Gross Domestic Product (GDP), a downward shift in the short-run aggregate supply curve, and a decrease in the price level. B) a rightward movement along a horizontal short-run aggregate supply curve, a short-run increase in real Gross Domestic Product (GDP), an upward shift in the short-run aggregate supply curve, and an increase in the price level. C) a leftward shift in a vertical short-run aggregate supply curve, a short-run decline in real Gross Domestic Product (GDP), an upward movement along the short-run aggregate supply curve, and an increase in the price level. D) a rightward shift in a vertical short-run aggregate supply curve, a short-run increase in real Gross Domestic Product (GDP), an upward movement along the short-run aggregate supply curve, and an increase in the price level. Answer: B Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

31) According to the hypothesis of New Keynesian inflation dynamics, an increase in aggregate demand brings about A) initial sluggish adjustment of the price level followed by higher inflation later on. B) initial rapid adjustment of the price level followed by lower inflation later on. C) initial sluggish adjustment of real Gross Domestic Product (GDP) followed by more rapid real Gross Domestic Product (GDP) growth later on. D) sluggish growth in real Gross Domestic Product (GDP) both initially and later on. Answer: A Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 32) According to some New Keynesian theories, one possible rationale for active policymaking is A) flexible prices. B) sluggish adjustment of the price level in response to changes in aggregate demand. C) people are not rational and so do not react to incentives. D) growing competition in U.S. product markets. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 33) New Keynesian theory implies that which of the following reduces firms' incentive to adjust their prices? A) a downward-sloping aggregate demand curve B) the required reserve ratio C) menu costs D) none of these Answer: C Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 34) New Keynesians hypothesize that A) the relationship between inflation and unemployment is exploitable in the long run. B) the relationship between inflation and unemployment is exploitable in the short run. C) there is no relationship between inflation and unemployment. D) fluctuations in output are largely caused by supply shocks. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 93 Copyright © 2021 Pearson Education, Inc.

35) What did Milton Friedman and E.S. Phelps argue with respect to the Phillips Curve? A) The Phillips Curve could accurately guide activist policy makers over the long run. B) The inverse relationship between unemployment and inflation only holds in the long run. In the short run, unemployment and inflation are positively related. C) Economic participants would soon understand activist policymakers' strategy and revise their expectations, making discretionary efforts to fine-tune the economy ineffective. D) The inflation rate will consistently be 2 percentage points below the unemployment rate. Answer: C Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 36) The stagflation experienced in the U.S. during the late 1960s and the 1970s showed us that A) the Phillips curve accurately represents the trade-off between unemployment and inflation. B) both inflation and economic expansion could exist simultaneously. C) the relationship between unemployment and inflation was not as clear-cut as presented on the Phillips curve. D) it is possible to alleviate economic stagflation through the government discretionary fiscal policy. Answer: C Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-13: Discuss the key measures, theories, and effects of inflation and deflation AACSB: Analytical thinking 37) Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because A) economic participants routinely incorporate changes in the inflation rate into their expectations. B) economic participants are not rational, and therefore act unpredictably to any policy change. C) unemployment levels and the inflation rate have a clear, positive relationship. D) unemployment levels and the inflation rate have a negative (inverse) relationship. Answer: A Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

38) According to New Keynesians, which of the following is a key factor that determines the inflation rate? A) anticipated future inflation B) fiscal policy C) supply shock D) the menu cost Answer: A Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 39) According to New Keynesians, which of the following is one of the two key factors that determines the inflation rate? A) fiscal policy B) firms' average inflation adjusted per-unit costs of production C) energy cost D) monetary policy Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 40) The longer is the interval between firms' price adjustments, A) the longer the interval that the horizontal new Keynesian aggregate supply curve will remain in position. B) the shorter the interval the horizontal new Keynesian aggregate supply curve will remain in position. C) the steeper the new Keynesian aggregate supply curve will become. D) the smaller the output effect of a given change in the money supply. Answer: A Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 41) New Keynesians argue that A) appropriate activist policies can reduce cyclical fluctuations. B) appropriate activist policies will increase the length of cyclical fluctuations. C) appropriate activist policies will have an known effect on the length of cyclical fluctuations. D) none of these. Answer: A Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 95 Copyright © 2021 Pearson Education, Inc.

42) According to New Keynesians, an increase in which of the following will tend to cause the inflation rate to increase? A) an anticipation of higher future inflation B) an expected increase in aggregate supply C) an unexpected decrease in aggregate demand D) all of these Answer: A Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 43) The shorter is the interval between firms' price adjustments, A) the greater is the scope for activist policies to stabilize the economy. B) the smaller is the scope for activist policies to stabilize the economy. C) a given unexpected increase in aggregate demand will cause a larger increase in output. D) a given unexpected increase in aggregate demand will cause a smaller increase in the price level in the short run. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 44) According to Friedman and Phelps, which of the following statements is a correct characterization of unemployment and inflation in the United States since the 1950s? A) A trade-off between inflation and unemployment as pictured in the Phillips curve existed over the entire time period. B) A trade-off between inflation and unemployment as pictured in the Phillips curve existed in the 1970s and 1980s, but not over the entire period. C) The relationship between inflation and unemployment is very different from the Phillips curve. A positive relationship is evident rather than an inverse relationship. D) There is no clear relationship between unemployment and inflation. Answer: D Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

45) A plot of points representing the rate of inflation and the unemployment for the United States since 1953 reveals that A) there is an inverse relationship between the two variables. B) there does not appear to be any trade-off between the two variables. C) there is a positive relationship between the two variables. D) none of these. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 46) According to New Keynesian economists, A) activist policy has little effect on real Gross Domestic Product (GDP). B) activist policy can be used to minimize variations in real Gross Domestic Product (GDP). C) fluctuations in output are primarily caused by supply shocks. D) the amount of time it takes firms to adjust prices is less than six months. Answer: B Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 47) According to New Keynesians, an increase in which of the following will tend to cause the inflation rate to increase? A) anticipated future inflation B) firms' average inflation adjusted per-unit costs of production C) an unexpected increase in aggregate demand D) all of these Answer: D Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 48) New Keynesian economists believe that A) there is an exploitable trade-off between unemployment and inflation. B) changes in aggregate demand will have relatively greater effects on real Gross Domestic Product (GDP) when firms change prices less frequently. C) activist policy can be used to reduce the fluctuations in real Gross Domestic Product (GDP). D) all of these Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 97 Copyright © 2021 Pearson Education, Inc.

49) If the average interval between firms' price adjustments is relatively long, A) an increase in aggregate demand will cause a relatively short-lived increase in real Gross Domestic Product (GDP). B) an increase in aggregate demand will cause a relatively long-lived increase in real Gross Domestic Product (GDP). C) a reduction in aggregate demand will cause a relatively short-lived reduction in real Gross Domestic Product (GDP). D) none of these Answer: B Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 50) If the average interval between firms' price adjustments is relatively short, A) an increase in aggregate demand will cause a relatively short-lived increase in real Gross Domestic Product (GDP). B) an increase in aggregate demand will cause a relatively long-lived increase in real Gross Domestic Product (GDP). C) a reduction in aggregate demand will cause a relatively long-lived reduction in real Gross Domestic Product (GDP). D) a reduction in aggregate demand will cause a relatively long-lived increase in real Gross Domestic Product (GDP). Answer: A Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 51) According to Friedman and Phelps, which of the following statements is a correct characterization of unemployment and inflation in the United States since the 1950s? A) A trade-off between inflation and unemployment as pictured in the Phillips curve existed over the entire time period. B) A trade-off between inflation and unemployment as pictured in the Phillips curve existed in the 1970s and 1980s, but not over the entire period. C) The relationship between inflation and unemployment is very different from the Phillips curve. A positive relationship is evident rather than an inverse relationship. D) There is no clear relationship between unemployment and inflation. Answer: D Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

52) What kind of relationship appears to actually exist, if one examines the actual data regarding the inflation rate and the unemployment rate for all years since 1953? A) a direct relationship B) a one-to-one relationship C) an inverse relationship D) no relationship in the long run Answer: D Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 53) Examination of data since 1953 indicates that during this period, stretching more than half a century, the Phillips curve A) fails to exist. B) is smoothly upward sloping. C) is smoothly downward sloping. D) slopes smoothly upward at first but then slopes smoothly downward. Answer: A Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 54) The U.S. economic data for the last 50 years indicates that A) there is an inverse relationship between unemployment rate and inflation rate. B) there is a direct relationship between unemployment rate and inflation rate. C) during recessions the unemployment rate was always twice as high as the inflation rate. D) there has been no long-run relationship between unemployment and inflation rates. Answer: D Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking

55) Available evidence about price adjustments across U.S. industries indicates that A) prices are very flexible in all industries. B) prices are very sticky in all industries. C) prices are equally flexible in all industries. D) there is considerable variation in price flexibility across industries. Answer: D Diff: 1 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-14: Identify different types and measures of unemployment and discuss its causes AACSB: Analytical thinking 56) What is the modern view of the Phillips curve? Answer: The modern view is that there is no trade-off between inflation and unemployment except in the short run. People can be surprised and unemployment can go down if the government pursues expansionary monetary or fiscal policy. However, once people learn the true state of affairs, they will adjust their behavior and the natural rate of unemployment will prevail. The price level will be higher though. Diff: 3 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 57) How do rational expectations models differ from traditional classical economics? How does the new Keynesian model differ from the traditional Keynesian view? Answer: A rational expectations model sees no real effect of monetary policy while the classical economics had changes in the money supply affecting aggregate demand. The classical view was that stabilization policy was unnecessary and the newer view is that it is too difficult to conduct. The traditional Keynesian view focused entirely on aggregate demand and emphasized fiscal policy while the new Keynesian view supports the role of monetary policy as well. Diff: 2 Topic: 17.4 Modern Approaches to Justifying Active Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 17.5 Behavioral Economics and Macroeconomic Policymaking 1) A central feature of behavioral economics is A) perfect expectations. B) bounded rationality. C) irrational expectations. D) people face no constraints in forming expectations. Answer: B Diff: 1 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 100 Copyright © 2021 Pearson Education, Inc.

2) When people face bounded rationality, they are likely to A) consider every conceivable choice available to them when making decisions. B) behave irrationally. C) rely on simple rules of thumb. D) do nothing. Answer: C Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 3) Habit formation in consumption implies that A) the amount of current consumption spending is not related to the amount of past real consumption spending. B) the amount of current consumption spending is directly related to the amount of past real consumption spending. C) the amount of current consumption spending is negatively related to the amount of past real consumption spending. D) consumption spending changes in a random manner over time. Answer: B Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 4) As a result of habit formation, people spend more today if A) they spent less in the past. B) they spent more in the past. C) they have no loan or debt in the past. D) they never had any income in the past. Answer: B Diff: 1 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

5) As a result of people's habit formation, a tax cut that aims at increasing desired real consumption spending will A) have no effect on aggregate demand. B) affect only inflation but not unemployment. C) decrease aggregate demand by the same amount of the change in real consumption spending. D) have long-lasting effects on aggregate demand. Answer: D Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 6) A macroeconomic policy action will have a longer-term effect on aggregate demand if people A) have rational expectations. B) have habit formation in consumption. C) have rational inattention. D) update the way they make decisions frequently. Answer: B Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 7) People might experience rational inattention if they A) have rational expectations. B) acquire information infrequently and make decisions based on incomplete information during the intervals between updates. C) update the state of the economy too frequently so they become confused about the information for their decisions. D) become irrational involuntarily. Answer: B Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 8) According to the rational-inattention theory, people A) are sometimes rational and sometimes irrational in forming inflation expectations. B) will never change their inflation expectations. C) do not always have all the knowledge about the economy to form inflation expectations. D) are always irrational in forming inflation expectations. Answer: C Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 102 Copyright © 2021 Pearson Education, Inc.

9) If people experience rational inattention, then during the interval between the public's informational updates, A) the Phillips curve slopes upward. B) the Phillips curve slopes downward. C) the Phillips curve does not exist. D) the Phillips curve becomes vertical. Answer: B Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 10) According to the rational inattention theory, during the periods between informational updates, A) firms fully adjust product prices. B) firms fail to fully adjust product prices. C) firms always change product prices more than the inflation rate. D) firms change the wages of their employees but keep product prices unchanged. Answer: B Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 11) Under which of the following assumption can activist policies have sizable effects on aggregate demand? A) rational inattention B) infrequent information updates C) habit formation among people D) all of these Answer: D Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 12) Prices are sticky as a result of A) rational inattention. B) frequent information updates. C) rational expectations. D) market competition. Answer: A Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 103 Copyright © 2021 Pearson Education, Inc.

13) If a group of economists believes the following points are TRUE, which is likely to be their policymaking stance? • Aggregate demand shocks have no long run effect on real Gross Domestic Product (GDP) or unemployment. • Pure competition is widespread throughout the economy. • Real wages are flexible. • The Phillips Curve trade-off does not exist in the long run. A) They will support active policymaking. B) They will support passive policymaking. C) They will support discretionary policymaking. D) They will argue that any attempt at economic policymaking is futile. Answer: B Diff: 3 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 14) An economist who would most likely use active policymaking would support which of the following conclusions? A) Pure competition is not typical in most markets. B) Price flexibility is common in most markets. C) Demand shocks have little or no short-run effects on real Gross Domestic Product (GDP) and unemployment. D) Supply shocks explain most business cycles. Answer: A Diff: 3 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 15) Most economists agree that A) active policymaking is likely to exert sizable long-run effects on real Gross Domestic Product (GDP). B) active policymaking is unlikely to exert sizable long-run effects on real Gross Domestic Product (GDP). C) passive policymaking is likely to exert sizable long-run effects on real Gross Domestic Product (GDP). D) none of these Answer: B Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

16) Wage and price stickiness causes A) changes in aggregate demand to have no short-run effects on real Gross Domestic Product (GDP). B) changes in aggregate demand to have long-run effects on real Gross Domestic Product (GDP). C) changes in aggregate demand to have both short-run and long-run effects on real Gross Domestic Product (GDP). D) changes in aggregate demand to have short-run effects on real Gross Domestic Product (GDP). Answer: D Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 17) The argument for passive policymaking will be stronger if A) pure competition is widespread. B) price flexibility is common. C) wage flexibility is common. D) all of these. Answer: D Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 18) When it comes to active policymaking, most economists agree that A) active policy making should be used over passive policymaking. B) it is unlikely that active policymaking will have any long term effects on the economy. C) it is likely that active policymaking will have long term effects on the economy. D) it will lead to long term shocks in the system. Answer: B Diff: 1 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 19) Those who favor passive policymaking do so because they conclude that A) price and wage flexibility is a common and speedy occurrence. B) price and wage flexibility is an uncommon occurrence. C) pure competition is not typical in most markets. D) there is a stable trade-off between inflation and unemployment in the short run. Answer: A Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 105 Copyright © 2021 Pearson Education, Inc.

20) Those who favor active policymaking argue that all of the following exist EXCEPT A) perfectly flexible wages and prices. B) inflation and unemployment are stable in the short run and predictable in the long run. C) pure competition is not typical. D) aggregate demand shocks can influence real Gross Domestic Product (GDP) and unemployment. Answer: A Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 21) Those who favor passive policymaking argue that all of the following exist EXCEPT A) perfectly flexible wages and prices. B) the trade-off between inflation and unemployment is not stable in the short run and is nonexistent in the long run. C) pure competition is typical. D) aggregate demand shocks can influence real Gross Domestic Product (GDP) and unemployment. Answer: D Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 22) The conclusion that the economy has price flexibility, wage flexibility, and perfectly competitive markets justifies A) active policymaking. B) rational policymaking. C) passive policymaking. D) none of these. Answer: C Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

23) Economists who believe in activist policymaking argue that A) decreases in aggregate demand impact the economy only in the long run. B) decreases in aggregate demand definitely impact the economy in the short run. C) only planned changes in the money supply impact the economy. D) only increases in the minimum wage levels improve economic well-being. Answer: B Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 24) There is greater support for active policymaking when A) pure competition is common. B) price flexibility is common. C) wage flexibility is common. D) none of these. Answer: D Diff: 2 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking 25) Compare and contrast the arguments favoring active versus passive policymaking. Answer: The models that stress wage and price flexibility and rationality on the part of economic agents tend to favor passive policymaking. If people can anticipate policy actions and if wages and prices are flexible, the economy will tend toward long-run equilibrium. Discretionary policies conducted by governmental policymakers will not be effective means of influencing real Gross Domestic Product (GDP). In contrast, economists who conclude that small menu costs are important elements of real-world economies conclude that active policy making can influence real GDP and move the economy toward full employment. Diff: 3 Topic: 17.5 Behavioral Economics and Macroeconomic Policymaking Learning Outcome: Macro-17: Discuss the fundamentals of key macroeconomic theories AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 18 Policies and Prospects for Global Economic Growth 18.1 Labor Resources and Economic Growth 1) According to the text, population growth in many poor countries does NOT generally result in increased labor resources because A) many people do not join the labor force. B) most people are not productive in their work. C) many people work two jobs. D) most jobs are for middle-age workers. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 2) Suppose that the real Gross Domestic Product (GDP) growth rate for a country was 5 percent and the population growth rate was 4 percent. What would the per capital real Gross Domestic Product (GDP) growth rate be for this country? A) -9 percent B) -1 percent C) 1 percent D) 9 percent Answer: C Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 3) Suppose that the real Gross Domestic Product (GDP) growth rate for a country was 2 percent and the population growth rate was 2 percent. What would the per capital real Gross Domestic Product (GDP) growth rate be for this country? A) 6 percent B) -6 percent C) 0 percent D) None of these Answer: C Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge

4) If population growth occurs while labor force participation does NOT increase, A) there may be no increase in labor resources or economic growth. B) a nation's labor resources will still continue to increase in both quality and quantity. C) economic growth will still continue because any population gain is a plus. D) per capita GDP is likely to increase sharply. Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 5) If the level of aggregate real Gross Domestic Product (GDP) remains constant, a reduction in the population A) directly increases per capita real GDP. B) directly reduces per capita real GDP. C) indirectly reduces per capita real GDP. D) has no effect on real per capita real GDP. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 6) If real per capita Gross Domestic Product (GDP) grows at a constant annual rate of 5 percent and the annual population growth rate increases from 3 percent to 4 percent, the annual rate of growth of per capita real GDP will A) increase. B) decrease. C) remain unchanged. D) increase or decrease depending. Answer: B Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

7) Suppose a nation's rate of growth of per capita real Gross Domestic Product (GDP) is 1 percent and its rate of growth in real GDP is 3 percent. Given this information, the nation's population growth rate is approximately equal to A) 2 percent. B) -2 percent. C) 3 percent. D) None of these: Cannot be determined with the information. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 8) Suppose a nation's real Gross Domestic Product (GDP) grows at a rate of 2 percent per year while its population grows 2 percent annually. Given this information, this nation's annual rate of per capita real GDP growth is equal to A) 0 percent. B) 1 percent. C) 8 percent. D) -4 percent. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 9) Over the past decade, a nation's real Gross Domestic Product (GDP) grew at a constant rate of 9 percent per year while its population grew 8 percent annually. Forecasters predict that during the coming decade, real GDP will continue to grow 10 percent annually, but the population growth rate is expected to drop to 7 percent annually. If the forecasters are correct, which of the following will be TRUE? A) The annual rate of growth of per capita real GDP will decline from 3 percent to 2 percent. B) The annual rate of growth of per capita real GDP will decline from 2 percent to 1 percent. C) The annual rate of growth of per capita real GDP will increase from 1 percent to 3 percent. D) The annual rate of growth of per capita real GDP will increase from 1 percent to 8 percent. Answer: C Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

10) The term "economic freedom" means A) the right to own private property. B) the right to trade goods and services. C) the right to own financial assets. D) all the above. Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 11) According to the text, the 17 countries with high degrees of economic freedom A) account for 80 percent of total world output. B) account for less than 20 percent of total world output. C) have the weakest economies. D) have low productivity. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 12) With respect to economic freedom, which of the following is TRUE? A) Three out of four people live in nations with governments that grant residents high degrees of economic freedom. B) Where governments do not grant residents a high degree of economic freedom, economic growth rates tend to be above the annual average for the world's nations. C) About three dozen nations with governments unwilling to grant much in the way of economic freedom are home to two-thirds of the world's population. Even so, these countries produce over 50 percent of the world's output. D) As economic freedom increases, so does a nation's prospects for economic growth. Answer: D Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 13) In the determination of economic growth, political freedom A) is more important than economic freedom. B) appears to be less important than economic freedom. C) is inversely related to economic freedom. D) is equally as important as economic freedom. Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 4 Copyright © 2021 Pearson Education, Inc.

14) Political freedom can sometimes moderately reduce economic growth because A) special interest groups may gain at the expense of the overall economy. B) campaign contributions lead to reductions in investment. C) most jobs are in unions that are politically connected. D) all of these Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 15) In nondemocratic countries that have experienced consistent economic growth and improvements in their standards of living, A) there is no tendency to become more democratic over time because the current political situation is economically successful. B) political freedom is apt to decrease over time as governments become more controlling. C) the rise of special-interest groups usually promotes competition and growth. D) there is a tendency to become democratic over time. Answer: D Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 16) Country A has experienced real Gross Domestic Product (GDP) growth of 2 percent and a population growth of 3 percent. What is county A's growth of per capita real GDP? A) -1 percent B) 1 percent C) 5 percent D) -5 percent Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge

17) Suppose a country has experienced relatively steady growth of aggregate real Gross Domestic Product (GDP). A higher population growth tends to A) reduce the growth of per capita real GDP. B) increase the growth of per capita real GDP. C) increase the level of economic freedom. D) increase the level of dead capital. Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 18) The rate of growth in real Gross Domestic Product (GDP) minus the rate of growth of the population is the A) rate of growth of nominal GDP. B) unemployment rate. C) employment growth rate. D) rate of growth of per capita real GDP. Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 19) What is the annual rate of growth of per capita real Gross Domestic Product (GDP) if real GDP grows at a constant rate of 4 percent per year and the annual rate of population growth is 2 percent? A) 6 percent B) 2 percent C) 4 percent D) -2 percent Answer: B Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge

20) What is the annual rate of growth of per capita real Gross Domestic Product (GDP) if real GDP grows at a constant rate of 3 percent per year and the annual rate of population growth is 3 percent? A) 0 percent B) 3 percent C) -6 percent D) 6 percent Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 21) What will happen to the annual rate of growth of per capita real Gross Domestic Product (GDP) if real GDP grows at a constant rate of 4 percent and the annual rate of population growth goes from 3 percent to 3.5 percent? A) The annual rate of growth of per capita real GDP will increase from 7 percent to 7.5 percent. B) The annual rate of growth of per capita real GDP will increase from -1 percent to -0.5 percent. C) The annual rate of growth of per capita real GDP will remain unchanged. D) The annual rate of growth of per capita real GDP will decrease from 1 percent to 0.5 percent. Answer: D Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 22) Assume that in the economy real Gross Domestic Product (GDP) grows at a constant rate. There has just been a decrease in the rate of growth of the population. This implies that the A) rate of growth of per capita real GDP will decrease. B) rate of growth of per capita real GDP will increase. C) rate of growth of capital accumulation will decrease. D) rate of growth of capital accumulation will increase. Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

23) What will happen to the annual rate of growth of per capita real Gross Domestic Product (GDP) if the annual rate of population growth increases and the annual rate of growth of real GDP goes down? A) It will increase since an increase in population means an increase in labor that translates into an increase in real GDP. B) It will increase since the annual rate of growth of real GDP does not influence the growth rate of per capita real GDP. C) It will decrease since an increase in the growth rate of population and a decrease in the growth rate of real GDP both work to decrease the growth of per capita real GDP. D) The effect will depend upon whether the rate of population growth is greater than or less than the rate of growth of real GDP. Answer: C Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 24) A higher population growth rate can potentially lead to a higher rate of growth in per capita real Gross Domestic Product (GDP) if A) it leads to an increase in the amount of dead capital. B) it leads to greater democracy in a nation. C) young workers replace older workers. D) there is a greater labor force participation rate. Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 25) Which of the following equations is correct? A) rate of growth of per capita real Gross Domestic Product (GDP) = rate of growth in real GDP - rate of growth of population B) rate of growth of per capita real Gross Domestic Product (GDP) = rate of growth in real GDP + rate of growth of population C) rate of growth in real Gross Domestic Product (GDP) = rate of growth of per capita real GDP - rate of growth of population D) rate of growth in real Gross Domestic Product (GDP) = rate of growth of per capita real GDP / rate of growth of population Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

26) The rights to own private property and to exchange goods with minimal government interference is A) capital freedom. B) population freedom. C) economic freedom. D) political freedom. Answer: C Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 27) Economic freedom is A) the right to vote in an election for a political leader. B) the right to own private property and to exchange goods with minimal government interference. C) the amount of control that the government has in a market. D) present as long as private individuals own businesses. Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 28) Economic freedom is A) important in leading to positive economic growth. B) not an important factor in leading to positive economic growth. C) a confusing concept since the more economic freedom residents in a country have the lower the level of economic growth. D) a concept in theory since no country has pure economic freedom and therefore cannot be analyzed with respect to economic growth. Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

29) According to the text, a country with a considerable amount of economic freedom will experience A) positive rates of per capita income growth. B) negative rates of per capita income growth. C) low levels of political freedom. D) dead capital. Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 30) The right to openly support and democratically select national leaders is A) capital freedom. B) population freedom. C) economic freedom. D) political freedom. Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 31) Which statement is TRUE about a comparison of economic freedom with political freedom? A) Economic freedom cannot exist without political freedom. B) Economic freedom leads to positive economic growth while political freedom leads to negative economic growth. C) Political freedom is more important than economic freedom when considering positive economic growth. D) Economic freedom is more important than political freedom when considering positive economic growth. Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

32) Which of the following statements is TRUE about the relationship between high birthrates and real Gross Domestic Product (GDP) growth? A) High birthrates in countries with little economic freedom will lead to higher labor force participation rates that in turn lead to higher growth of real GDP. B) High birthrates reduce per capita incomes, and a lack of economic freedom inhibits real GDP growth. C) There is no relationship between birthrates and real GDP growth. D) The influence that birthrates have on real GDP growth is the same in countries whether or not economic freedom exits. Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 33) Population growth is more likely to contribute to economic growth when A) economic freedom is present. B) capital accumulation is limited. C) technological progress is limited. D) the labor force participation rate does not increase. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 34) A major contributor to a country's real rate of economic growth is its real Gross Domestic Product (GDP) growth relative to its A) inflation. B) population size. C) money growth. D) none of these Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

35) Economic freedom by its nature suggests A) minimal government intervention in free markets. B) zero government. C) a lack of laws and regulations. D) economic anarchy. Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 36) Political freedom seems to be ________ important to growth than economic freedom. A) less B) more C) equally D) critically Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 37) Which of the following best represents economic growth? A) an increase in nominal Gross Domestic Product (GDP) B) an increase in real Gross Domestic Product (GDP) C) an increase in the per capita nominal Gross Domestic Product (GDP) D) an increase in the per capita real Gross Domestic Product (GDP) Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 38) Economic growth is measured by A) the annual percentage change in nominal Gross Domestic Product (GDP). B) the annual percentage change in the unemployment rate. C) the annual percentage change in per capita nominal Gross Domestic Product (GDP). D) the annual percentage change in per capita real Gross Domestic Product (GDP). Answer: D Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

39) If the average annual growth rate in real Gross Domestic Product (GDP) for a nation during the last decade was 4 percent per year and the average annual population growth rate was 3 percent per year during the same period, then the average annual growth rate of per capita GDP was A) 1 percent. B) -1 percent. C) 7 percent. D) 0 percent. Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Application of knowledge 40) The percentage change in per capita real Gross Domestic Product (GDP) measures economic growth because it takes into account all of the following variables EXCEPT A) the percentage change in population. B) the percentage change in the inflation rates. C) the percentage change in nominal GDP. D) the percentage change in the quality of life. Answer: D Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 41) Which of the following is a barrier to economic growth in many developing nations? A) the shortage of labor B) the lack of natural resources C) the lack of economic freedom D) the low level of restrictions in the labor market Answer: C Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

42) A reduction in the rate of population growth A) always causes an increase in economic growth. B) never causes an increase in economic growth. C) may or may not cause an increase in economic growth. D) will cause a reduction in economic growth if accompanied by an increase in the rate of growth of real GDP. Answer: C Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 43) The right to private property and ability to exchange goods and services freely is known as A) political freedom. B) economic freedom. C) constitutional freedom. D) external freedom. Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 44) The per capita real Gross Domestic Product (GDP) is the A) rate of growth in real GDP plus the population growth rate. B) real GDP divided by the population. C) rate of growth in real GDP times the population growth rate. D) rate of growth in real GDP minus the population growth rate. Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 45) Which of the following is the term used to describe the expansion of a country's per capita real Gross Domestic Product (GDP)? A) economic growth B) technological change C) change in the labor force D) change in factor incomes Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

46) The general set of rights to own private property and exchange goods, services, and financial assets with minimal government interference is defined as A) capitalism. B) market socialism. C) economic freedom. D) economic privilege. Answer: C Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 47) The right to openly support and to elect leaders in a democratic way is known as A) political freedom. B) economic freedom. C) constitutional freedom. D) external freedom. Answer: A Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 48) Laws that make it difficult to start a new business lead to a A) high rate of economic growth. B) low rate of economic growth. C) more political freedom. D) laissez-faire. Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 49) If a country has a 4 percent annual growth in real Gross Domestic Product (GDP) and a one percent growth in population, its per capita growth of real GDP is A) 3 percent. B) 4 percent. C) 6 percent. D) 0.25 percent. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

50) In general, a country that adheres to the rule of law has A) a higher level of real Gross Domestic Product (GDP) per capita. B) a lower level of real Gross Domestic Product (GDP) per capita. C) no relationship to the level of real Gross Domestic Product (GDP) per capita. D) an inverse relationship to the level of real Gross Domestic Product (GDP) per capita. Answer: A Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 51) An increase in population growth in a country A) always causes an increase in labor resources. B) may not necessarily cause an increase in per capita real Gross Domestic Product (GDP). C) may not cause an increase in labor resources in rich countries because employers will cut down on the number of hours required of workers. D) will always cause an increase in per capita real Gross Domestic Product (GDP). Answer: B Diff: 1 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 52) Explain the role of economic freedom in economic development. Answer: Economic freedom is a measurement of the extent to which one can pursue economic activity without interference from government. Economic freedom is based upon personal choice, voluntary exchange, and the security of property rights. Economic freedom stimulates economic growth when the markets are competitive. Greater economic freedom encourages investment, which in turn, creates jobs and economic growth. Diff: 2 Topic: 18.1 Labor Resources and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 18.2 Capital Goods and Economic Growth 1) Dead capital is A) machinery that fails to operate properly. B) machinery that requires constant maintenance. C) a capital resource that lacks clear title of ownership. D) a capital resource that depreciates rapidly. Answer: C Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 16 Copyright © 2021 Pearson Education, Inc.

2) The significance of dead capital is that A) it is difficult to allocate to its most efficient use. B) its fixed cost is too high. C) it costs too much to acquire. D) it replaces too many workers. Answer: A Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 3) Developing countries are damaged by dead capital because A) it replaces too many workers, creating unemployment. B) it results in inefficiencies that greatly reduce the rate of return on capital investment. C) it must be sold as scrap. D) it reduces too much household saving. Answer: B Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 4) Which of the following has contributed to developing countries' poor economic performance? A) low population growth B) corruption C) a high saving rate D) foreign direct investment Answer: B Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 5) According to the text, is there any relationship between bureaucratic inefficiency and economic growth? A) Yes, bureaucratic inefficiency and economic growth are positively related. B) Yes, but only in the most economically developed nations. C) Yes, bureaucratic inefficiency and economic growth are inversely related. D) No. Some nations' economies grow rapidly despite their inefficient governments while others collapse with inefficient governments. Answer: C Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

6) Which of the following represents dead capital? A) capital that wears out rapidly B) capital that has become obsolete C) capital that lacks clear title of ownership D) none of these Answer: C Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 7) Dead capital refers to A) a capital resource that lacks clear title ownership. B) a capital resource whose owner is deceased. C) a capital resource jointly owned by more than one person. D) a capital resource that has no more useful life. Answer: A Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 8) There is a(n) ________ relationship between a nation's rate of growth in real GDP per capita and bureaucratic inefficiency. A) direct B) inverse C) proportional D) undefined Answer: B Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9) Any capital resource that lacks clear title ownership is A) public capital. B) dead capital. C) social capital. D) human capital. Answer: B Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

10) The role that dead capital plays in a country's economic growth is that A) growth increases because the dead capital is replaced with more technologically efficient capital. B) growth increases since the firms using the dead capital are using it for free. C) growth neither increases nor is impaired by dead capital. D) growth is impaired since the capital cannot be allocated to its most efficient use. Answer: D Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 11) The relationship of dead capital to inefficient production is A) that without clear ownership it is not possible to sell or transfer a resource so that it can be used efficiently. B) that outdated equipment will lead to inefficient production. C) nonexistent since the capital is already dead. D) that when the dead capital is replaced by more technologically advanced capital, economic growth occurs. Answer: A Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 12) The following are impediments to economic growth EXCEPT A) dead capital. B) human capital development. C) lack of economic freedom. D) bureaucratic inefficiency. Answer: B Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 13) When a country has a large amount of dead capital, A) there is too much political freedom. B) there is a large amount of economic growth. C) large amounts of capital will be inefficiently employed. D) a country's exports increase. Answer: C Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

14) One of the most significant barriers to economic growth in the world's poorest nations is A) environmental issues. B) political freedom. C) dead capital. D) foreign government interference. Answer: C Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 15) The inefficiencies associated with dead capital A) lead to increased consumption. B) reduce the rate of return on investment. C) increase the amount of investment as businesses look for more technologically advanced capital. D) lead to more economic freedom as firms try to get rid of the inefficient capital. Answer: B Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 16) When government inefficiencies exist, A) a country tends to grow at a slower rate. B) a country tends to grow at a faster rate. C) economic growth is not affected. D) economic growth is higher if the relative size of government in the economy is larger. Answer: A Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 17) When government inefficiencies exist and government officials can be bribed, then A) dead capital will not exist. B) the country will have positive economic growth. C) a bribe will increase the cost of investing in capital. D) property rights will be more secure since an official has been bribed to grant ownership to the business. Answer: C Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

18) Which of the following is NOT true about dead capital? A) Dead capital can lead to a situation where resources are not efficiently employed. B) Dead capital can inhibit economic growth. C) Companies will be less likely to want to invest when a country has a lot of dead capital. D) Dead capital will lead to higher investment returns. Answer: D Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 19) Dead capital is A) unlikely to have any productive use. B) unlikely to be applied to its most efficient use. C) useful only if employed in a labor-intensive production process. D) useful only if employed in a capital-intensive production process. Answer: B Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 20) Which one of the following statements is TRUE? A) Dead capital is most frequently found in countries with well-defined property rights. B) Dead capital is most frequently found in the most prosperous countries. C) It is easy for dead capital resources to be allocated to their best possible use. D) It is difficult for dead capital resources to be insured or traded. Answer: D Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 21) Dead capital is most likely to exist when A) there are restrictions on imports. B) there are restrictions on exports. C) property rights are well-defined. D) residents of a country face barriers to establishing legal ownership of resources. Answer: D Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

22) Extensive government restrictions on the use of capital are likely to A) create dead capital. B) enhance economic growth. C) enhance economic freedom. D) result in capital resources being devoted to their most efficient uses. Answer: A Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 23) A nation's economic growth is more rapid when A) the government owns all capital resources in a nation. B) capital resources are devoted to their most efficient use. C) there are barriers to establishing legal ownership of capital resources. D) scarce resources are made available for all citizens free of charge. Answer: B Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 24) The problem of dead capital can be eliminated by A) returning all privately owned capital to the government. B) increasing the labor force participation rate. C) making it easier for people to establish legal ownership of productive capital. D) restricting population growth. Answer: C Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 25) Countries with the highest degrees of governmental bureaucratic inefficiency index A) typically are nations with the highest real GDP per capita. B) typically are nations with the lowest real GDP per capita. C) normally have the lowest measured levels of dead capital. D) normally have the highest measured levels of economic freedom. Answer: B Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

26) Dead capital is A) a capital resource that lacks a clear title of ownership. B) a capital resource that is obsolete. C) a capital resource that is used to produce non-competitive products. D) a capital resource associated with the defense industry. Answer: A Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 27) When there is a building that is used for production, but no one has clear property rights to it A) resources are guided to their best use by "the invisible hand." B) this is known as "dead capital" and causes efficient production. C) this is known as "dead capital" and causes no production. D) this is known as "dead capital" and causes inefficient production. Answer: D Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 28) All of the following are major factors limiting economic growth in developing countries EXCEPT A) dead capital. B) deregulation. C) inefficient government regulation. D) corruption. Answer: B Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 29) Countries with a high level of bureaucratic inefficiency tend to have low rates of real GDP growth because A) of complications that keep capital goods from flowing to their most efficient use. B) of poor accounting practices when determining real GDP. C) of poor management skill development in companies. D) they facilitate capital goods development. Answer: A Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

30) The tolerance of bribe-taking by government officials A) reduces economic uncertainty because all investors are aware of the practice. B) reduces economic efficiency because rules governing property rights are not regularly enforced. C) reduces government expenditures because public employees can be paid less. D) reduces the need for government to impose taxes on poor people. Answer: B Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 31) As productive capital goods are established in developing nations, A) developed nations will become less prosperous. B) they will be less likely to engage in international trade. C) these countries will experience higher rates of economic growth. D) portfolio investment will be replaced by loans from international aid agencies. Answer: C Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 32) All of the following are examples of institutions that promote real economic growth EXCEPT A) an efficient judicial system used to enforce contracts. B) patent laws that protect innovation. C) complex rules associated with business licensing used to promote careful business growth. D) strong law enforcement used to protect business interests. Answer: C Diff: 3 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 33) Explain the meaning of the term dead capital, and discuss why its existence retards economic growth. Answer: Dead capital means a capital resource without a clearly defined owner. Although dead capital is often used in production, the lack of clearly defined title of ownership typically leads to inefficient use of the resource. The inefficient use of dead capital reduces the rate of return on investments and thus the incentive to increase investment in capital goods are reduced. Lower levels of capital investment diminish the rate of economic growth. Diff: 2 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 24 Copyright © 2021 Pearson Education, Inc.

34) Define what dead capital is and why economists are concerned with its existence. Answer: Dead capital is when capital resources lack a clear title of ownership. Dead capital is a concern because it can lead to a reduction in investment and economic growth in developing nations. Dead capital will lead to a reduction in investment if the investors cannot count on having clear ownership of their capital. Dead capital will lead to a reduction in economic growth because resources cannot be put to their most efficient use. Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 35) How have government inefficiencies contributed to the creation of dead capital in the world's developing nations? Answer: Governments in developing nations place obstacles in the way of entrepreneurs interested in owning capital goods and directing them to profitable opportunities. Poorly administered government regulations reduce investment in new capital goods. Because of the poor administration, investors are unwilling to risk having their investment turn into dead capital. Diff: 1 Topic: 18.2 Capital Goods and Economic Growth Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 18.3 A Recent Shift in Global Growth Trends 1) Emerging nations refer to A) developed countries that have continued to experience high economic growth. B) developing countries that have never experienced economic growth despite their potential. C) developing countries that have experienced high economic growth so that they are closer to advanced-nation status. D) countries that have per capita real GDP (Gross Domestic Product) levels beyond those of advanced nations. Answer: C Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

2) Which of the following is NOT commonly regarded as an emerging nation? A) Bangladesh B) India C) China D) Mexico Answer: A Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 3) China is regarded as one of the emerging nations because A) China has experienced high population growth. B) China has experienced high economic growth. C) economic and political freedoms in China are still limited. D) per capita real GDP is now higher in China than in the United States. Answer: B Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 4) Since 2000, the overall growth rates among emerging countries have been A) positive but lower than the overall growth rates among advanced nations. B) higher than the overall growth rates among advanced nations. C) negative every year. D) lower than the overall growth rates among other developing nations. Answer: B Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 5) For advanced nations, the average annual rate of growth of real per capital GDP A) was lower during the 1981-1999 period than during the 2000-2020 period. B) was higher during the 1981-1999 period than during the 2000-2020 period. C) was roughly the same between the 1981-1999 period and the 2000-2020 period. D) has shown random patterns since 1981. Answer: B Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

6) According to the text, a typical resident born in an advanced nation in the early 1980s would A) experience a lower level of per capital real GDP by 2000. B) experience two times larger in per capital real GDP by 2000. C) experience about 40% larger in per capital real GDP by 2000. D) experience almost the same per capital real GDP by 2000. Answer: C Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 7) According to the text, a typical resident born in an emerging country in 2000 would A) experience a lower level of per capital real GDP by 2020. B) experience two times larger in per capital real GDP by 2020. C) experience about 65% larger in per capital real GDP by 2020. D) experience almost the same per capital real GDP by 2020. Answer: C Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 8) According to the text, the average annual growth rate of real GDP during the 2000-2020 period was about ________ for advanced nations and about ________ for emerging and developing nations. A) 5%; 4% B) 7%; 2% C) 5%; 5% D) 1.5%; 3% Answer: D Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 9) According to the text, during the 2000-2020 period the average annual growth rate was A) lower for developing nations than advanced nations. B) the same between developing nations and advanced nations. C) higher for developing nations than advanced nations. D) lower for emerging nations than developing and advanced nations. Answer: C Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking

10) According to the text, how has the global shift in economic growth occurred since 2000? A) High economic growth has shifted from emerging nations to developing nations. B) Economic growth has shifted downward for all nations in the world. C) High economic growth has shifted from advanced nations to emerging nations. D) Emerging and developing nations have experienced negative economic growth rates while advanced nations have continued to experience high economic growth rates. Answer: C Diff: 2 Topic: 18.3 A Recent Shift in Global Growth Trends Learning Outcome: Macro-4: Explain the sources of productivity growth AACSB: Analytical thinking 18.4 Private International Financial Flows as a Source of Global Growth 1) Foreign direct investment is defined as A) the purchase of more than 10 percent of the shares of ownership in a company in another nation. B) funds allocated into a foreign stock market that represent an ownership share of firms less than 5 percent. C) opening a deposit account in a foreign bank. D) purchasing government bonds. Answer: A Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 2) The acquisition of more than 10 percent of the shares of ownership in a company in another nation is called A) portfolio investment. B) gross private international investment. C) foreign direct investment. D) indirect investment. Answer: C Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

3) An example of foreign direct investment is the A) domestic acquisition of less than 10 percent of a foreign company. B) foreign purchase of an entire domestic company. C) purchase of livestock from abroad. D) sale of insurance in a foreign nation. Answer: B Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Application of knowledge 4) Most international investment finance today comes from A) portfolio and foreign direct investment. B) printing more money. C) government financing. D) tax collections. Answer: A Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 5) Portfolio investment means buying A) less than 10 percent of stock shares of of a foreign company. B) more than 50 percent of stock shares of a foreign company. C) a combination of different companies' stock shares. D) bonds through a financial company. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 6) The three sources of private direct investment in developing nations are A) bank loans, government loans, and Eurobond issues. B) bank loans, portfolio investments, and foreign direct investments. C) portfolio loans, IMF loans, and government loans. D) foreign direct investment, government loans, and Eurobond issues. Answer: B Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

7) Which of the following is NOT one of the three primary sources of private investment funds flowing into developing nations? A) bank loans B) foreign direct investment C) World Bank and IMF loans D) portfolio investment Answer: C Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 8) The primary motivation for private foreign investment in developing nations is A) to improve the standard of living for workers. B) to do research in countries with fewer social regulations. C) to eradicate poverty. D) the potential for high rates of return. Answer: D Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 9) The World Bank has extended a loan to Country X to build a new toll road and counts on the repayment of the loan from the collected tolls. After the funds have been transferred to the country, the government decides to spend the money to build a new presidential palace. This is an example of A) hostile selection. B) adverse selection. C) moral hazard. D) government risk. Answer: C Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

10) An international financial crisis is most often caused by A) a nation's central bank lowering domestic interest rates. B) a government refusing to pay its dues to the United Nations. C) foreign investments and loans being withdrawn from a nation. D) a drop in the value of the U.S. dollar. Answer: C Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 11) Which of the following is NOT a method for promoting global economic growth? A) Rely on private markets to direct capital goods toward their best use. B) Count on developed nations to develop policies that promote economic growth in developing nations. C) Encourage population growth so that developing nations' labor supply increases. D) market-based approach Answer: C Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 12) All of the following are sources of funding for capital goods in developing countries EXCEPT A) loans from banks. B) foreign direct investment. C) taxation. D) portfolio investment. Answer: C Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

13) Portfolio investment is defined as A) the purchase of less than 40 percent of the shares of ownership in a company in another country. B) the acquisition of more than 40 percent of the shares of ownership in a company in another country. C) the diversification of purchasing shares in many companies in one country so that risk is kept to a minimum. D) none of these Answer: D Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 14) Foreign direct investment is A) the purchase of less than 10 percent of the shares of ownership in a company in another country. B) the purchase of more than 10 percent of the shares of ownership in a company in another country. C) the diversification of purchasing shares in many companies in one country so that risk is kept to a minimum. D) the diversification of purchasing shares in one company in many countries so that risk is kept to a minimum. Answer: B Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 15) The acquisition of more than 10 percent of the shares of ownership in a company in another country is known as A) gross overseas investment. B) net national investment. C) portfolio investment. D) none of these Answer: D Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

16) The purchase of less than 10 percent of the shares of ownership in a company in another country is known as A) a hostile takeover. B) dead capital investment. C) foreign direct investment. D) portfolio investment. Answer: D Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 17) Why are international investors who have invested in developing nations favoring foreign direct investment and portfolio investment over loans? A) The process of making loans is usually more difficult for investors to do than foreign direct and portfolio investment. B) The interest rate charged on the loans is usually lower than what can be earned in the U.S. C) It is illegal for banks to make loans to foreign firms. D) Investors have an aversion to owning dead capital and want to make sure that the resources they own do not become dead capital. Answer: D Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 18) When investment occurs in developing nations, A) investors hope to gain significant returns on their investment and residents gain higher rates of economic growth. B) higher rates of economic growth are usually not achieved. C) significant levels of pollution usually occur. D) government politicians usually benefit from the illegal payments made to secure the investment. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

19) Adverse selection is a barrier to financing global growth because A) firms sometimes have trouble determining whether they need funds or not. B) if investors have trouble identifying high-risk firms they may be unwilling to lend funds to creditworthy firms. C) there is the possibility that the funds are used for riskier behavior than the lender agreed to. D) of the differences between financing using loans, portfolio investment and foreign direct investment. Answer: B Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 20) Moral hazard is a barrier to financing global growth because A) firms sometimes have trouble determining whether they need funds or not. B) if investors have trouble identifying high-risk firms they may be unwilling to give money to creditworthy firms. C) there is the possibility that the funds are used for riskier behavior than the lender agreed to. D) of the differences between financing using loans, portfolio investment and foreign direct investment. Answer: C Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 21) An international financial crisis is A) when at least one developing country defaults on its loans. B) when a major bank defaults. C) when a world leader is deposed from office. D) the rapid withdrawal of foreign investments and loans from a nation. Answer: D Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

22) A rapid withdrawal of foreign investments and loans from a nation is A) dead capital. B) an international financial crisis. C) foreign direct capital. D) portfolio investment. Answer: B Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 23) When an international financial crisis occurs, A) financial lenders protect their investments by pouring money into the ailing country. B) investors sell off bonds and restrict loans as a mechanism to help the country recover. C) financial flows can slow to a trickle, influencing economic growth. D) there are no serious financial effects that last more than a few months. Answer: C Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 24) International investors are more likely to invest in countries A) where it is relatively easier to establish property rights to capital goods. B) where there is a significant amount of dead capital. C) which have a high amount of government inefficiency. D) where there are barriers to the ownership of capital goods. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

25) Foreign direct investment refers to A) the acquisition of more than 10 percent of the shares of ownership in a company in another nation. B) the acquisition of less than 10 percent of the shares of ownership in a company in another nation. C) the granting of a loan to a company located in a foreign country. D) a direct monetary grant to a foreign company or government. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 26) Foreign direct investment implies that the investor obtains ________ share in a foreign company's ownership. A) less than 1 percent B) less than 5 percent C) less than 10 percent D) none of these Answer: D Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 27) The purchase of less than 10 percent of the shares of ownership in a foreign company is referred to as a A) portfolio investment. B) foreign direct investment. C) foreign indirect investment. D) negligible investment. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

28) Portfolio investment means the A) purchase of all shares of multiple companies in another country. B) purchase of less than 50 percent of the shares of ownership in a company in another country. C) purchase of more than 80 percent of the shares of ownership in a company in another country. D) purchase of less than 10 percent of the shares of ownership in a company in another country. Answer: D Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 29) The acquisition of more than 10 percent of the outstanding shares in a company in another country is A) foreign direct investment. B) foreign direct acquisition. C) portfolio investment. D) portfolio acquisition. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 30) For foreign direct investment to occur, the purchase has to be more than A) 2 percent but less than 5 percent of shares in a business located abroad. B) 5 percent but less than 10 percent of shares in a business located abroad. C) 8 percent but less than 10 percent of shares in a business located abroad. D) 10 percent of shares in a business located abroad. Answer: D Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

31) If you invest in a foreign company by buying 8 percent of its shares of stock, you have engaged in A) portfolio investment. B) moral hazard. C) foreign direct investment. D) adverse selection. Answer: A Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 32) If you invest in a foreign company by buying 30 percent of its shares of stock, you have engaged in A) portfolio investment. B) moral hazard. C) foreign direct investment. D) adverse selection. Answer: C Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 33) Portfolio investment and foreign direct investment are methods through which A) ownership in assets are acquired in countries other than one's home country. B) U.S. residents invest funds in companies that export goods. C) U.S. residents invest funds in companies that import goods. D) short-term investments are converted to long-term ones. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

34) The possibility for recipients of funds in foreign countries to engage in riskier behavior after receiving financing is called A) inequitable financing. B) moral hazard. C) adverse selection. D) asymmetric information. Answer: B Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 35) The adverse selection problem in international investment means A) that those seeking funds for the riskiest projects are those most actively seeking the funds. B) that the recipients of the funds may use the funds for other than the approved projects. C) that government officials may demand higher than the usual amount of bribes. D) those in the highest levels of government are the most dishonest. Answer: A Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 36) An example of the moral hazard problem in international investment would be that A) those seeking funds for the riskiest projects are amongst those most actively seeking the funds. B) the recipients of the funds may use the funds for riskier projects than the approved project. C) government officials may demand higher than the usual amount of bribes. D) those seeking the funds are dishonest. Answer: B Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

37) The purchase of more than ten percent of the shares of a foreign company is known as a(n) A) foreign direct investment. B) International Monetary Fund (IMF) investment. C) portfolio investment. D) World Bank investment. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 38) Investors are often willing to take the risks associated with investing in capital goods in developing nations because developing nations A) always insure the investments. B) insure a small return on investment. C) get the International Monetary Fund (IMF) to back investments through a series of loan guarantees. D) have a large portion of the world's unutilized or underutilized resources and hence profit potential. Answer: D Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 39) When lenders are unable to get good information about the worthiness of a project the lender has the problem of A) adverse selection. B) adverse hazard. C) moral hazard. D) moral selection. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

40) The potential for recipients of a loan to engage in riskier behavior after receiving the financing is called A) adverse selection. B) moral hazard. C) moral selection. D) adverse hazard. Answer: B Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 41) If high level of corruption in a country deters foreign investment in worthy projects, this is known as A) dead capital investment. B) moral hazard. C) foreign direct investment. D) adverse selection. Answer: D Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 42) When a foreign company engages in riskier behavior after it has received international investment funds, it is known as A) portfolio investment. B) moral hazard. C) foreign direct investment. D) adverse selection. Answer: B Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

43) If there is a major problem in a country that leads to the rapid withdrawal of foreign investment, this is known as A) moral hazard. B) adverse selection crisis. C) an international leakage. D) international financial crisis. Answer: D Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 44) In recent years, the largest form of international investment funds for developing countries was in the form of A) bank loans. B) portfolio investments. C) foreign direct investments. D) loans from the World Bank. Answer: B Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 45) Two types of asymmetric information that create problems for international investment are A) adverse hazard and moral selection. B) adverse hazard and moral hazard. C) adverse selection and moral hazard. D) adverse selection and moral selection. Answer: C Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

46) The rapid withdrawal of foreign investment funds from a nation creates A) an international financial crisis. B) an international funding crisis. C) an international fiscal crisis. D) an international fiduciary crisis. Answer: A Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 47) Adverse selection and moral hazard problems arise when there is A) complete information B) asymmetric information. C) too much information. D) symmetric information. Answer: B Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 48) If there are concerns about moral hazard and adverse selection in a country, A) economic growth will reduce. B) there will be more portfolio investment. C) there will be more foreign direct investment. D) it will be easier to arrange financing for new development projects. Answer: A Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

49) An international financial crisis will likely occur when A) the rate of money supply growth is not the same in all nations. B) many international investors look at the behavior of a few large investors to determine when funds should be withdrawn from a particular country. C) newly-acquired political freedom in a country leads some interest groups to form a coalition limiting competition. D) there is an increase in portfolio investment. Answer: B Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 50) A country experiencing an international financial crisis will likely A) see an increase in portfolio investment. B) see an increase in foreign direct investment. C) experience a decrease in its economic growth rate. D) be able to maintain growth and prosperity in its domestic economy, but its export sector will suffer. Answer: C Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 51) All of the following are barriers to international investment EXCEPT A) symmetric information. B) adverse selection. C) incomplete information. D) moral hazard. Answer: A Diff: 2 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

52) The following are obstacles to international investment EXCEPT A) rational expectations. B) asymmetric information. C) adverse selection. D) moral hazard. Answer: A Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 53) Discuss the rationales for foreign financing of investment in developing nations and explain how developing countries benefit from international capital investment. Answer: The primary motivation for foreign investment in developing nations is the potential for high rates of return on large amounts of untapped resources. Developing countries benefit from international capital investment because they do not have the internal funds to be able to support projects that will lead to economic growth. Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 54) What are the sources of private investments in foreign nations? Answer: The three sources of private investment funds are bank loans, portfolio investments and foreign direct investment. Portfolio investment is a purchase of less than 10 percent of the shares in a corporation in another country. Foreign direct investment is a purchase of more than 10 percent of ownership share in a foreign corporation. Diff: 1 Topic: 18.4 Private International Financial Flows as a Source of Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

18.5 International Institutions and Policies for Global Growth 1) Which of the following is TRUE about the World Bank? A) It is a multinational agency that specializes in development loans. B) It is a U.S. agency that specializes in development loans. C) It is a U.N. sponsored agency that specializes in development loans. D) It is made up of all central banks in the world. Answer: A Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 2) The multinational agency that specializes in making loans to developing nations in an effort to promote long-term development and growth is the A) International Monetary Fund. B) World Trade Organization. C) United Nations Development Program. D) World Bank. Answer: D Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 3) Approximately what percentage of the World Bank's loans go to developing nations in the East Asia/Pacific and South Asia regions combined? A) 5% B) 35% C) 70% D) 100% Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

4) Approximately what percentage of the World Bank's loans go to developing nations in the entire African continent? A) 5% B) 34% C) 70% D) 100% Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 5) The World Bank makes loans primarily to A) nations without free markets, such as North Korea. B) developing nations. C) nations without national debt. D) highly developed nations. Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 6) The multinational organization that aims to promote world economic growth by fostering financial stability is the A) International Monetary Fund. B) World Trade Organization. C) United Nations. D) World Bank. Answer: A Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

7) A nation's account with the IMF is called its A) deposit surplus. B) current account. C) quota subscription. D) capital account. Answer: C Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 8) The World Bank was formed in A) 1930. B) 1960. C) 1945. D) 1918. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 9) The World Bank is A) made up of the central banks of the leading industrial nations of the world. B) made up of five separate institutions. C) the Bank of the United Nations. D) the European Union. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 10) The International Monetary Fund (IMF) is an international organization designed to A) promote world economic growth by means of greater financial stability. B) promote world economic growth via loans to developed nations. C) circulate a single currency worldwide. D) act as the world's central bank. Answer: A Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 48 Copyright © 2021 Pearson Education, Inc.

11) The international unit of accounting used by the International Monetary Fund (IMF) is called A) the Eurodollar. B) the IMF dollar. C) the quota subscription. D) special drawing rights. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 12) The largest quota subscriber of the International Monetary Fund (IMF) is A) Japan. B) Germany. C) the United States. D) China. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 13) The International Monetary Fund (IMF) was created to achieve each of the following goals EXCEPT A) to supervise exchange-rate practices of member countries. B) to help finance economic development in poor countries. C) to encourage convertibility of member countries' currencies. D) to lend funds to countries having difficulties meeting their international payment obligations. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

14) Which of the following statements about the International Monetary Fund (IMF) is TRUE? A) The IMF was created to finance long-term economic development projects in poor countries. B) The IMF was created to reduce tariff barriers between nations. C) The IMF functions as a central bank that conducts monetary policy for the world economy. D) The IMF obtains funds from quota subscriptions charged to member countries. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 15) Each nation's International Monetary Fund (IMF) quota subscription is based on A) its national income. B) its share in world trade. C) its public debt. D) its trade surplus. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 16) Which of the following is NOT a criticism that has been leveled at the World Bank? A) Too many loans go to nations capable of privately financing their projects. B) Since 1990, the World Bank has loaned mostly to African countries, to the detriment of nations in other parts of the world. C) Some countries receiving World Bank loans are net lenders of funds to other nations and so should not be receiving World Bank funds. D) Despite receiving loans from the World Bank, economic growth in many client nations has been disappointing. Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

17) The World Bank specializes in making loans to promote A) short-term assistance when a nation experiences a financial crisis. B) so-called stand-by arrangements and credits. C) financial stability. D) long-term economic development. Answer: D Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 18) The World Bank A) is a central bank like the Federal Reserve System. B) is the bank that causes international financial crisis when the reserves are too high. C) is a multinational agency that specializes in making loans to promote long-term development and growth in developing countries. D) is a multinational organization that aims to promote world economic growth through more financial stability. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 19) Which of the following world regions has received the largest percentage of lending from the World Bank since 1990? A) Latin America/Caribbean B) South Asia C) Africa D) Middle East Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

20) The International Monetary Fund A) is a central bank like the Federal Reserve System. B) is the bank that causes international financial crisis when the reserves are too high. C) is a multinational agency that specializes in making loans to promote long-term development and growth in developing countries. D) is a multinational organization that aims to promote world economic growth through more financial stability. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 21) The largest International Monetary Fund quota subscription, denominated in Special Drawing Rights, is held by A) the United States. B) Japan. C) China. D) Russia. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 22) A multinational agency that specializes solely in making loans to promote long-term development and growth in developing countries is the A) Federal Reserve System. B) World Bank. C) International Monetary Fund. D) International World Fund. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

23) A multinational organization that aims to promote world economic growth through more financial stability is the A) Federal Reserve System. B) World Bank. C) International Monetary Fund. D) International World Fund. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 24) The World Bank will primarily make A) short-term loans for investment projects that are relatively safe. B) short-term loans for investment projects which might not receive private financial support. C) long-term loans for investment projects that are relatively risky. D) long-term in nature for investment projects which might not receive private financial support. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 25) The international organization with the sole goal of promoting global antipoverty efforts is the A) World Bank. B) International Monetary Fund. C) Board of Governors of the Federal Reserve System. D) GAE. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

26) Which of the following is NOT part of the World Bank? A) International Development Association B) Federal Reserve Bank of New York C) International Center for Settlement of Investment Disputes D) Multinational Investment Guarantee Agency Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 27) The primary source of funds for the World Bank is A) quota subscriptions. B) private financial markets. C) the world's wealthiest countries. D) the New York Stock Exchange. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 28) A quota subscription is A) the maximum amount of funds that can be drawn at the World Bank without a formal proposal. B) the maximum amount that a private investor can invest in foreign firms. C) a nation's account at the International Monetary Fund. D) when an investor sets limits on the proportion of their portfolio that will contain foreign investments. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

29) A nation's account with the International Monetary Fund denominated in special drawing rights is A) the quota subscription. B) the account at the World Bank. C) portfolio investment. D) the account at the Fed. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 30) The funds that nations have on account at the International Monetary Fund are measured in A) U.S. dollars. B) the currency of the nation that has deposited the funds. C) a quota subscription. D) an international unit of accounting called special drawing rights. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 31) To be a member of the Internal Monetary Fund a nation must deposit funds based on A) its national income. B) the amount of funds it wants to deposit. C) the need to loan money to developing nations. D) rules set up by the World Bank. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

32) Which of the following statements is TRUE? A) All nations that belong to the International Monetary Fund have equal voting power. B) The voting power of a nation in the International Monetary Fund is determined by its quota subscription. C) The voting power of a nation in the International Monetary Fund is called special drawing rights. D) The voting procedure in the International Fund is determined by the World Bank. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 33) The amount of funds that a nation can withdraw from the International Monetary Fund depends upon A) its quota subscription. B) whether it is a developing nation or a developed nation. C) whether it is seeking a long-term or short-term loan. D) the rules set up by the World Bank. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 34) The primary function of the International Monetary Fund is A) to provide loans only to private firms in developing countries. B) to make direct, irrevocable transfers of funds from wealthy nations to poor nations. C) to lend solely on the basis of a nation's relative poverty. D) to make loans aimed at promoting global stability and hence growth. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

35) All the following would be a possible loan that the International Monetary Fund might make EXCEPT A) a loan to a private firm. B) long-term loans to a nation's government which support growth promoting projects. C) short-term loans to a nation's government. D) long-term loans to countries which are having problems in repaying existing debts. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 36) Which of the following statements is TRUE about the success of the World Bank? A) The World Bank has been very successful in promoting economic growth because loans have been primarily made to countries that have trouble attracting private funds. B) The World Bank has not been successful because many loans have been made to countries that can attract private funds. C) The World Bank has been successful because it has focused on its primary function of making loans to governments. D) The World Bank has not been successful because it has focused on making loans to governments where there has been a loss of confidence in a nation's financial system. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 37) If the World Bank makes loans to nations that can attract private funds, A) the increase in growth in that nation will spill over to other nations that are developing. B) these loans will interfere in the private market for capital goods and can lead to inefficient investment. C) the World Bank's loans will lead to even more private loans made to developing nations. D) the presence of the World Bank's loans will lead to even more private funds being attracted to that country. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

38) It is believed that in order to promote growth, a top priority of the World Bank and the International Monetary Fund is to A) promote the increase of dead capital. B) make more loans. C) focus on basic market foundations of guaranteeing property and contract rights. D) join forces and merge into one unit. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 39) Because of the problems of adverse selection and moral hazard, it has been suggested that the World Bank and International Monetary Fund A) make loans to the riskiest nations so that private investors will not be tempted to take a risk. B) loan only to countries that have free elections. C) not make loans to risky nations because there is a high demand for funds from safer nations. D) impose tougher preconditions on borrowers. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 40) The World Bank A) determines the price level in each of its member nations. B) determines the labor force participation rate in each of its member nations. C) mediates contracts regarding minimum prices for various globally-traded commodities. D) extends long-term loans for capital investment projects to developing nations. Answer: D Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

41) Where does the World Bank get its funds? A) from printing its own money B) from tariffs collected on goods traded internationally C) from governments of the wealthiest nations and from private financial markets D) from seizing dead capital in developing nations and selling it at auction Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 42) The World Bank is A) composed of five separate institutions. B) composed of large private banks among developed nations. C) the official name of the International Monetary Fund. D) the central bank of the United Nations. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 43) Special drawing rights are A) the reserves held by members of the European Union to back their accounts with the European Central Bank. B) credit accounts held by individual stockholders with portfolio investments in other countries. C) international units of account held by the International Monetary Fund for member countries. D) the estimated level of oil reserves remaining in OPEC countries. Answer: C Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

44) How did the original focus of the IMF differ from that of the World Bank? A) The IMF provided short-term loans and the World Bank provided long-term loans. B) The IMF assisted wealthy nations and the World Bank assisted developing nations. C) The IMF gave grants to developing countries and the World Bank made loans. D) The IMF dealt in North and South America only, and the World Bank dealt with the rest of the world. Answer: A Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 45) The official mission of the World Bank is to A) fight global inflation. B) advise member nations on the appropriate levels of taxation. C) establish exchange rates between the currencies of member nations. D) provide funding for needed development projects that would have difficulty attracting private investment. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 46) Those who advocate a role for the World Bank in establishing systems of well-defined property and contract rights in developing nations would argue that A) such changes would eliminate the need for long-term capital funding. B) such changes would eliminate the need for short-term loans. C) such changes would make these economies more productive. D) asymmetric information is currently not a problem in these countries. Answer: C Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

47) The World Bank was formed in A) 1919. B) 1945. C) 1960. D) 1980. Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 48) The World Bank specializes in making loans to A) industrialized nations. B) communist nations. C) developing nations. D) African nations. Answer: C Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 49) Most of the loanable funds available to the World Bank to lend to developing nations come from A) the sale of oil. B) developing nations. C) the world's wealthiest nations. D) the sale of international bonds that are issued by the World Bank. Answer: C Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

50) One of the major criticisms of the World Bank is that it lends funds A) to impoverished nations. B) to countries which could easily borrow funds from other sources. C) to industrialized nations. D) to terrorist groups not affiliated with any country. Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 51) The World Bank primarily engages in A) short-term lending aimed at helping developing nations repay debt accumulated in past years. B) short-term lending aimed at helping developing nations repay loans from the International Monetary Fund. C) long-term lending aimed at helping developing nations' governments and central banks keep exchange rates from varying. D) long-term lending aimed at helping developing nations' governments and businesses make investments that will contribute to economic growth. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 52) The goal of the World Bank is to A) supervise exchange rate stability. B) supervise the activities of the central banks of member nations. C) sell the government securities of member nations on the open market. D) help finance economic development. Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

53) The ________ specializes in making long-term loans for capital investment projects that do NOT have private financial support. A) International Monetary Fund B) European Central Bank C) World Bank D) Federal Reserve Bank Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 54) A multinational agency that specializes in making loans to a larger number of developing nations to promote long-term development and growth is A) the International Bank. B) the World Bank. C) the International Monetary Fund. D) the World Monetary Fund. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 55) If the government of a developing country is having difficulty selling bonds to build an irrigation system, it could go to the A) World Bank. B) Federal Reserve Bank. C) United Nations International Bank. D) International Monetary Organization. Answer: A Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

56) An international organization formed with the aim of promoting world economic growth through financial stability is called A) the World Bank. B) the International Development Association. C) the International Finance Corporation. D) the International Monetary Fund (IMF). Answer: D Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 57) Which of the following countries has the largest quota subscription at the IMF? A) Japan B) Russia C) United States D) China Answer: C Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 58) The International Monetary Fund was created to achieve each of the following goals EXCEPT A) lend funds to countries with international payment problems. B) finance large government infrastructure projects. C) monitor and offer advice on the exchange rate policies of member nations. D) encourage free convertibility of the currencies of member nations. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

59) When a nation's currency suddenly loses value, the ________ may step in to buy the afflicted currency. A) World Bank B) International Monetary Fund C) World Trade Organization D) United Nations Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 60) A nation's account with the International Monetary Fund is measured in an international unit known as A) international reserves. B) special drawing rights. C) gold reserves. D) monetary deposits. Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 61) A nation's account with the International Monetary Fund is known as A) a quota subscription. B) special drawing rights. C) gold standard. D) international reserves. Answer: A Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

62) A multinational organization that aims to promote world economic growth through more financial stability is A) the World Monetary Fund. B) the International Bank. C) the International Monetary Fund. D) the Impossible Mission Force. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 63) The international unit of accounting used by the IMF is the A) euro. B) gold standard. C) special drawing right. D) dollar. Answer: C Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 64) Both the International Monetary Fund and the World Bank were established A) at the end of World War I. B) at the end of World War II. C) at the end of Korean War. D) in the 1970s. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

65) Voting power in the IMF is determined by A) the population size of member states. B) the quota subscription size. C) the length of membership. D) the size of the member nation's trade surplus. Answer: B Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 66) Both the World Bank and the IMF typically A) make loans for less than 5 years only. B) toughen the loan requirements after a nation has violated an original arrangement. C) charge lower than average loan rates to ensure repayment. D) charge higher than average loan rates. Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 67) The "currency" of the IMF is A) the International Currency Unit. B) the Special Drawing Right. C) the IMF Dollar. D) gold. Answer: B Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 68) Each country's IMF quota subscription is determined by A) the relative size of its national income. B) the size of its population. C) the size of world trade. D) how much a country wants to contribute. Answer: A Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 67 Copyright © 2021 Pearson Education, Inc.

69) In recent years, many economists criticized the IMF and the World Bank. Some suggestions for reform are to A) create a board of directors made up of finance ministers for the IMF. B) establish rules restricting capital outflows. C) increase private-sector lending by governments providing tax breaks to lenders. D) all of these Answer: D Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 70) When a nation joins the IMF, it deposits funds into an account. These funds have a value based on a weighted average of A) the euro, the British pound sterling, the Japanese yen, and the U.S. dollar. B) the euro, the British pound sterling, and the Chinese yuan. C) the Russian ruble, the British pound sterling, the Japanese yen, and the U.S. dollar. D) the Russian ruble, the British pound sterling, the Chinese yuan, and the U.S. dollar. Answer: A Diff: 3 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 71) Which organization functions as a lender of last resort for national governments? A) the World Bank B) the U.S. Treasury C) the Federal Reserve Bank D) the International Monetary Fund Answer: D Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

72) Which of the following is NOT a function of the International Monetary Fund? A) serve as lender of last resort for national governments B) administer an international foreign exchange system C) establish the SDR system nations utilize to settle international payment obligations D) establish and administer each nation's fiscal and monetary policies Answer: D Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 73) What is the mission of the World Bank? Answer: The World Bank, which was established after World War II, is charged with the mission of providing long-term loans for specific capital investment projects. In the past thirty years the bank is increasingly involved in financing projects that aim to reduce poverty. Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 74) What is the mission of the International Monetary Fund (IMF)? Answer: The IMF was established after World War II to help maintain international financial stability. When nations join the IMF, they all must deposit funds called quota subscriptions, measured in an accounting unit called special drawing rights. Quotas are based on each nation's national income. The IMF can lend these funds in an effort to solve financial problems arising from fluctuations in trade, investor loss of confidence in a nation's financial system, or spillover effects from financial problems originating elsewhere. Diff: 1 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 75) Name the two international institutions that have been formed to attain higher rates of global economic growth and briefly discuss what each of the agencies does. Answer: There are two agencies, the World Bank and the International Monetary Fund. The World Bank specializes in making long-term loans for capital investment projects in developing countries that otherwise might not receive private financial support. The International Monetary Fund promotes global economic growth by fostering financial stability in developing countries. Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 69 Copyright © 2021 Pearson Education, Inc.

76) Discuss why the World Bank has been criticized for making loans to nations that can attract private funds. Answer: Loans given to nations that can attract private funds interfere with the private market for capital goods. This can encourage inefficient investment in projects that should not be undertaken. Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking 77) What are some of the criticisms that have been levied on the World Bank and the International Monetary Fund concerning adverse selection and moral hazard? Answer: The World Bank and International Monetary Fund usually place very loose conditions on loans and this increases adverse selection problems. Some economists argue that the private lenders and investors assume that the World Bank and International Monetary Fund will back up nations and will therefore lower their standards and make loans to less creditworthy nations. This contributes to international financial crises. Diff: 2 Topic: 18.5 International Institutions and Policies for Global Growth Learning Outcome: Macro-16: Discuss the obstacles to development in developing countries and ways to address those obstacles AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 19 Demand and Supply Elasticity 19.1 Price Elasticity 1) The price elasticity of demand is a measure of A) the responsiveness of the quantity demanded of a good to a changes in the price of the good. B) the quantity demanded of a good at a given price. C) the demand for a product holding prices constant. D) the horizontal shift in the demand curve when the price of a good changes. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 2) Suppose that when the price of donuts rises 10%, the quantity demanded of donuts falls 3%. Based on this information, what is the approximate absolute price elasticity of demand for donuts? A) 3.33 B) 0.3 C) 30 D) 1.3 Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 3) The price elasticity of demand measures A) the consumers' sensitivity to a price change. B) the producers' sensitivity to a price change. C) how much the market supply changes in response to a change in demand. D) how much the demand changes in response to a change in income. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

4) A good's price elasticity of demand can be calculated by using the formula of A) percentage change in price divided by percentage change in quantity demanded. B) percentage change in quantity demanded divided by percentage change in price. C) percentage change in price divided by percentage change in income. D) absolute change in quantity demanded divided by absolute change in price. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 5) Which of the following statements about demand and price elasticity of demand is TRUE? A) As the demand curve has a positive slope, the price elasticity of demand is positive. B) As the demand curve has a negative slope, the price elasticity of demand is negative. C) As the demand curve has a positive slope, the price elasticity of demand is negative. D) As the demand curve has a negative slope, the price elasticity of demand is positive. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 6) The price elasticity of demand shows A) the relationship between market price and household income. B) the proportionate amount by which the quantity demanded changes in response to a proportionate change in price. C) the quantity demanded at a given price. D) the proportionate amount by which the price changes in response to a proportionate change in quantity demanded. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

7) The price elasticity of demand is A) always positive, so there is no reason to consider the absolute value of the price elasticity of demand. B) always negative, but by convention, economists typically express the price elasticity of demand as an absolute value. C) always equal to -1, which by convention economists typically express as an absolute value, or 1. D) always equal to zero, so there is no reason to consider the absolute value of the price elasticity of demand. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 8) If the absolute price elasticity of demand for good A is 0.2, when there is a 10 percent increase in price, we can conclude that quantity demanded A) has fallen by 50 percent. B) has fallen by 20 percent. C) has fallen by 5 percent. D) has fallen by 2 percent. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 9) When economists want to obtain a measure of the responsiveness of quantity demanded to changes in price, they use A) the slope of the demand curve. B) the price elasticity of demand. C) the unit change in quantity demanded. D) the cross-price elasticity of demand. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

10) If the price elasticity of demand for good A is -4, then a 2% increase in A) consumer income will result in a 2% decrease in the demand for good A. B) consumer income will result in a 2% increase in the demand for good A. C) the market price of good A will result in a 8% increase in the quantity demanded of good A. D) the market price of good A will result in a 8% decrease in the quantity demanded of good A. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 11) The formal definition of price elasticity of demand is A) change in quantity demanded divided by change in price. B) quantity demanded divided by price. C) percentage change in quantity demanded divided by percentage change in price. D) quantity demanded multiplied by price and divided by 100. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 12) If price decreases by 10 percent and quantity demanded increases by 2 percent, the price elasticity of demand will be A) 2. B) 0.2. C) 5. D) 20. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

13) If the absolute price elasticity of demand is 1.0, a 10 percent decrease in price will increase quantity demanded by A) 0.1 percent. B) 10 percent. C) 100 percent. D) 1 percent. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 14) A 2 percent rise in the price of a good leads to a 6 percent decrease in quantity demanded. The absolute price elasticity of demand is A) 3. B) 0.3. C) 1.2. D) 6. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 15) An absolute price elasticity of demand equal to 2 indicates that a A) 2 percent increase in price leads to a 10 percent decrease in quantity demanded. B) 1 percent increase in price leads to a 2 percent decrease in quantity demanded. C) 0.2 percent decrease in price leads to a 1 percent increase in quantity demanded. D) 10 percent decrease in price leads to a 2 percent increase in quantity demanded. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

16) Even though price elasticity of demand is always ________, by convention its absolute value is always discussed as a ________. A) negative; prime number B) positive; negative number C) a fraction; whole number D) negative; positive number Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 17) When the price of a soft drink from the campus vending machine was $0.60 per can, 100 cans were sold each day. After the price increased to $0.75 per can, sales dropped to 85 cans per day. Over this range, the absolute price elasticity of demand for soft drinks was approximately equal to A) 0.15. B) 0.60. C) 0.73. D) 1.67. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 18) Six months ago, the price of gasoline was $2.20 per gallon. Now, the price is $2.40 per gallon. In response to this price increase, the number of gallons of gasoline purchased has declined by 2 percent. Based on this information, what is the absolute price elasticity of demand for gasoline? A) 4.35 B) 1.20 C) 0.23 D) 0.10 Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

19) The local baseball stadium's concession stands previously sold hot dogs for 80 cents apiece. At that price, when a baseball fan went to watch a baseball game, he bought 2 hotdogs. But now that the stadium has a "dime-a-dog night," he has purchased 6 hot dogs. What is the approximate value of this individual's absolute price elasticity of demand for hot dogs? A) 0.64 B) 0.80 C) 1.00 D) 1.56 Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 20) Suppose the quantity demanded of ice cream cones increases from 400 to 425 cones a day when the price is reduced from $1.50 to $1.25. In this situation, the elasticity of demand, calculated using the average method, is A) 3. B) 1. C) 0.33. D) 1.33. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 21) The quantity of raspberries sold at a local store increases from 100 pints to 1,500 pints when the price is reduced from $4.00 to $1.00. In this situation, the absolute price elasticity of demand for raspberries is approximately A) 0.69. B) 6.7. C) 1.46. D) 4.3. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

22) Suppose that the price of eggs increases from 75 cents to $1.00 per dozen and as a result a typical farmer experiences a decrease in egg sales from 300 to 200 dozen per week. Using the method of average values, the absolute price elasticity of demand is A) 1.4. B) 0.8. C) 3.0. D) 1.75. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 23) If the price of good A increases from $15 to $20 per unit and quantity demanded falls from 150 to 100 units, then by using the method of average values, we can calculate the absolute price elasticity of demand to be A) 2.6. B) 0.75. C) 1.4. D) 2.4. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 24) When price is $5 per unit, quantity demanded is 12 units. When price is $6 per unit, quantity demanded is 8 units. The value of the absolute price elasticity of demand is approximately A) 2.20. B) 4.00. C) 1.82. D) 0.36. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

25) According to the above table, what is the absolute price elasticity of demand if price falls from $8.00 to $7.50? A) 4.00 B) 2.82 C) 1.80 D) 1.21 Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 26) According to the above table, what is the absolute price elasticity of demand when price rises from $5.50 to $6? A) 4.00 B) 2.23 C) 1.21 D) 0.50 Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 27) The price elasticity of demand measures A) the responsiveness of quantity demanded to a change in price. B) the responsiveness of price to a change in competition. C) the change in quantity demanded due to a change consumer income. D) the change in price due to a change in demand. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

28) The responsiveness of quantity demanded of a good to changes in its price is the A) cross elasticity of demand. B) quantity elasticity of price. C) income elasticity. D) price elasticity of demand. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 29) The word best associated with price elasticity of demand is A) relative. B) total. C) positive. D) unit. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 30) The price elasticity of demand is measured by the A) percentage change in quantity demanded divided by the percentage change in price. B) percentage change in price divided by the percentage change in quantity demanded. C) change in quantity demanded divided by the change in price. D) change in price divided by the change in quantity demanded. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 31) The actual value of the price elasticity of demand is always A) positive because of the law of demand. B) negative because of the law of demand. C) positive because of diminishing marginal utility. D) negative because percentages can only be negative. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

32) A 10 percent increase in the price of computer apps leads to a 1 percent decrease in the quantity demanded of computer apps. The absolute price elasticity of demand for computer apps is A) 9. B) 1. C) 0.1. D) 10. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 33) A 10 percent increase in the price of wireless earbuds leads to a 5 percent decrease in the quantity demanded of wireless earbuds. The absolute price elasticity of demand is A) 3. B) 0.33. C) 0.5. D) 2. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 34) A 2 percent increase in the price of wheat leads to a 2 percent decrease in the quantity demanded of rice. The absolute price elasticity of demand is A) 3. B) 1. C) 0.1. D) 6. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

35) A 2 percent increase in the price of shoes leads to a 5 percent decrease in the quantity demanded of shoes. The absolute price elasticity of demand is A) 2.5. B) 1. C) 0.4. D) 0.2. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 36) A value of the absolute price elasticity of demand equal to 0.4 indicates that A) a 4 percent increase in price leads to a 10 percent decrease in quantity demanded. B) a 10 percent increase in price leads to a 4 percent decrease in quantity demanded. C) a 0.4 percent increase in price leads to a 1 percent decrease in quantity demanded. D) a 1 percent increase in price leads to a 4 percent decrease in quantity demanded. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 37) A value of the absolute price elasticity of demand equal to 0.25 indicates that A) a 10% decrease in price leads to a 2.5% increase in quantity demanded. B) a 10% decrease in price leads to a 25% increase in quantity demanded. C) a 1% decrease in price leads to a 2.5% increase in quantity demanded. D) a 0.25% decrease in price leads to a 1% increase in quantity. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

38) A value of the absolute price elasticity of demand equal to 1.5 indicates that A) a 0.5% decrease in price leads to a 1% increase in quantity demanded. B) a 2% decrease in price leads to a 25% increase in quantity demanded. C) a 1% increase in price leads to a 15% decrease in quantity demanded. D) a 10% increase in price leads to a 15% decrease in quantity demanded. Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 39) Absolute price elasticities are calculated for four goods, and the values are: 0.009; 1.0; 3.5; and 4. Which indicates the most price-responsive situation? A) 0.009 B) 1.0 C) 3.5 D) 4.0 Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 40) The value of the absolute price elasticity of demand for good A is 4. The absolute price elasticity for good B is 1. Which good's quantity demanded is more responsive to a change in price? A) Good A B) Good B C) They are equally responsive. D) Not enough information is given. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

41) The value of the absolute price elasticity of demand for good A is 3. The absolute price elasticity for good B is 2. Which good's quantity demanded is less responsive to a change in price? A) Good A B) Good B C) They are equally responsive. D) Not enough information is given. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 42) The more sensitive quantity demanded is to a change in price, the A) smaller a change in price must be to induce a certain change in quantity demanded. B) greater the absolute price elasticity of demand. C) smaller the absolute price elasticity of demand. D) closer the absolute price elasticity of demand is to zero. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 43) Gold is sold in world markets, usually priced in terms of troy ounces. In the market for gold, the price elasticity of demand for gold would be expressed as A) the number of troy ounces of gold sold. B) the number of whatever currency is used in purchasing the gold. C) the number of dollars spent on gold. D) a unitless number. Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

44) Relative percentage changes are used in measuring price elasticity of demand, so that A) it does not matter whether price increases or decreases when calculating the elasticity. B) it does not matter what units are used to measure prices or quantities. C) we always obtain a positive number. D) larger numbers indicate greater responsiveness. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 45) The actual value of price elasticity of demand A) measures the absolute change in quantity demanded when there is a change in price. B) will change when the units good is measured in changes. C) varies with changes in supply. D) is always negative. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 46) The absolute price elasticity of demand for good A is 1.5 when price is measured in dollars. If price were measured in cents, the price elasticity elasticity of demand would equal A) 150. B) 12. C) 1.5. D) 0.75. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

47) The price elasticity of demand can be computed as A) change in total utility/change in quantity. B) change in price/change in quantity demanded. C) percentage change in quantity demanded/percentage change in price. D) change in quantity demanded/change in price. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

48) Refer to the above table. What is the absolute price elasticity of demand if a price falls from $7 to $6.50? A) 0.85 B) 1.08 C) 1.17 D) 0.92 Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

49) Refer to the above table. What is the absolute price elasticity of demand if a price falls from $7.50 to $7? A) 10 B) 1.38 C) 0.724 D) 0.1 Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 50) Refer to the above table. What is the absolute price elasticity of demand when a price rises from $9 to $9.50? A) 0.35 B) 0.55 C) 2.57 D) 2.85 Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 51) Refer to the above table. What is the absolute price elasticity of demand when a price rises from $8 to $8.50? A) 5.15 B) 1.94 C) 0.515 D) 0.194 Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

52) Refer to the above table. What is the absolute price elasticity of demand when price changes from $5.50 to $5.00? A) 0.72 B) 0.79 C) 1.38 D) 5.0 Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 53) Refer to the above table. Demand is least price elastic at a price of A) $10.00. B) $7.50. C) $7.00. D) $5.00. Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 54) Refer to the above table. Demand is unit elastic between the prices of A) $5.00 and $10.00. B) $6.00 and $7.00. C) $6.00 and $6.50. D) $7.00 and $7.50 Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

55) Refer to the above table. What is the absolute price elasticity of demand when price changes from $6.00 to $6.50? A) 1.60 B) 1.00 C) 0.65 D) 0.60 Answer: B Diff: 3 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 56) Price elasticity of demand is the responsiveness of A) the quantity demanded to a change in price. B) demand to a change in supply. C) demand to a change in income. D) demand for a good to a change in the demand for another good. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 57) The price elasticity of demand is the A) percentage change in quantity demanded divided by the percentage change in price. B) change in quantity demanded divided by the change in price. C) percentage change in price divided by the percentage change in quantity demanded. D) change in price divided by the change in quantity demanded. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

58) The result of the calculation of the price elasticity of demand is A) always positive. B) always negative. C) sometimes positive, sometimes negative. D) always greater than one. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 59) Price elasticity of demand basically measures A) the reliability of a product. B) the responsiveness of consumers to price changes. C) the variability of price changes. D) the percentage change in market price as a result of a change in demand. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 60) If the price of gasoline increased by 10% and consumers responded by purchasing 10% less gasoline, the absolute value of price elasticity of demand for gasoline would equal A) 0.1. B) 0.5. C) 10. D) 1. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

61) If the price of a cola increased by 10% and consumers responded by purchasing 20% less cola, the absolute value of price elasticity of demand for cola would be A) 0.20. B) 1.2. C) 2. D) 0.5. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 62) When discussing the price elasticity of demand we generally refer to the absolute price elasticity of demand by consumers. This means that we will A) disregard the law of demand. B) ignore its relationship to demand. C) disregard the minus sign. D) consider absolute rather than relative changes. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 63) The price elasticity of demand measures A) changes in demand. B) how responsive market prices are to a change in demand. C) how responsive consumers are to a change in price. D) how responsive consumers are to a change in income. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

64) If the absolute price elasticity of demand is 2, a 10 percent increase in the price will cause A) the quantity demanded to decrease by 2 percent. B) the quantity demanded to decrease by 20 percent. C) the quantity demanded to decrease by 5 percent. D) the quantity demanded to decrease by 50 percent. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 65) If the absolute price elasticity of demand is 0.1, a 10 percent decrease in the price will cause A) the quantity demanded to increase by 1 percent. B) the quantity demanded to increase by 10 percent. C) the quantity demanded to increase by 100 percent. D) the quantity demanded to increase by 0.1 percent. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 66) Consider the following data: Price of A $5 $4

Quantity Demanded of A 6 10

The absolute value of the price elasticity of demand for product A is A) 0.44. B) 1.80. C) 0.56. D) 2.25. Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

67) If the price of gasoline goes up by 10% and the quantity demanded goes down by 5%, the absolute value of the price elasticity of demand is A) 0.25. B) 0.50. C) 0.75. D) 1.00. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 68) The price elasticity of demand is A) always negative. B) sometimes positive. C) always positive. D) positive or negative, depending on supply. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 69) Owners of a taco shop finds that they can sell 150 tacos a day when the price of a taco is $1.20. When they price tacos at $1, they sell 170 tacos. The absolute value of the price elasticity of demand for tacos is A) 0.69. B) 1.45. C) 1.00. D) infinity. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

70) If the absolute price elasticity of demand for a product is less than 1, then A) consumers are relatively sensitive to price changes. B) consumers are relatively insensitive to price changes. C) there is a positive relationship between price changes and the quality of the product. D) producers are relatively insensitive to price changes. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 71) If the absolute price elasticity of demand for a product is less than 1, then A) consumers are relatively insensitive to price changes. B) consumers are relatively sensitive to price changes. C) there is a positive relationship between price changes and total revenue. D) producers are relatively insensitive to price changes. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 72) If the price of coffee increases from $2.50 per cup to $3.00 per cup and the quantity demanded goes down from 120 cups per week to 115 cups per week, the absolute value of price elasticity of demand in that price range is approximately A) 0.23. B) 4.35. C) 0.93. D) 2.34. Answer: A Diff: 3 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

73) If the price of nacho chips increases from $2.00 per bag to $3.00 per bag and the quantity demanded goes down from 100 million bags per week to 50 million bags per week, the absolute value of price elasticity of demand in that price range is A) 0.50. B) 1.67. C) 0.93. D) 2.33. Answer: B Diff: 3 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 74) At a price of $10, quantity demanded is 30 units. When the price rises to $11, quantity demanded is 24 units. What is the absolute price elasticity of demand? A) 0.5 B) 0.43 C) 2.33 D) 6.0 Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 75) If the absolute value of the price elasticity of demand for a product is 2, and the price of a product increased 10 percent, then the quantity demanded will decline by A) 20 percent. B) 10 percent. C) 5 percent. D) 2 percent. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

76) The smaller is the absolute price elasticity of demand, the A) smaller is the responsiveness of quantity demanded to the price change. B) larger is the responsiveness to a price change. C) larger is the income of the buyer. D) higher is the change in demand to an income change. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 77) Suppose that the absolute price elasticity for cookies equals 0.8. We could then say that the demand for cookies is A) elastic. B) inelastic. C) unit-elastic. D) perfectly elastic. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 78) When demand is perfectly inelastic, the demand curve is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

79) If the absolute value of the price elasticity of demand for a product is less than 1, then A) quantity demanded is very sensitive to price changes. B) demand is inelastic. C) demand is unit-elastic. D) demand is elastic. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 80) If the absolute price elasticity of demand for automobiles is equal to 1.25, we say A) that demand is elastic. B) that demand is inelastic. C) that there is no responsiveness of quantity demanded to automobiles price cuts. D) none of these is correct. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 81) Inelastic demand implies A) that a one percent increase in price results in a smaller than one percent decrease in quantity demanded. B) that a one percent increase in price results in a larger than one percent decrease in quantity demanded. C) that a one percent cut in price results in a larger than one percent increase in quantity demanded. D) that a one percent decrease or increase in price induces no change in total revenue. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

82) Elastic demand implies A) that a one percent increase in price results in a smaller than one percent decrease in quantity demanded. B) that a one percent increase in price results in a larger than one percent decrease in quantity demanded. C) that a one percent increase in price results in a larger than one percent increase in quantity demanded. D) that a one percent decrease or increase in price induces no change in total revenue. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 83) If the calculated price elasticity of demand between two points is -1.5, demand is A) inelastic. B) elastic. C) unresponsive to price. D) unit-elastic. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 84) When the calculated price elasticity of demand is -0.85, demand is A) perfectly inelastic. B) elastic. C) unit-elastic. D) inelastic. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

85) When the absolute percentage change in quantity demanded is just equal to the percentage change in price, demand is A) elastic. B) perfectly inelastic. C) unit-elastic. D) relatively inelastic. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 86) Price elasticities are calculated for four goods, and the values are: 5.5; 3.5; 1.0; 0.2. Which price elasticity is most elastic? A) 5.5 B) 3.5 C) 1.0 D) 0.2 Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 87) The less sensitive buyers are to a change in price, the A) smaller a change in price must be to induce a certain change in quantity demanded. B) smaller is the price elasticity of demand. C) greater the price elasticity of demand. D) closer the price elasticity of demand is to one. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

88) An elastic demand indicates that A) quantity demanded does not vary with changes in the price. B) relatively small changes in price lead to relatively large changes in quantity demanded. C) relatively large changes in price are required to obtain a relatively small change in quantity demanded. D) relatively large changes in quantity demanded lead to relatively large changes in price. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 89) If a two percent increase in the price of bananas leads to a two percent decrease in the quantity of bananas demanded, then the demand for bananas is A) elastic. B) inelastic. C) unit-elastic. D) perfectly inelastic. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 90) A perfectly horizontal demand curve has A) zero elasticity. B) some positive finite elasticity. C) negative elasticity. D) elasticity equals infinity. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

91) If the demand curve for a product is vertical, then A) the demand for the product is elastic. B) the demand for the product is perfectly elastic. C) only a certain amount of the product will be consumed if the price falls to zero. D) the price elasticity of the product approaches zero. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 92) A vertical demand curve has A) infinite elasticity. B) positive elasticity. C) zero elasticity. D) negative elasticity. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 93) If the demand curve for a product is horizontal, then A) the demand for the good is perfectly inelastic. B) consumers are not responsive to price changes. C) its price elasticity of demand approaches infinity. D) consumers purchase a fixed amount regardless of the market price. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 94) If the quantity demanded of a product is the same for each possible price, demand is A) unit-elastic. B) elastic. C) perfectly elastic. D) perfectly inelastic. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 31 Copyright © 2021 Pearson Education, Inc.

95) If there is no response in quantity demanded to a change in price, demand is A) perfectly inelastic. B) perfectly elastic. C) elastic. D) unit-elastic. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 96) A perfectly elastic demand curve A) shows that a slight change in income will lead to a large reduction in price. B) is a vertical line drawn across from the quantity axis. C) shows that a slight increase in price will reduce quantity demanded to zero. D) has a slope of -1. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 97) A demand relationship that is a vertical line up from the quantity axis is A) perfectly elastic. B) unit-elastic. C) perfectly inelastic. D) somewhat elastic. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

98) The price elasticity of demand along a vertical demand curve is A) elastic at high prices and inelastic at low prices. B) infinite. C) one. D) zero. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 99) A perfectly elastic demand curve is A) vertical. B) horizontal. C) a rectangular hyperbola. D) a downward-sloping straight line. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 100) A consumer is willing and able to buy 100 units of a good at $100, but the consumer's quantity demanded falls to zero if the price rises even a fraction of a cent. The consumer's demand curve is A) horizontal and is perfectly inelastic. B) horizontal and is perfectly elastic. C) vertical and is perfectly elastic. D) downward sloping from higher prices down to $10 and then horizontal. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

101) Refer to the above table. For which prices is demand elastic? A) in a range of prices below $6.50 B) in a range of prices above $6.50 C) in a range of prices between $5 and $10 D) in a range of prices above $9.00 Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 102) Refer to the above table. For which prices is demand inelastic? A) in a range of prices below $6.00 B) in a range of prices above $6.00 C) in a range of prices between $5 and $1 D) in a range of prices above $9.00 Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

103) Refer to the above table. For which prices is demand unit-elastic? A) in a range of prices below $6.50 B) in a range of prices above $6.50 C) in a range of prices between $5 and $10 D) in a range of prices between $6 and $6.50 Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 104) Refer to the above table. At a price below $5, the absolute price elasticity of demand is A) 1.0. B) below 1. C) between 0.8 and 1.0. D) greater than 1. Answer: B Diff: 3 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 105) To say that demand is elastic means that A) people do not like the good very much. B) quantity demanded not very responsive to price changes. C) relatively small changes in price lead to relatively large changes in quantity demanded. D) relatively small changes in quantity demanded lead to relatively small changes in price. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

106) A demand relationship in which a given percentage change in price will result in a larger percentage change in quantity demanded is A) elastic. B) unit-elastic. C) inelastic. D) consistent with zero elasticity. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 107) A demand relationship in which the quantity demanded changes exactly in proportion to the change in price is A) elastic. B) unit-elastic. C) inelastic. D) consistent with zero elasticity. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 108) A demand relationship in which a given percentage change in price will result in a less than proportionate percentage change in quantity demanded is A) elastic. B) unit-elastic. C) inelastic. D) consistent with zero elasticity. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

109) When demand is elastic, A) a proportionately small change in price leads to a proportionately large change in quantity supplied. B) a proportionately small change in price leads to a proportionately small change in quantity supplied. C) a proportionately small change in price leads to a proportionately large change in quantity demanded. D) a proportionately small change in price leads to a proportionately small change in quantity demanded. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 110) When demand is elastic, A) quantity demanded is very responsive to a change in price. B) quantity demanded is not very responsive to a change in price. C) the proportional change in quantity demanded is equal to the proportional change in price. D) producers react quickly to price changes. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 111) When demand is inelastic, A) quantity demanded is very responsive to a change in price. B) quantity demanded is not very responsive to a change in price. C) the proportional change in quantity demanded is equal to the proportional change in price. D) producers react quickly to price changes. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

112) If demand is unit elastic, then A) a ten percent increase in price leads to a one percent decrease in quantity demanded. B) the unit change in quantity demanded equals the unit change in price. C) a two percent increase in price leads to a two percent decrease in quantity demanded. D) an increase in price of any amount leads to quantity demanded falling to zero. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 113) The absolute price elasticity of demand for a vertical demand curve A) is infinite. B) is 1.0. C) is 0. D) depends on where one is on the demand curve. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

114) Refer to the above figure. Demand is A) perfectly elastic. B) unitary elastic. C) perfectly inelastic. D) undetermined without more information. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

115) Refer to the above figure. Demand is A) perfectly elastic. B) unitary elastic. C) perfectly inelastic. D) undetermined without more information. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 116) When the absolute price elasticity of demand equals 1, demand is A) elastic. B) unit-elastic. C) inelastic. D) undetermined without more information. Answer: B Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 117) When the absolute price elasticity of demand is greater than 1, demand is A) elastic. B) unit-elastic. C) inelastic. D) undetermined without more information. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

118) When the absolute price elasticity of demand is less than 1, demand is A) elastic. B) unit-elastic. C) inelastic. D) undetermined without more information. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 119) When the absolute price elasticity of demand equals 2.5, demand is A) elastic. B) unit-elastic. C) inelastic. D) undetermined without more information. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 120) When the absolute price elasticity of demand equals 0.9, demand is A) elastic. B) unit-elastic. C) inelastic. D) undetermined without more information. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 121) Moving up a straight-line demand curve, the absolute price elasticity of demand A) decreases. B) remains constant. C) increases. D) varies in uncertain ways. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

122) If the absolute price elasticity of demand for a product is greater than 1, then A) the absolute price elasticity of demand is inelastic and consumers are relatively insensitive to price changes. B) the absolute price elasticity of demand is inelastic and consumers are relatively sensitive to price changes. C) the absolute price elasticity of demand is elastic and consumers are relatively insensitive to price changes. D) the absolute price elasticity of demand is elastic and consumers are relatively sensitive to price changes. Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 123) If the absolute price elasticity of demand for a product is equal to 1, then A) the absolute price elasticity of demand is inelastic and consumers are relatively insensitive to price changes. B) the absolute price elasticity of demand is inelastic and consumers are relatively sensitive to price changes. C) the absolute price elasticity of demand is elastic and consumers are relatively insensitive to price changes. D) the absolute price elasticity of demand is unit-elastic and the percentage change in quantity demanded equals the percentage change in price. Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 124) Suppose the price change of a good causes no change in quantity demanded, we would say that the item is A) perfectly elastic. B) perfectly inelastic. C) infinitely elastic. D) unitary elastic. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

125) If demand is elastic and the price of a product decreases by 100 percent, then A) the change in quantity demanded is less than 100 percent. B) the change in quantity demanded is equal to 100 percent. C) the change in quantity demanded is greater than 100 percent. D) the decrease in quantity demanded is greater than 0 percent. Answer: C Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 126) If demand is inelastic and the price of a product decreases by 100 percent, then A) the change in quantity demanded is less than 100 percent. B) the change in quantity demanded is equal to 100 percent. C) the change in quantity demanded is greater than 100 percent. D) the decrease in quantity demanded is greater than 0 percent. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 127) Whenever the absolute value of the price elasticity of demand is greater than 1 but less than infinite, A) demand is inelastic. B) demand is unit elastic. C) demand is elastic. D) demand is perfectly elastic. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

128) A perfectly inelastic demand curve is A) a horizontal straight line. B) a vertical straight line. C) a downward-sloping straight line that intersects the horizontal axis at the origin. D) an upward-sloping straight line that crosses the vertical axis. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 129) If a 10 percent change in the price of a good caused a 10 percent change in the quantity demanded of the good, we would say that over this range of prices the good has a(n) A) elastic demand. B) inelastic demand. C) perfectly elastic demand. D) unit elasticity of demand. Answer: D Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 130) When demand is unit elastic, a 7 percent change in the price of the good A) will cause a change in quantity demanded of less than 7 percent. B) will cause a change in quantity demanded equal to 7 percent. C) will cause a change in quantity demanded greater than 7 percent. D) will not cause any change in quantity demanded. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

131) We say that a good has elastic demand whenever the absolute value of the price elasticity of demand is greater than one. A one percent change in price therefore causes A) exactly a one percent change in the quantity demanded. B) a change of less than one percent in the quantity demanded. C) a greater than one percent change in quantity demanded. D) a change that cannot be determined based on one percent. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 132) Demand is inelastic if A) a given percentage change in price will result in a less than proportionate percentage change in the quantity demanded. B) demand exhibits zero responsiveness to price changes. C) small price increases will lead to zero quantity demanded. D) a given percentage change in price will result in a greater than proportionate percentage change in the quantity demanded. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 133) A perfectly inelastic demand would imply what kind of demand curve? A) horizontal B) vertical C) upward sloping D) downward sloping Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

134) If ice cream has an absolute price elasticity of demand that is greater than 1, then the demand for ice cream is A) elastic. B) inelastic. C) perfectly inelastic. D) unit elastic. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 135) The slope of the perfectly inelastic demand curve is ________, the slope of the perfectly elastic demand curve is ________. A) undefined; zero B) one; one C) zero; undefined D) one; zero Answer: A Diff: 3 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 136) If a good has an absolute price elasticity of 4, the demand for the good is A) unit elastic. B) inelastic. C) perfectly elastic. D) elastic. Answer: D Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

137) If tablets have an absolute price elasticity of 1, the demand for tablets is A) unit elastic. B) inelastic. C) perfectly elastic. D) elastic. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 138) Suppose diamonds have an absolute price elasticity of 0, the demand for the good is A) unit elastic. B) inelastic. C) perfectly inelastic. D) elastic. Answer: C Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 139) A perfectly inelastic demand curve exhibits A) zero responsiveness to changes in price. B) zero quantity demanded when there is a slight change in price. C) a change in quantity demanded that is proportional to the change in price. D) a change in quantity demanded that is always twenty percent of the change in price. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 140) A perfectly elastic demand curve exhibits A) zero responsiveness to changes in price. B) that quantity demanded will decrease to zero when there is a slight increase in the price level. C) a change in quantity demanded that is proportional to the change in price. D) a change in quantity demanded that is always twenty percent of the change in price. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

141) When the price of a textbook is $100, 60 copies are demanded; and when the price of that textbook goes up to $120, 30 copies are demanded. In the price range between $100 and $120, the demand for the textbook is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. Answer: A Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 142) Which of the following is NOT characteristic of a good with elastic demand? A) The absolute price elasticity of demand is less than 1. B) Total revenue decreases if price is increased. C) Buyers are relatively sensitive to price changes. D) The percentage change in quantity demanded is greater than the percentage change in price. Answer: A Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 143) If demand for a good is perfectly inelastic, then A) a price increase would cause a fall in quantity demanded. B) a price increase would cause no change in quantity demanded. C) a price increase would cause an increase in quantity demanded. D) a price increase would cause a fall in total revenue. Answer: B Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

144) What is the price elasticity of demand? How is the price elasticity of demand calculated? Answer: The price elasticity of demand is the responsiveness of the quantity demanded of a good to changes in the price of the good. Price elasticity of demand is calculated as the percentage change in quantity demanded divided by the percentage change in price. That is: Ep = [(change in Q)/(Q1 + Q2)/2]/ [(change in P)/(P1 + P2)/2]. Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 145) Price elasticity of demand is measured using percentage changes. Why? Answer: By using percentage changes, we are focusing on relative changes and not absolute changes. This means we don't have to worry about the units we use to measure either quantity or price. If someone buys 12 eggs a week at $1 a dozen and 8 eggs at 75 cents a dozen, we will get the same value for elasticity whether we use eggs, dozens of eggs, dollar, or cents as the measures. Percentage change is independent of the units chosen. Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 146) "The slope of the demand curve gives the elasticity of demand." Do you agree or disagree? Why? Answer: Disagree. The slope gives absolute change in price divided by the absolute change in quantity demanded. Price elasticity of demand is measured using relative changes. Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 147) "Price elasticity measures how many more units of a good that consumers will buy given a decrease in price." Do you agree or disagree? Explain. Answer: Disagree. Price elasticity measures the percentage change in quantity demanded in response to a percentage change in price. As such, the statement is not valid as the elasticity measure is unit free. Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

148) Explain the three possible ranges for price elasticity of demand. Answer: If the percentage change in quantity demanded is greater than the percentage change in price, then quantity demanded is very responsive to changes in price, and demand is elastic (Ep > 1). If the percentage change in quantity demanded is less than the percentage change in price, then quantity demanded is not very responsive to a price change and demand is inelastic (Ep < 1). Demand is unit elastic (Ep = 1) if the percentage change in quantity demanded equals the percentage change in price. Diff: 1 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 149) What does a perfectly elastic demand curve look like? A perfectly inelastic demand curve? Explain. Answer: A perfectly elastic demand curve is horizontal and a perfectly inelastic demand curve is vertical. If the demand curve is vertical, then quantity demanded does not change when price changes, or the elasticity equals 0. Quantity demanded is completely unresponsive to changes in price. If the demand curve is horizontal, a tiny increase in price causes quantity demanded to go to zero. As the percentage change in price approaches zero, elasticity of demand approaches infinity. Quantity demanded is extremely responsive to even very small changes in price. Diff: 2 Topic: 19.1 Price Elasticity Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 19.2 Elasticity and Total Revenues 1) When total revenue and price are inversely related, demand is A) unit-elastic. B) inelastic. C) elastic. D) not related. Answer: C Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

2) When total revenue and price are directly related, demand is A) unit-elastic. B) inelastic. C) elastic. D) not related. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 3) When total revenue remains unchanged when there is a change in price, demand is A) unit-elastic. B) inelastic. C) elastic. D) not related. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 4) No matter what the price of orange juice is , Lili spends $20 a week on orange juice. We can conclude that the absolute value of the price elasticity of demand for orange juice for Lili is A) greater than 1. B) less than 1. C) equal to 1. D) none of these. Answer: D Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

5) A firm could lower prices and still increase revenue if A) demand is elastic. B) elasticity of demand is equal to unity. C) demand is inelastic. D) elasticity of demand is equal to zero. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 6) Suppose that the demand for coffee is inelastic. If a coffee shop decided to lower the price of coffee, total revenue would A) increase. B) decrease. C) stay the same. D) be maximized. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 7) If the price elasticity of demand for pineapples is greater than 1, an increase in pineapple prices will A) raise total revenue. B) lower total revenue. C) not affect total revenue. D) either raise or lower total revenue, but it is impossible to determine which. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

8) If a seller lowers the price of a product when demand is price inelastic, the seller can expect revenues to A) rise. B) fall. C) stay the same. D) either rise or fall, but it is impossible to determine which. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 9) If the market price of a product falls and as a result total revenue of firms falls, we can conclude that A) demand is elastic in this price range. B) the product's price is above the midpoint of its demand curve. C) demand is inelastic in this price range. D) the demand curve is horizontal. Answer: C Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 10) If the absolute price elasticity of demand for movie tickets is 0.75, an increase in ticket prices will A) increase total revenue. B) decrease total revenue. C) not change the elasticity of demand. D) not change total revenue. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

11) Suppose the absolute price elasticity of demand for magazine subscriptions is 1.2. In order to increase the total revenues from subscriptions, the publishers should A) increase the price of the newsletters. B) reduce the price of the newsletters. C) sell the newsletters on the inelastic portion of its demand curve. D) keep the price the same. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 12) An increase in total revenue will result if A) demand is inelastic and price increases. B) demand is elastic and price increases. C) demand is inelastic and price decreases. D) demand is unitary elastic and price decreases. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 13) An increase in total revenue will result if A) demand is inelastic and price decreases. B) demand is elastic and price decreases. C) demand is elastic and price increases. D) demand is unitary elastic and price increases. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

14) A decrease in total revenue will result if A) demand is inelastic and price increases. B) demand is elastic and price decreases. C) demand is inelastic and price decreases. D) demand is unitary elastic and price decreases. Answer: C Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 15) A decrease in total revenue will result if A) demand is inelastic and price increases. B) demand is elastic and price increases. C) demand is elastic and price decreases. D) demand is unitary elastic and price decreases. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 16) When demand is perfectly inelastic, an increase in price will A) leave total revenue unchanged. B) increase total revenue. C) decrease total revenue. D) either increase total revenue or decrease total revenue, but it is impossible to tell which. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 17) When demand is elastic, a decrease in price will A) decrease total revenue. B) not change total revenue. C) increase total revenue. D) reduce quantity demanded. Answer: C Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

18) Given a price elasticity of demand of -0.9, a decrease in price will A) reduce total revenue. B) increase total revenue. C) leave total revenue unchanged. D) decrease quantity. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 19) If the absolute price elasticity of demand of a good is 1.25, then the total revenues will increase if its market price A) increases. B) decreases. C) stays the same. D) changes, but we can't tell without more information if the price increases or decreases. Answer: B Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 20) If a price decrease of a product significantly raises its revenues, then the absolute price elasticity of demand for that product must be A) less than one. B) equal to one. C) greater than one. D) an example of unit elasticity. Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

21) The range to the left of the midpoint on a linear demand curve is A) elastic. B) infinite. C) one. D) inelastic. Answer: A Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 22) The range to the right of the midpoint on a linear demand curve is A) elastic. B) infinite. C) one. D) inelastic. Answer: D Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 23) The price elasticity of demand along a linear demand curve is A) more elastic at higher prices than at low prices. B) infinite. C) one. D) constant. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

24) In the above figure, over the price range P1P2, demand is A) unit elastic. B) elastic. C) inelastic. D) perfectly elastic. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 25) In the above figure, over the price range P5P6, demand is A) unit elastic. B) elastic. C) perfectly inelastic. D) inelastic. Answer: D Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

26) In the above figure, through which range would the demand for this good be most inelastic? A) A-B B) B-E C) E-F D) G-H Answer: D Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

27) In the above figure, along the section of the demand curve between point a and point b, demand is A) elastic. B) inelastic. C) unit elastic. D) unit inelastic. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

28) In the above figure, the range of unit elasticity occurs A) on the vertical axis. B) on the horizontal axis. C) between point c and point d. D) below point e. Answer: C Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 29) In the above figure, along which range would the demand for this good be most elastic? A) between point a and point b B) between point c and point d C) between point d and point e D) at point e Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 30) In the above figure, along which range would total revenue rise by lowering prices? A) between point a and point b B) between point c and point d C) between point d and point e D) below point e Answer: A Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 31) In the above figure, along which range would total revenue rise by raising prices? A) between point a and point b B) between point c and point d C) between point d and point e D) above point a Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 59 Copyright © 2021 Pearson Education, Inc.

32) In the above figure, along which range would total revenue remain unchanged by raising prices? A) between point a and point b B) between point c and point d C) between point d and point e D) below point e and above point a. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 33) Over the inelastic range of a demand curve, there is A) a positive relationship between a given percentage change in price and a change in total revenues. B) a negative relationship between a given percentage change in price and a change in total revenues. C) an increase in total revenues regardless of an increase or decrease in price. D) no relationship between changes in price and changes in total revenues. Answer: A Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 34) If total revenues decline when the market clearing price increases, then we know that A) demand is inelastic. B) demand is elastic. C) demand is unit-elastic. D) demand has zero elasticity. Answer: B Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

35) If total revenues rise when the market price increases, then we know that A) demand is inelastic. B) demand is elastic. C) demand is unit-elastic. D) its demand has an elasticity of infinity. Answer: A Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 36) If the bus fare of a city increases from $1.00 to $1.10 per ride and as a result total revenue increases, then we know that A) percentage change in fare is less than percentage change in number of rides. B) percentage change in fare is greater than percentage change in number of rides. C) percentage change in fare is equal to the percentage change in number of rides. D) it is impossible to tell. Answer: B Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 37) Total revenues reach a maximum when A) demand is elastic. B) demand is inelastic. C) demand is unit-elastic. D) price elasticity is at a minimum. Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

38) If demand is unit-elastic throughout the demand curve, then total revenues are A) greater the higher the price. B) lower the higher the price. C) maximized at the midpoint of the demand curve. D) the same for any price the firm charges. Answer: D Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 39) Within the range of prices around the midpoint on a straight-line demand curve, demand is A) elastic. B) inelastic. C) unit-elastic. D) zero. Answer: C Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 40) If the slope of a demand curve is constant, then we know that A) elasticity of demand is also elastic everywhere. B) elasticity of demand is constant and elastic. C) elasticity of demand is inelastic everywhere. D) elasticity of demand varies along the demand curve. Answer: D Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 41) If demand is perfectly elastic everywhere along the demand curve, then A) people must be irrational. B) the demand curve is vertical. C) the demand curve is a rectangular hyperbola. D) the demand curve is horizontal. Answer: D Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 62 Copyright © 2021 Pearson Education, Inc.

42) Suppose 1000 units of a good are sold at $10 a unit. If its price increases to $20 and total revenue increases to $20,000 and increases by $1000 for every dollar increase in price after that, we know that A) demand is perfectly elastic. B) the demand curve is vertical. C) the demand curve is downward sloping and the firm is on the inelastic portion of the demand curve. D) the demand curve is a rectangular hyperbola. Answer: B Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 43) A local transit authority charges $1 for a bus ride. An economics study suggests that in the price range from $0.50 to $1.50, the elasticity of demand for bus trips is 1.2. To increase its revenue, the transit authority should A) leave the fare as it is. B) raise the fare. C) lower the fare. D) charge $1.20. Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 44) Moving upward along a downward-sloping straight-line demand curve, as the price of the product goes up, A) the price elasticity of demand does not change. B) the price elasticity of demand goes from being inelastic to being elastic. C) the price elasticity of demand goes from being elastic to being inelastic. D) the price elasticity of demand goes from negative to positive. Answer: B Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

45) Moving downward on a downward-sloping linear demand curve, the absolute value of the price elasticity of demand A) is constant. B) increases continuously. C) decreases continuously. D) may either increase or decrease. Answer: C Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

46) Consider the above figure. Which of the following statements is correct? A) In any range of prices encompassing the crossing point of the two demand curves, the price elasticity of demand associated with demand curve D1 is equal to the price elasticity of demand associated with demand curve D2. B) In any range of prices encompassing the crossing point of the two demand curves, the price elasticity of demand associated with demand curve D1 is less than the price elasticity of demand associated with demand curve D2. C) In any range of prices encompassing the crossing point of the two demand curves, the price elasticity of demand associated with demand curve D1 is greater than the price elasticity of demand associated with demand curve D2. D) In any range of prices encompassing the crossing point of the two demand curves, the price elasticity of demand is infinite. Answer: C Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

47) Suppose that the demand for movie tickets is price inelastic for the range of prices between $8 and $10. If a movie theater raises the price of tickets from $8 to $10, what will happen to total revenues? A) Total revenues will decrease. B) Total revenues will increase. C) Total revenues will not change. D) Total revenues will have no relationship to the quantity of ties demanded. Answer: B Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 48) A university raises annual tuition by 10 percent. No other events have occurred, and the university's revenues have increased. It must be TRUE that A) the associated change in quantity demanded was smaller than 10 percent. B) the associated change in quantity demanded was equal to 10 percent. C) the associated change in quantity demanded was greater than 10 percent. D) there was no associated change in quantity demanded. Answer: A Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 49) If the price of a good increases and the total revenue also increases, the good has a(n) A) elastic demand. B) inelastic demand. C) unit elastic demand. D) perfectly elastic demand. Answer: B Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

50) A movie theater raises ticket prices from $12 to $14 in order to raise revenues. The theater's management is assuming the absolute value of the price elasticity of demand for tickets is A) less than 1. B) greater than 1. C) equal to 1. D) infinity. Answer: A Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 51) Which of the following is FALSE regarding inelastic demand? A) Price elasticity of demand is less than 1 (Ep < 1). B) If a firm raises price, total revenues will go up. C) Price elasticity of demand is greater than 1 (Ep > 1). D) If a firm lowers price, total revenues will fall. Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 52) If the government places a $1 tax on an item for which demand is perfectly elastic, A) the entire tax will be paid by the consumer. B) the tax will be split equally between the consumer and producer, with each paying exactly $0.5. C) most of the tax will be paid by the consumer. D) the entire tax will be paid by the producer. Answer: D Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

53) When demand is elastic, A) changes in price and changes in total revenue move in the same direction. B) there is no relationship between changes in price and changes in total revenue. C) changes in price and changes in total revenue move in opposite directions. D) for any change in price, total revenue will not change. Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 54) Total revenue is A) price × quantity. B) change in price × change in quantity. C) change in price × quantity. D) price × change in quantity. Answer: A Diff: 1 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 55) All of the following are true regarding the relationship between price elasticity of demand and total revenues EXCEPT A) when market demand is elastic, if the market price declines, then total revenues will rise. B) when market demand is unit elastic, if the market price rises, then total revenues will not change. C) when market demand is inelastic, if the market price falls, then total revenues will decrease. D) when market demand is inelastic, if the market price rises, then total revenues will decrease. Answer: D Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

56) When demand is unit elastic, an increase in price will cause A) an increase in total revenue. B) a decrease in total revenue. C) no change in total revenue. D) a change in total revenue in either direction depending on whether the price is increasing or decreasing. Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 57) If the price of a good increases and the total revenue remains the same, the demand for the good is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. Answer: C Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 58) When the price of coffee is $2.2 per cup, 11 million cups are demanded, and when the price of coffee goes up to $2.6 per cup, 10 billion cups are demanded. The coffee in this range has a(n) A) elastic demand. B) inelastic demand. C) unit elastic demand. D) perfectly elastic demand. Answer: B Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

59) Use the above figure. When the price increases from $2 to $10, total revenue A) increases from areas A + B to areas B + C and demand is inelastic. B) increases from areas B + C to areas A + B and demand is inelastic. C) increases from areas B + C to areas A + D and demand is elastic. D) increases from areas C + D to areas B + A and demand is elastic. Answer: B Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 60) Use the above figure. When the price increases from $2 to $10, the absolute price elasticity of demand is A) 0.67. B) 1.50. C) 0.25. D) 1.00. Answer: C Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

61) When the price of a pound of oranges is $1.00, 7500 pounds of oranges are demanded. When the price of a pound of oranges decreases to $0.80, 10,000 pounds of oranges are demanded. In this price range the demand for oranges is A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. Answer: A Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

62) Refer to the above figure. Demand will be elastic when quantity is between A) 0 and A. B) 0 and B. C) A and B. D) B and C. Answer: A Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

63) Refer to the above figure. Demand will be unit-elastic when quantity is between A) 0 and A. B) 0 and B. C) A and B. D) B and C. Answer: C Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 64) Refer to the above figure. Demand will be inelastic when quantity is between A) 0 and A. B) 0 and B. C) A and B. D) B and C. Answer: D Diff: 3 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 65) "Unit elasticity of demand can be found everywhere along a straight-line demand curve with a slope of -1." Do you agree or disagree? Explain. Answer: Disagree. A vertical demand curve implies perfectly inelastic demand and a horizontal demand curve implies perfectly elastic demand. However, unit elasticity of demand can only be can found in the mid-range of a straight-line demand curve with a slope of -1, but not anywhere else along it. Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 66) For a linear demand curve, where is the amount of total expenditures on a good maximized? Answer: For a linear demand curve, total expenditures are maximized at the midpoint of the demand curve. At this point, price elasticity of demand equals one. Above this point, demand is elastic, which means total expenditures increase when price falls. Below this point, demand is inelastic and total expenditures increase when price increases. Hence, expenditures are maximized when elasticity is one. Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

67) "Higher prices always yield higher revenues." Do you agree or disagree? Why? Answer: Disagree. Higher prices generate higher revenues if demand is inelastic but generate lower revenues if demand is elastic. The effect of a price change on revenues depends on whether demand is elastic or inelastic. Diff: 2 Topic: 19.2 Elasticity and Total Revenues Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 19.3 Determinants of the Price Elasticity of Demand 1) An elastic response in the quantity of a good demanded would be caused by A) the availability of many substitutes. B) a lack of substitutes. C) a lack of sensitivity to the good's price. D) the good representing a small portion of a person's budget. Answer: A Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 2) Which of the following is a determinant of the price elasticity of demand for an item? A) the availability of a close substitute for the item B) the percentage of a consumers budget allocated to expenditures on the item C) the amount of time available to adjust to a change in the price of the item D) All of these are correct. Answer: D Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

3) Which of the following is a determinant of the price elasticity of demand for a product? I. The existence of substitute goods II. The percentage of a consumer's total budget devoted to purchases of that commodity A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 4) One of the most important determinants of a good's price elasticity of demand is A) the profits of suppliers. B) the numbers of buyers in the market. C) the ease with which consumers can substitute other goods for that product. D) the cost of producing the good. Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 5) Which of the following would NOT affect a good's price elasticity of demand? A) the ease of substitution between goods B) the cost of producing the good C) the number of substitute goods available D) the proportion of one's budget spent on an item Answer: B Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

6) The price elasticity of demand would most likely be the lowest for A) a house. B) salt. C) a Toyota sport utility vehicle. D) Shell gasoline. Answer: B Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 7) Which of the following goods is most likely to have the lowest price elasticity? A) movie tickets B) DVD rentals C) tap water D) pasta Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 8) The demand for diet soft drinks (as a group) is relatively inelastic because A) there are many of them on the market. B) there are few substitutes. C) the purchase of a soft drink represents a large portion of a person's budget. D) none of these Answer: B Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 9) Which of the following would most likely exhibit the highest price elasticity of demand? A) gasoline B) Colgate toothpaste C) motor oil D) salt Answer: B Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 74 Copyright © 2021 Pearson Education, Inc.

10) Other things being equal, demand is less elastic A) the more expensive the good is. B) the smaller the percentage of a total budget that a family spends on a good. C) the longer is the time period for adjustment. D) the more substitutes a good has. Answer: B Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 11) The demand curve for gasoline should be A) more elastic in the long run than in the short run. B) less elastic in the long run than in the short run. C) as elastic in the long run as it is in the short run. D) more or less elastic in the long run versus the short run depending upon supply conditions. Answer: A Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 12) The longer the time frame involved, the more likely it is that the demand will be relatively A) elastic. B) inelastic. C) steep. D) flat. Answer: A Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

13) Compared to the short-run price elasticity of demand, the long-run price elasticity of demand is A) smaller. B) the same. C) greater. D) either greater than or less, depending on the number of substitutes the good has. Answer: C Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 14) If the price elasticity of demand (Ep) equals one in the short run, then, other things being equal, in the long run Ep will be A) one. B) less than one. C) greater than one. D) indeterminate without more information. Answer: C Diff: 3 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 15) The longer any price change persists, the A) more difficult it is to alter quantity demanded. B) greater is the price elasticity of demand. C) lower is the price elasticity of demand. D) more likely price will return to its original level. Answer: B Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

16) The government raises gasoline taxes as part of the price of gasoline and receives more tax revenues. However, after five years, the government discovers that revenues from the gasoline tax have declined. This situation would be most likely to occur if A) the long-run elasticity of supply was much greater than the long-run elasticity of demand. B) the demand for gasoline was inelastic in the short run, but elastic in the long run. C) the long-run elasticity of demand was greater than the long-run elasticity of supply. D) the demand for gasoline was perfectly inelastic in both the short run and the long run. Answer: B Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 17) Which of the following is NOT a determinant of the price elasticity of demand? A) existence of substitutes B) expenditures on the good as a share of a consumer's budget C) the amount of time allowed for adjustment to changes in the price of the commodity D) the price level in a country Answer: D Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 18) When many substitutes exist for a good, demand will be A) elastic. B) unit-elastic. C) inelastic. D) perfectly unit-elastic. Answer: A Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

19) When very few substitutes for a good exist, demand will be A) elastic. B) unit-elastic. C) inelastic. D) perfectly elastic. Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 20) Suppose two goods are perfect substitutes. The price elasticity of demand of one of the goods is A) 0. B) 1. C) 10. D) infinity. Answer: D Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 21) Which of the following is NOT a factor that determines the price elasticity of demand? A) the amount that suppliers have made available B) the percentage of a consumer's total budget spent on the good C) the existence of substitutes D) the length of time allowed for adjustments to change in the price of the commodities Answer: A Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

22) When a particular product has numerous but imperfect substitutes, the demand for that product will tend to be A) inelastic. B) elastic. C) unitary. D) perfectly elastic. Answer: B Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 23) When there are very few substitutes for a good, the demand for the good will tend to be A) inelastic. B) elastic. C) unitary. D) perfectly elastic. Answer: A Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 24) For which of the following would the absolute price elasticity of demand be greatest? A) salt B) tickets to the Super Bowl C) Dr. Pepper cola D) gasoline Answer: C Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

25) For which of the following purchases would the absolute price elasticity of demand be greatest? A) a luxury sedan B) utilities C) chewing gum D) a smartphone Answer: A Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 26) For which of the following purchases would the absolute price elasticity of demand be smallest? A) a luxury sport utility vehicle B) a house C) chewing gum D) a tablet Answer: C Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 27) Other things being equal, demand is more elastic if A) the good is less expensive. B) the time period for adjustment is shorter. C) a family spends a larger percentage of its budget on the good. D) the good is more unique. Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

28) When the consumer spends a large portion of her income on a good, demand will be A) elastic. B) unit-elastic. C) inelastic. D) elastic, unit-elastic or inelastic depending upon supply. Answer: A Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 29) When a household spends over 70% of its monthly income on a good, demand will be A) elastic. B) unit-elastic. C) inelastic. D) elastic, unit-elastic or inelastic depending upon supply. Answer: A Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 30) When the consumer spends a small portion of his income on a good, demand will be A) elastic. B) unit-elastic. C) inelastic. D) elastic, unit-elastic or inelastic depending upon supply. Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 31) When the consumer spends less than 1% of his income on a good, demand will be A) elastic. B) unit-elastic. C) inelastic. D) elastic, unit-elastic or inelastic depending upon supply. Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 81 Copyright © 2021 Pearson Education, Inc.

32) The absolute price elasticity of demand would be the lowest for A) automobiles. B) Mr. Donut coffee. C) sugar. D) movie tickets. Answer: C Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 33) Suppose that the value of the short-run absolute elasticity of demand for a good is 0.9. Then, we know the long-run absolute price elasticity of demand will be A) 0. B) greater than 0.9. C) inelastic. D) less than 0.9. Answer: B Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 34) Suppose that the value of the long-run absolute elasticity of demand for a good is one. Then, we know the short-run absolute price elasticity of demand will be A) infinity. B) greater than one. C) elastic. D) less than one. Answer: D Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

35) Compared to the long-run absolute elasticity of demand, the short-run absolute elasticity of demand is A) smaller. B) the same. C) larger. D) either smaller or larger, depending on other factors. Answer: A Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 36) Suppose that the absolute price elasticity of demand for hamburger is 1.5 and that the absolute price elasticity of demand for steak is 2.5. Then the absolute price elasticity of demand for beef will be A) less than 1.5. B) more than 2.5. C) between 1.5 and 2.5. D) equal to 1.5. Answer: A Diff: 3 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 37) The longer any price change lasts over time, the A) more difficult it is to alter quantity demanded. B) the more quickly quantity demanded will return to its original level. C) the longer the short-run equilibrium will continue to be the short-run equilibrium. D) more quantity demanded will change. Answer: D Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

38) For an addictive drug such as heroin, if the price of heroin increases, then A) the quantity demanded never changes. B) the quantity demanded will decrease by a relatively large amount. C) the quantity demanded will actually increase. D) the quantity demanded will decrease by a relatively small amount. Answer: D Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 39) Which of the following is NOT a determinant of the price elasticity of demand? A) the availability of potential substitutes B) the share of the budget spent on the item C) the time the consumer has to adjust to the price change D) the cost to produce the product Answer: D Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 40) Which of the following is NOT a determinant of the price elasticity of demand? A) the number of producers of the good B) the number of substitutes available to buyers C) the time consumers have to adjust to a price change D) expenditures on the item as a percentage of a consumer's total budget Answer: A Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

41) The absolute price elasticity of demand for a product for which annual expenditures make up a very small share of a typical consumer's budget is probably A) less than 1. B) equal to 1. C) greater than 1. D) infinity. Answer: A Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 42) The absolute price elasticity of demand for a product that has many good substitutes is probably A) less than 1. B) greater than 1. C) equal to 1. D) infinity. Answer: B Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 43) Other things being equal, the longer a price change persists, A) the less is the elasticity of demand. B) the less chance a consumer will be able to adjust. C) the more the consumer will be willing to pay. D) the greater is the elasticity of demand. Answer: D Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

44) If the absolute price elasticity of demand is equal to 1 in the short run, then in the long run, other things being equal, the absolute price elasticity of demand will be A) less than one. B) less than zero. C) greater than one. D) equal to zero. Answer: C Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 45) In which of the following situations is the absolute price elasticity of demand for an item most likely to exceed a value of 1? A) when there are very few close substitutes for the item B) when there are very few producers of the item C) when the item's share of expenses in consumers' budgets is very small D) when there is considerable time to adjust to a change in the price of the item Answer: D Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 46) Generally, expenses on toothpaste are a small part of a consumer's budget, so the demand for toothpaste is more likely to be A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. Answer: B Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

47) Which of the following is more likely to have perfectly elastic or nearly perfectly elastic demand? A) a textbook required for an economics course B) the guitar produced by a master craftsman C) cotton produced by a Texas farmer D) the services offered by the only allergist in the community Answer: C Diff: 1 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 48) After full adjustment to a price change has occurred, the absolute price elasticity of demand for an item is equal to 1.5. In the short run, the absolute price elasticity of demand for the item was probably A) less than 0. B) greater than 0. C) less than 1.5. D) greater than 1.5. Answer: C Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 49) Generally, expenses on a truck are a large part of a consumer's budget, so the demand for trucks is more likely to be A) elastic. B) inelastic. C) unit elastic. D) perfectly elastic. Answer: A Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

50) A product that has an elastic demand curve has all of the following characteristics EXCEPT A) it has many substitutes. B) a consumer can wait to buy the product. C) it has few or no substitutes. D) it is a large part of a consumer's income. Answer: C Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 51) Why is elasticity of demand greater for goods that are a large share of a consumer's budget? Answer: The greater the share of a consumer's budget accounted for by a good, the greater the elasticity of demand because the real income effect is greater. An increase in the price of a good that accounts for a relatively large share of the budget means that the consumer would have to significantly reduce spending on other goods. It is also more likely the consumer will also cut back on consumption of the good itself too. Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 52) Which has a more elastic demand: hamburger or beef? Answer: Hamburger has the more elastic demand because there are more substitutes for hamburger than there are for beef. Anything that is a substitute for hamburger is also a substitute for beef. Plus, any other kind of beef is a substitute for hamburger. Diff: 2 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 53) "The price elasticity of demand for a particular good is smaller in the long run because consumers adapt to higher prices over time." Do you agree or disagree? Explain. Answer: Disagree. Price elasticity of demand is related to a particular good rather than all the goods that individuals may consume. In the long run, consumers can find more substitutes. Thus, the price elasticity of demand of a particular good is actually greater in the long run than in the short run. Diff: 3 Topic: 19.3 Determinants of the Price Elasticity of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

19.4 The Cross Price and Income Elasticities of Demand 1) Suppose that the number of units of good A consumed falls 10 percent when the price of good B falls 5 percent. The cross price elasticity of demand between goods A and B is A) 0.2. B) 0.5. C) 5. D) 2.0. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 2) Suppose that the cross price elasticity of demand between goods A and B equals 1.25. Which of the following is TRUE? A) Goods A and B are complements because the cross price elasticity is greater than one. B) Goods A and B are complements because the cross price elasticity is positive. C) Goods A and B are substitutes because the cross price elasticity is greater than one. D) Goods A and B are substitutes because the cross price elasticity is positive. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 3) Suppose that when the price of root beer rises 10%, the quantity of hotdogs demanded falls 5%. This would mean that hotdogs and root beer are A) substitutes, with a cross price elasticity of 0.5. B) complements, with a cross price elasticity of -0.5. C) substitutes, with a cross price elasticity of -2.0. D) complements, with a cross price elasticity of -2.0. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

4) Suppose that the amount of computer apps demanded increases by 10 percent when the price of personal computers falls by 5 percent. The cross price elasticity of demand between computer apps and personal computers is A) 0.5. B) -2.0. C) -0.5. D) 2.0. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 5) If milk and cookies are complements, then their cross price elasticity of demand will be A) elastic. B) greater than zero but less than 1. C) negative. D) positive. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 6) When two goods are substitutes for each other, the cross price elasticity of demand A) will be negative. B) will be zero. C) may be either positive or negative. D) will be positive. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

7) If the cross price elasticity of demand between Los Angeles Lakers professional basketball tickets and Los Angeles Dodgers professional baseball tickets is positive, then the two goods are A) substitutes. B) unrelated. C) complements. D) not related. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 8) Suppose that the cross price elasticity of demand between good A and good B is -1.2. This indicates that the two goods are A) substitutes. B) complements. C) both inferior. D) completely unrelated in the minds of consumers. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 9) Suppose that when the price of good A changes, the quantity of good B demanded remains the same. The cross price elasticity of demand is A) zero. B) positive. C) negative. D) either positive or negative. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

10) If the cross price elasticity of demand between two goods is negative, then the two goods are A) substitutes. B) complements. C) unrelated. D) independent. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 11) If the cross price elasticity of demand between two goods is positive, then the two goods are A) substitutes. B) complements. C) independent. D) unrelated. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 12) A positive cross price elasticity of demand between two goods suggests that the goods are A) not related. B) complements. C) substitutes. D) both of unitary elasticity. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 13) If goods are completely unrelated, their cross price elasticity will A) be greater than one. B) be less than one. C) be equal to zero. D) be negative. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 92 Copyright © 2021 Pearson Education, Inc.

14) If the prices of computer tablets rise, we would expect the number of tablet covers purchased to A) increase. B) decrease. C) be equal to ten. D) be equal to one. Answer: B Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 15) When the price of sausages is $2.00 per pound, consumers buy 50 pounds of fish. When the price of sausages rises to $3.00 per pound, 60 pounds of fish are purchased. The cross price elasticity of demand between sausages and fish is approximately equal to A) +0.04. B) -0.45. C) +2.20. D) +0.45. Answer: D Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 16) The cross price elasticity of demand is measured by the A) percentage change in the quantity demanded of one good divided by the percentage change in quantity demanded of another good. B) percentage change in the price of one good divided by the percentage change in price of another good. C) percentage change in the demand for one good divided by the percentage change in price of another good. D) percentage change in the price of one good divided by the percentage change in the demand for another good. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

17) In the above table, the cross price elasticity of demand for good A with good B when PB falls from $20 to $18 is A) -2. B) 0. C) +1. D) -1. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 18) In the above table, the cross price elasticity of demand for good B with good A when PA rises from $10 to $12 is A) +0.29. B) +1.83. C) +0.58. D) -0.58. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 19) In the above table, the cross price elasticity of demand for good C with good B when PB rises from $15 to $18 is A) -2.20. B) +2.20. C) +1.10. D) -1.10. Answer: D Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 94 Copyright © 2021 Pearson Education, Inc.

20) In the above table, the cross price elasticity of demand (using averages) for C with good A, when PA increases from $12 to $15, is approximately equal to A) +1.03. B) +2.26. C) +0.44. D) -0.44. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 21) When the price of a video rental was $2.00, ticket sales at the local movie theatre averaged 180 admissions per night. Then the video store reduced the price of a video rental to $1, and the theatre manager reported that ticket sales had fallen to 126 per night. What is the approximate value of the cross price elasticity of demand between video rentals and theatre tickets? A) -0.53 B) +0.30 C) +0.53 D) +1.67 Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 22) The cross elasticity of demand is A) the percentage change in the demand of one good divided by the percentage change in price of another good. B) the change in the price of one good divided by the change of quantity demanded of another good. C) the percentage change in the quantity demanded of one good divided by the percentage change in the quantity demanded of another good. D) the percentage change in the price of one good divided by the percentage change in the price of another good. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

23) The percentage change in the demand for one good divided by the percentage change in the price of a related good is the A) price elasticity of demand. B) price elasticity of supply. C) cross price elasticity of demand. D) income elasticity. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 24) When two goods are substitutes, their cross price elasticity of demand is A) infinity. B) 0. C) negative. D) positive. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 25) If two goods are complements, A) the demands for both goods will be elastic. B) cross price elasticity of demand will be 0. C) cross price elasticity of demand will be negative. D) cross price elasticity of demand will be positive. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

26) When two goods are unrelated, A) their cross price elasticity of demand will be infinity. B) their cross price elasticity of demand will be 0. C) their cross price elasticity of demand will be negative. D) their cross price elasticity of demand will be positive. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 27) Robert must always have sugar in his coffee. For Robert, the cross price elasticity of demand for coffee and sugar is A) equal to 0. B) negative. C) positive. D) impossible to determine without more information. Answer: B Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 28) George always purchases the soda with the lowest price. For George, the cross price elasticity of demand for two brands of soda will be A) equal to 0. B) negative. C) positive. D) impossible to determine without more information. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

29) Refer to the above table. Based on the information in the table, we can say that A) all three goods are substitutes for each other. B) all three goods are complements. C) Goods A and B are substitutes, B and C are complements, and A and C are substitutes. D) Goods A and B are complements, B and C are substitutes, and A and C are complements. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 30) Refer to the above table. Suppose the price of B rises from $18 to $20. What is the cross price elasticity of demand between A and B? A) -2 B) -1 C) 0 D) +1 Answer: D Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 31) Refer to the above table. Suppose the price of B rises from $18 to $20. What is the cross price elasticity of demand between B and C? A) -1.7273 B) -1.1176 C) -0.8947 D) +1.7273 Answer: B Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

32) Refer to the above table. Suppose the price of A increases from $10 to $12. What is the cross price elasticity of demand between A and C? A) +0.292 B) +7.06 C) -7.06 D) -0.292 Answer: A Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 33) Refer to the above table. Suppose the price of A increases from $10 to $12. What is the cross price elasticity of demand between A and B? A) -1.833 B) +0.545 C) +0.579 D) +1.833 Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 34) Refer to the above table. The price of B decreases from $18 to $15. What is the cross price elasticity of demand between B and A? A) -0.73 B) -1.0 C) +1.38 D) +1.83 Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

35) A measure of the responsiveness of the demand for one good to the percentage change in the price of another good is A) price elasticity of demand. B) price elasticity of supply. C) cross price elasticity of demand. D) income elasticity. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 36) Suppose the price of A increases by 10 percent while the quantity demanded of B does NOT change. We would conclude that A) the two goods are substitutes, but the cross elasticity of demand is not large. B) the two goods are complements, but the cross elasticity of demand is not large. C) the two goods are perfect substitutes. D) the two goods are not related. Answer: D Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 37) The cross price elasticity between A and B is 1.2. We can conclude that A) goods A and B are substitutes. B) goods A and B are complements. C) goods A and B are unrelated. D) goods A and B are perfect substitutes. Answer: A Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

38) The price of A falls by 2 percent, and the quantity demanded of A increases by 2 percent. Meanwhile, the quantity demanded of B increases by 2 percent too. We would conclude that A) demand for A is elastic, and A and B are substitutes. B) demand for A is elastic, and A and B are complements. C) demand for A is unit-elastic, and A and B are complements. D) demand for A is inelastic, and A and B are unrelated. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 39) The cross price elasticity of demand between two goods is 2. We may conclude that A) the two goods are very complementary and probably are sold together. B) the two goods are poor substitutes for each other. C) the demand for one of the goods is likely to be fairly elastic and the demand for the other good is likely to be fairly inelastic. D) the demand for each of the goods is likely to be very elastic. Answer: D Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 40) The cross-price elasticity of demand of products "A" and "B" is zero. This implies that "A" and "B" are A) substitute products. B) complementary products. C) independent products. D) unique goods, as the price elasticity of demand for one of them is zero. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

41) If the price of one good increases, and as a result the demand for another related good falls, the goods are A) substitutes. B) normal goods. C) complements. D) inferior goods. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 42) Two items which have a positive cross price elasticity of demand are referred to as A) luxury goods. B) inferior goods. C) substitutes. D) complements. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 43) Two items which have a negative cross price elasticity of demand are referred to as A) luxury goods. B) inferior goods. C) substitutes. D) complements. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

44) If the value of the cross elasticity of demand is negative, the two goods are A) complementary goods. B) substitute goods. C) normal goods. D) inferior goods. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 45) The cross price elasticity of demand is defined as A) the percentage change in the supply for one good (a shift in the supply curve) divided by the percentage change in price of a related good. B) the percentage change in demand for two different commodities. C) the percentage change in the demand for one good (a shift in the demand curve) divided by the percentage change in price of a related good. D) the percentage change in price for two different commodities. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 46) If the price of one good increases, and as a result the demand for another good increases, the goods are A) substitutes. B) normal goods. C) complements. D) inferior goods. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

47) If the cross price elasticity of demand between two commodities is positive, then these commodities are A) superior. B) complements. C) substitutes. D) inferior. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 48) If the price of oranges went up by 20 percent, which of the following values of the cross price elasticity for apples would be most reasonable to anticipate? A) 0.0 B) 1.2 C) -2.0 D) -0.2 Answer: B Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 49) If the price of apples went down by 20 percent, which of the following values of the cross price elasticity for boats would be most reasonable to anticipate? A) 0.0 B) 2.0 C) -2.0 D) -20 Answer: A Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

50) Use the above figure. Which graph depicts complementary goods? A) A B) B C) C D) D Answer: C Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 51) Use the above figure. Which graph depicts substitute goods? A) A B) B C) C D) D Answer: D Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

52) If the price of wireless phone service decreases and the demand for wired phone services decreases, then wired and wireless phone services are A) substitutes. B) complements. C) inferior goods. D) elastic goods. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 53) Income elasticity relates to A) a movement down a demand curve. B) a movement up a demand curve. C) a horizontal shift in a demand curve. D) the percentage change in quantity demanded divided by the percentage change in the price. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 54) Suppose that the income elasticity of demand for peanut butter is 0.75. Which of the following is TRUE? A) Peanut butter is a normal good, because income elasticity is positive. B) Peanut butter is an inferior good, because income elasticity is positive. C) Peanut butter is a normal good, because income elasticity is less than 1. D) Peanut butter is an inferior good, because income elasticity is less than 1. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

55) Income elasticity of demand is defined as A) the change in quantity demanded divided by the change in income. B) the change in quantity demanded divided by the change in market price. C) the percentage change in income divided by the percentage change in quantity demanded. D) the percentage change in demand divided by the percentage change in income. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 56) If one's demand for good X decreases as income rises, the income elasticity of demand for good X is A) elastic. B) inelastic. C) unit elastic. D) negative. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 57) If an individual's income rises 10 percent and his clothing purchases increase 15 percent in response, the income elasticity for clothing by the individual is A) -0.8. B) 0.8. C) 1.5. D) -1.5. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

58) Which of the following goods is likely to have the highest income elasticity? A) a pair of designer jeans B) tomato soup C) hamburger D) can of tuna Answer: A Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 59) Income elasticity of demand is defined as A) the change in income divided by the change in quantity. B) the change in price divided by the change in income. C) the percentage change in demand divided by the percentage change in income. D) the change in income multiplied by the change in quantity. Answer: C Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 60) If demand for Tesla automobiles rises in an area where incomes have increased, this tells us that a Tesla is A) a normal good. B) an inferior good. C) a complementary good. D) a substitute good. Answer: A Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

61) When Raul's income was $100 per week, 10 units of good A were demanded. Now Raul's income is $150 per week and 12 units of good A are demanded. Using the percentage change formula, the income elasticity of demand for good A equals A) 0.45. B) 0.40. C) 2.20. D) 2.50. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 62) Income elasticity of demand reflects A) the change in total quantity demanded divided by the total change in income. B) the responsiveness of the quantity demanded to changes in income, adjusting its relative price so real income does not change. C) the responsiveness of income of producers to a change in quantity sold of the good. D) the responsiveness of demand to changes in income. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 63) When Mary earned $3,200 per month, she bought 2 concert tickets each month. Now her monthly income is $5,600, and the number of concert tickets she purchases has risen to 3 per month. Mary's income elasticity of demand for concert tickets equals ________ and the tickets are a(n) ________ good for Mary. A) -1.36; normal B) -0.21; inferior C) +0.21; complementary D) +0.73; normal Answer: D Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

64) The income elasticity of demand is A) the percentage change in demand divided by the percentage change in income. B) the change in income divided by the percentage change in price. C) the change in quantity demanded divided by the change in price. D) the percentage change in income divided by the percentage change in quantity demanded. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 65) A measure of the responsiveness of demand to changes in income, all other things being constant, is A) income elasticity of demand. B) price income elasticity of demand. C) price elasticity of demand. D) cross price elasticity of demand. Answer: A Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 66) The responsiveness of demand to changes in income holding the good's relative price constant is A) price elasticity of demand. B) income elasticity of demand. C) elasticity of supply. D) cross price elasticity of demand. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

67) The difference between price elasticity of demand and income elasticity of demand is that A) income elasticity of demand examines how an individual's income changes when prices change and the price elasticity of demand examines how quantity demand changes when price changes. B) income elasticity refers to the movement along the demand curve while price elasticity refers to a horizontal shift of the demand curve. C) income elasticity measures the responsiveness of income to changes in supply while price elasticity of demand measures the responsiveness of demand to a change in price. D) income elasticity refers to a horizontal shift of the demand curve while price elasticity of demand refers to a movement along the demand curve. Answer: D Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 68) When Peter earned $65,000 he purchased 10 novels a year. His income has just increased to $68,000 and he plans to purchase 15 novels this year. Peter's income elasticity of demand for novels equals A) 0. B) 0.11. C) 1.67. D) 8.87. Answer: D Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 69) Ginger earns an income of $2,000 a week and goes out to dinner 4 times a week. If her income increased to $2,100 she would go out to dinner 5 times a week. Ginger's income elasticity of demand is A) 0.22. B) 4.56. C) 2.28. D) -0.22. Answer: B Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

70) The income elasticity of demand A) is positive only. B) is negative only. C) must lie between -1 and +1. D) can be positive, negative, or zero. Answer: D Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 71) The income elasticity of demand for all goods taken together must be A) zero. B) -1. C) +1. D) between 0 and 1. Answer: C Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

72) Use the above figure. Which graph depicts an inferior good? A) A B) B C) C D) D Answer: B Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 73) Use the above figure. Which graph depicts a normal good? A) A B) B C) C D) D Answer: A Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

74) An inferior good has an income elasticity of demand that is A) positive. B) negative. C) positive but less than 1. D) zero. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 75) For most goods and services the income elasticity of demand is A) negative. B) positive. C) invisible. D) inverse. Answer: B Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

76) Use the above table. The income elasticity of artisan bread is A) 1.285. B) 0.780. C) 0.012. D) 8.330. Answer: A Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

77) Use the above table. Based on the information in the table, artisan bread is a(n) A) normal good. B) necessary good. C) inferior good. D) negative good. Answer: A Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 78) Use the above table. The income elasticity of jam is A) -0.33. B) 0.33. C) 3.00. D) -3.00. Answer: A Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 79) Use the above table. Based on the information in the table, jam is a(n) A) normal good. B) necessary good. C) inferior good. D) negative good. Answer: C Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

80) If your income rises and, as a result, you buy fewer packages of Ramen Noodles, then Ramen Noodles are a(n) A) substitute. B) normal good. C) complement. D) inferior good. Answer: D Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 81) If your income rises by one percent and, as a result, you buy more steak, then steak is a(n) A) substitute. B) normal good. C) complement. D) inferior good. Answer: B Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 82) Charlie's income went from $1000 per week to $1500 per week. As a result he increased his consumption of beef from 1 pound a week to 3 pounds a week. Based on his consumption patterns, the income elasticity of beef for Charlie is A) 2.50. B) -.50. C) .50. D) -1.50. Answer: A Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

83) What would you expect the cross price elasticity of iPods and online music downloads to be? Explain your answer. Answer: The cross price elasticity of iPods and music downloads should be negative because they are likely to be complements. Thus, an increase in the price of iPods will decrease the demand for music downloads. Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 84) How does the cross elasticity of demand differ from the price elasticity of demand? How are they related? Answer: The cross elasticity of demand is the responsiveness of demand for one good to a percentage change in the price of another good. Instead of looking at the effect of the change in the good itself, we look at the effect on the amount demanded of another good. If the goods are substitutes, the cross elasticity of demand is positive, but the cross price elasticity of demand is negative when they are complements. A high positive cross elasticity of demand means the goods are close substitutes, which implies the price elasticity of demand will be relatively elastic because elasticity is a function of the closeness of substitutes. Diff: 3 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 85) Why can cross price elasticity of demand be positive or negative, unlike the price elasticity of demand with respect to the item's own price? Answer: Cross price elasticity of demand is the responsiveness of the demand for one good to a change in the price of a related good. Goods are related in two ways: complements and substitutes. For complements, the demand for one good increases in response to a decrease in the price or another good, so that the cross price elasticity of demand for complementary goods is negative. For substitutes, the demand for one good decreases in response to a decrease in the price of another good, so that the cross price elasticity of demand for substitutable goods is positive. Due to the law of demand, however, the price elasticity of demand with respect to the good's own price must always be negative; that is, as the price of the good increases, the quantity demanded of that good decreases, ceteris paribus. Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

86) "Income elasticity of demand is always positive." Do you agree or disagree? Explain. Answer: Disagree. Income elasticity of demand can be positive or negative. For normal goods, an increase in income results in an increase in demand (given positive income elasticity of demand). For inferior goods, however, an increase in income results in a decrease in demand (given negative income elasticity of demand). Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 87) "The income elasticity of a good is positive if a consumer increases the total spending on that good as a result of an increase in its market price." Do you agree or disagree? Why? Answer: Disagree. If a consumer increases the total spending on a good when the price of that good increases, then the good will have a price inelastic demand. The income elasticity of a good is positive if its demand increases as result of an increase in income. Diff: 2 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 88) Graphically, what is the main difference between the measure of income elasticity of demand as opposed to the measure of price elasticity of demand? Answer: Graphically, income elasticity of demand is measured by a horizontal shift in the demand curve in response to a change in income, while price elasticity of demand is measured by a movement along the demand curve in response to a change in price. Diff: 1 Topic: 19.4 The Cross Price and Income Elasticities of Demand Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 19.5 Price Elasticity of Supply 1) If the price elasticity of supply of smartphones is constant and equal to 3, a 10 percent increase in price will result in a change in quantity supplied equal to A) 3 percent. B) 30 percent. C) 33 percent. D) -30 percent. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 118 Copyright © 2021 Pearson Education, Inc.

2) If the quantity supplied of candy increases by 1% when the price of candy increases by 5%, which of the following is TRUE? A) Supply for candy is elastic, and price elasticity of supply = 2.0. B) Supply for candy is inelastic, and price elasticity of supply = 2.0. C) Supply for candy is elastic, and price elasticity of supply = 0.2. D) Supply for candy is inelastic, and price elasticity of supply = 0.2. Answer: D Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 3) If the supply of a good is perfectly inelastic, the price elasticity of supply will equal A) positive infinity. B) one. C) zero. D) none of these. Answer: C Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 4) An 36 percent increase in the price of small cars results in a 20 percent increase in the quantity supplied. The supply elasticity in this range equals A) 9/5. B) 5/9. C) 7/10. D) 4/10. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge

5) OLED television prices rise by 10 percent, and in response the quantity of those OLED televisions supplied increases by 5 percent. The supply elasticity for OLED television sets in that price range is A) 0.5. B) 1.5. C) 2.0. D) -2.0. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 6) The price elasticity of supply A) is the slope of the supply curve. B) is the percentage change in quantity supplied divided by the percentage change in price. C) is always negative. D) does not vary between the long and the short run. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 7) We expect the price elasticity of supply to be A) negative. B) positive. C) between -1 and +1. D) zero. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

8) When the Gizmo Company could sell a gizmo for $10, it produced 2,500 per month. More recently, the price of a gizmo has fallen to $9 and so Gizmo is only producing 2,000 units per month. What is the price elasticity of supply for gizmos? A) 0.47 B) -0.47 C) -2.11 D) 2.11 Answer: D Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 9) If the quantity supplied stays the same no matter what the price is, then supply is A) perfectly inelastic. B) perfectly elastic. C) unit elastic. D) undefined. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 10) A vertical supply curve may be described as being A) relatively elastic. B) perfectly inelastic. C) relatively inelastic. D) perfectly elastic. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

11) If the supply curve is vertical, then supply is A) relatively elastic. B) perfectly elastic. C) unit elastic. D) perfectly inelastic. Answer: D Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 12) If a 5 percent increase in price causes a 10 percent increase in quantity supplied, then supply is A) elastic. B) inelastic. C) unit elastic. D) infinite. Answer: A Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 13) If a 1 percent increase in price causes a 0.5 percent increase in quantity supplied, then supply is A) elastic. B) inelastic. C) unit elastic. D) infinite. Answer: B Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

14) When the price of computer printers decreased from $100 to $85, the number of computer printers produced fell from 1,000 per week to 850 per week. Using this information, we know the supply of computer printers is A) elastic. B) inelastic. C) unit elastic. D) perfectly inelastic. Answer: C Diff: 3 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 15) In the long run, the supply curve A) is more elastic than it is in the short run. B) is less elastic than it is in the short run. C) exhibits no systematic sequence of changes in elasticity. D) exhibits no change in elasticity at all. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 16) Changes in technology over time will result in A) a more inelastic supply curve. B) a more elastic supply curve. C) a unitary elastic supply curve. D) no change in the elasticity of supply. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

17) The most important determinant of the elasticity of supply is A) whether the good is a durable good or a nondurable good. B) the price of the good. C) the time period firms have to adjust to the new price. D) the proportion of the good in the budget of consumers. Answer: C Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 18) If a good's price increases by 2 percent, then its quantity supplied increases by more than 2 percent. This means A) supply is elastic. B) supply is unit-elastic. C) supply is inelastic. D) the good has good substitutes. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 19) Price elasticity of supply is always A) positive because of the law of supply. B) negative because of the law of supply. C) positive because of diminishing marginal utility. D) negative because percentages can only be negative. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

20) The price elasticity of supply measures A) the responsiveness of quantity demanded to a change in price. B) the responsiveness of quantity supplied to a change in price. C) the change in supply due to a change in input prices. D) the change in price due to a change in quantity supplied. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 21) We generally expect the price elasticity of supply to be A) zero. B) negative. C) positive. D) positive or negative, depending on demand. Answer: C Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 22) When quantity supplied is very responsive to a change in price, supply is A) elastic. B) unit-elastic. C) inelastic. D) income sensitive. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 23) When quantity supplied is NOT very responsive to a change in price, supply is A) elastic. B) unit-elastic. C) inelastic. D) income sensitive. Answer: C Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 125 Copyright © 2021 Pearson Education, Inc.

24) Which of the following statements is FALSE? A) A perfectly inelastic supply curve is a vertical line. B) Time is an important consideration in determining supply elasticity. C) Price elasticity of supply can never equal 1. D) A horizontal supply curve is possible. Answer: C Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 25) A perfectly inelastic supply curve is A) an upward-sloping straight line that intersects the origin. B) horizontal. C) vertical. D) downward sloping. Answer: C Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 26) A perfectly elastic supply curve is A) an upward-sloping straight line that intersects the origin. B) horizontal. C) vertical. D) downward sloping. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

27) Refer to the above figure. The supply curve is A) elastic at high prices and inelastic at low prices. B) unitary for all prices. C) perfectly elastic. D) perfectly inelastic. Answer: D Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

28) Refer to the above figure. The supply curve is A) elastic at high prices and inelastic at low prices. B) unitary for all prices. C) perfectly elastic. D) perfectly inelastic. Answer: C Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

29) Supply will become more elastic when A) a time period lengthens. B) the time period shortens. C) the good is important to consumers. D) there are good substitutes for the goods. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 30) Suppose the short-run supply curve is a straight line of slope +1 that intersects the origin. The long-run supply curve will be A) horizontal. B) steeper. C) shallower. D) vertical. Answer: C Diff: 3 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 31) The most important determinant of price elasticity of supply is A) the number of close substitutes there are for the good. B) the time period firms have to adjust to the new price. C) the price of the good. D) the importance of the good in the budgets of consumers. Answer: B Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

32) The supply curve for housing in the very short run is likely to be A) very elastic. B) very inelastic. C) unit-elastic elastic. D) perfectly elastic. Answer: B Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 33) Suppose the demand for rental apartments decreased substantially. We would expect to observe A) no change in rent and a sharp reduction in quantity supplied in the short run, and an even larger decrease in quantity supplied in the long run. B) a large decrease in quantity supplied in the short run, followed by a counter-reaction and an increase in quantity supplied in the long run. C) a small decrease in quantity supplied and significantly lower rents in the short run, and quantity supplied to decrease much more in the long run. D) a large decrease in quantity supplied in the short run and the long run, but much larger reductions in rent in the long run. Answer: C Diff: 3 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 34) A cafeteria is willing to produce 100 bottles of soda when the price is $1 and 150 bottles of soda when the price is $1.30, other things being equal. The price elasticity of supply of soda is A) 1.53. B) 0.67. C) 0.10. D) 0.50. Answer: A Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

35) The price elasticity of supply is A) negative. B) zero. C) positive. D) unknown, depending on other factors. Answer: C Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 36) A perfectly elastic supply curve is A) a straight line that crosses the horizontal axis. B) a straight line coming out of the origin. C) a horizontal straight line. D) a vertical straight line. Answer: C Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 37) The price elasticity of supply is higher when A) the number of buyers in the market decreases. B) the product in question is an inferior good. C) the number of buyers in the market increases. D) producers have more time to adjust to price changes. Answer: D Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 38) The price elasticity of supply is higher when A) the number of producers in the market increases over time. B) the product in question is a complementary good. C) the number of buyers in the market increases. D) producers have less time to adjust to price changes. Answer: A Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 130 Copyright © 2021 Pearson Education, Inc.

39) While the slope of the perfectly inelastic supply curve ________, the slope of the perfectly elastic supply curve ________. A) is zero; approaches infinity B) approaches infinity; is zero C) is zero; is zero D) approaches infinity; approaches infinity Answer: A Diff: 3 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 40) A situation in which there is a reduction in quantity supplied to zero when there is the slightest decrease in price is A) perfectly elastic supply. B) perfectly elastic demand. C) perfectly inelastic supply. D) perfectly inelastic demand. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 41) Which of the following statements regarding price elasticity of supply and the length of time for adjustment is FALSE? A) The longer is the time period for adjustment, the greater is the price elasticity of supply. B) The longer is the time period for adjustment, the less is the extent to which resources flow into (or out of) an industry through expansion (or contraction) of existing firms. C) The longer is the time period for adjustment, the greater is the extent to which entry or (exit) of firms increases or (decreases) production in an industry. D) The shorter the time period for adjustment, the smaller is the price elasticity of supply. Answer: B Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

42) Usually, price elasticities of supply are A) positive, because higher prices yield larger quantities supplied. B) considered short-run adjustments due to supply constraints. C) ordinarily a negative number based on the law of supply. D) an inverse relationship between price and quantity supplied. Answer: A Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 43) If price elasticity of supply is less than 1, A) supply is elastic. B) demand is elastic. C) demand is inelastic. D) supply is inelastic. Answer: D Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 44) The paintings of a world famous artist Vincent Van Gogh have a price elasticity of supply A) equal to 2.0. B) equal to 1.0. C) close to 0.0. D) approaching infinity. Answer: C Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 45) Which of the following statements is correct? A) Supply is more elastic in the short run than in long run. B) Supply is more elastic in the long run than in short run. C) Price elasticity of supply is constant along the supply curve. D) Price elasticity of supply is always a negative number. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 132 Copyright © 2021 Pearson Education, Inc.

46) Tickets for the Super Bowl are an example of supply that is A) perfectly elastic. B) unit elastic. C) slightly inelastic. D) perfectly inelastic. Answer: D Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 47) For most items, we find the price elasticity of supply will be A) negative. B) positive. C) zero. D) infinity. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 48) The shorter the time period that suppliers have to adjust to price changes, the A) lower will be the price elasticity of supply. B) higher will be the price elasticity of supply. C) higher will be the price elasticity of demand. D) lower will be the price elasticity of demand. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

49) If the price of hamburgers increases by 10 percent and the quantity supplied by meat packing companies increases by 20 percent, what is the price elasticity of supply? A) 5 B) 0.2 C) 0.8 D) 2 Answer: D Diff: 3 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Application of knowledge 50) If the price elasticity of supply is equal to 1, we would say the supply of the item is A) unit elastic. B) inelastic. C) elastic. D) perfectly elastic. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 51) A supply curve that is parallel to the price axis is A) perfectly elastic. B) perfectly inelastic. C) relatively inelastic. D) unitary elastic. Answer: B Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

52) A supply curve that is parallel to the quantity axis is A) perfectly elastic. B) perfectly inelastic. C) relatively inelastic. D) unitary elastic. Answer: A Diff: 1 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 53) The price elasticity of supply is 0.6. This means that A) a $10 increase in price would increase quantity supplied by 60. B) a 10 percent increase in price would increase quantity supplied by 6 percent. C) a 10 percent increase in quantity will occur when price increases by 0.6 percent. D) a 10 percent increase in quantity will occur when price increases by 60 percent. Answer: B Diff: 3 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking 54) Why is the price elasticity of supply greater if there is more time for adjustment to an increase in the price of an item? Answer: If more time is available for adjustment to a price increase, then more resources can flow into an industry, and more firms can enter the industry. Thus, after a longer period of time a greater expansion of production can take place in response to the rise in the price of the item. Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

55) Why is time such an important determinant in the elasticity of supply? Is time also important in determining price elasticity of demand? Explain. Answer: Time is an important determinant in the elasticity of supply because more resources can flow into or out of production of a good the greater the time period allowed for supply to adjust to price changes. In the short run, some inputs are fixed so firms cannot make all the adjustments they would like to make. In the long run, all adjustments can be made so quantity supplied will be more responsive to a change in price. Time is also important for determining price elasticity of demand. Again, people have more time to adjust to new situations, and more time to find substitutes for the good. Diff: 2 Topic: 19.5 Price Elasticity of Supply Learning Outcome: Micro-6: Explain the fundamentals of the elasticity of supply and demand and the applications of both AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 20 Consumer Choice 20.1 Utility Theory 1) In economics, another term for satisfaction is A) scarcity. B) need. C) utility. D) return. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 2) The amount of pleasure or satisfaction derived from consumption of a good is called A) need. B) utility. C) consumer surplus. D) demand. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 3) Suppose that Dallas derives 40 utils of total utility from eating 3 hotdogs and 42 utils of total utility from eating 4 hotdogs. What is Dallas' marginal utility from eating the 4th hotdog? A) 2 B) 6 C) 7 D) 6.67 Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

4) Utility analysis helps economists understand A) how people make decisions about what they buy and how much. B) how to eliminate opportunity costs. C) how to eliminate scarcity. D) none of these. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 5) Which of the following is NOT true of utility? A) It represents the want-satisfying power of a good. B) It is measured using a representative unit called a util. C) The utility that a good provides depends on a consumer's preferences. D) Utility can be measured objectively. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 6) The utility that people experience from the consumption of a good depends on A) their income level. B) their tastes and preferences. C) total sales of the good. D) how much shopping time they spent obtaining the good. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 7) Economists use what term to describe the want-satisfying power of a good? A) demand B) utility C) marginal propensity to consume D) income elasticity Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) In economics, utility is defined as A) the want-satisfying power of a good or service. B) the usefulness of a good or service. C) the utilitarian value of a good or service. D) the objective measure of the desirability of a good or service. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 9) In economic utility analysis, consumer tastes and preferences are assumed A) to be determined by income. B) to be influenced by the prices of goods. C) given and stable for an individual. D) given but rapidly changeable. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 10) A representative unit that measures the want-satisfying power of a good is A) a margin. B) purchasing power. C) income. D) a util. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

11) Which English philosopher set out to develop an arithmetic formula for measuring happiness and along the way invented the util? A) John Maynard Keynes B) Milton Friedman C) Jeremy Bentham D) Adam Smith Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 12) Marginal utility is measured as A) utility per unit of production. B) additional output divided by additional utility. C) output of a good or service divided by price. D) additional utility from each additional good consumed. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 13) Marginal utility is A) the utility received from consuming one unit of a good. B) the change in total utility due to a one-unit change in the quantity of a good consumed. C) the total utility received from consuming a certain quantity of a good divided by the quantity. D) the utility received by the last consumer of a good. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

14) Marginal utility equals the change in total utility divided by A) the number of units consumed. B) the price of the product. C) the change in the number of units consumed. D) the consumer's subjective level of preference. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 15) The term marginal means A) total. B) average. C) subjective. D) additional. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 16) When economists refer to people making decisions at the margin, they mean that we compare ________ benefits with ________ costs. A) total; total B) total; incremental C) additional; additional D) additional; average Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

17) The concept of marginality is important in economics because A) individuals make decisions at the margin. B) marginal decisions indicate a lack of importance. C) individuals make decisions based on tastes only. D) large expenditures are the only factor influencing consumption. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 18) Marginal utility can be thought of as A) the incremental change in a person's total satisfaction level from the consumption of a good. B) the total change in satisfaction from buying a good. C) the additional cost of that next good purchased. D) the opportunity cost of buying the next good. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 19) If total utility is decreasing, then marginal utility is A) negative. B) positive. C) zero. D) increasing. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 20) If total utility is increasing, then marginal utility is A) negative. B) positive. C) zero. D) decreasing. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

21) If total utility is unchanged, then marginal utility is A) negative. B) positive. C) zero. D) increasing. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

22) According to the above table, Hillary's marginal utility from watching the 5th movie is A) 170 units of utility. B) 50 units of utility. C) 30 units of utility. D) 20 units of utility. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 23) According to the above table, Bill's marginal utility from watching the 9th movie is A) 405 units of utility. B) 0 units of utility. C) 15 units of utility. D) 10 units of utility. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 7 Copyright © 2021 Pearson Education, Inc.

24) According to the above table, Hillary's marginal utility from watching the 4th movie is A) 140 units of utility. B) 40 units of utility. C) 60 units of utility. D) 30 units of utility. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 25) Refer to the above table. What is the marginal utility for the 10th unit for Hillary and for Bill? A) Hillary: -10; Bill: 10 B) Hillary: 10; Bill 10 C) Hillary: 220; Bill 450 D) Hillary: 0; Bill: 0 Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 26) The total utility from consuming 8 units of a good is 155. The marginal utility of the 8th unit is 7 and the marginal utility of the 7th unit is 11. The total utility from consuming 6 units of the good is A) 173. B) 144. C) 137. D) 130. Answer: C Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

27) According to the above table, what is Jill's marginal utility of the 4th unit? A) 90 B) 220 C) 310 D) 115 Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 28) According to the above table, what is Michael's marginal utility of the 8th unit? A) 372 B) 43 C) 42 D) 44 Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 29) According to the above table, what is Tim's marginal utility of the 5th unit? A) 60 B) 4500 C) 600 D) 500 Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 9 Copyright © 2021 Pearson Education, Inc.

30) According to the above table, what is Diva's marginal utility of the 7th unit? A) 420 B) 400 C) 120 D) 60 Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 31) When the total utility from consuming one good is maximized, marginal utility is A) maximized. B) minimized. C) zero. D) positive. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 32) If two units of a good provide 8 utils and the marginal utility of the third unit of the good is 2 utils, what is the total utility from consuming three units of the good? A) 2 utils B) 8 utils C) 10 utils D) 6 utils Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

33) Marginal utility is defined as A) the increase in utility divided by the total number of units consumed. B) the total utility divided by the total number of units consumed. C) the change in total utility divided by the change in number of units consumed. D) the number of units consumed divided by the total utility. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 34) Consumers are most satisfied when A) all of their income has been saved. B) the total level of utility is as high as possible. C) goods are bought "on sale." D) they save more than they spend. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 35) Utility refers to A) the usefulness of a good or service. B) the value of a good or service. C) the want-satisfying power of a good or service. D) the degree to which a good or service is needed. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 36) The want-satisfying power of a good or service is known as A) purchasing power. B) utility. C) consumer optimum. D) principle of substitution. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 11 Copyright © 2021 Pearson Education, Inc.

37) A good synonym for "utility" is A) marginal. B) need. C) necessity. D) satisfaction. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 38) The concept of utility is A) subjective so that there can be no true measurement of someone's utility. B) subjective so measurement of someone's utility must be done scientifically. C) objective so that devices can be developed that would measure a person's utility. D) objective so that psychologists can measure utility and compare one person's utility with that of another person. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 39) Economists infer that a consumer receives more utility from one good than another by A) giving consumers surveys about the utility they receive from the goods. B) observing the consumer's behavior. C) the logic of the models used. D) means of introspection and speculation. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

40) Utility analysis is the analysis of A) how consumers decide how to earn more money. B) the formation of tastes and preferences. C) the psychology of decision making. D) consumer decision making based on utility maximization. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 41) The analysis of consumer decision making based on utility maximization is known as A) specialization analysis. B) consumption analysis. C) utility analysis. D) market analysis. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 42) At a ball game we can observe people eating hot dogs, french fries, and hamburgers. If all are priced the same and we observe Michelle eating a hot dog and David eating a hamburger, we can conclude that A) Robert will be eating french fries. B) Michelle likes hot dogs better than David does and David likes hamburgers better than Michelle does. C) Michelle derives the same amount of utility from eating a hot dog as David derives from eating a hamburger. D) at this time Michelle derives more utility from eating a hot dog than from eating either a hamburger or french fries, while David derives more utility from eating a hamburger than from eating either a hot dog or french fries. Answer: D Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

43) Juan and Lauren have decided to stop studying economics and get a bite to eat. Juan wants to go for a pizza and Lauren wants a hot dog They decide to go for pizza. What can we conclude from this? A) Juan always gets more utility from pizza than Lauren does. B) Lauren gets less utility from pizza than she could from a hot dog. C) Lauren will get negative utility from the pizza. D) Utility analysis does not work here since Lauren did not eat a hot dog. Answer: B Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 44) A representative unit by which utility is measured is A) a util. B) utility. C) marginal utility. D) ordinal utility. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 45) In cardinal utility analysis, A) numbers can be assigned to utility. B) it is recognized that numbers cannot be assigned to utility. C) the concept of marginal utility exists while in ordinal utility analysis marginal utility does not exist. D) marginal utility always increases as more of a good is consumed. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

46) Marginal utility is A) the utility received by the last consumer of a good. B) the total utility received from consuming a given quantity of a good divided by the number of units consumed. C) the change in total utility from consuming an additional unit of a good. D) the utility received from consuming the first unit of a good. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 47) The change in the total utility as a result of increasing consumption by one unit is known as A) marginal utility. B) average utility. C) proportional utility. D) utils. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 48) The rate of change in total utility equals A) marginal utility. B) the change in marginal utility associated with eating all the quantities a person can handle. C) the change in marginal utility divided by the change in quantity. D) the rate of change in marginal utility divided by the price. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

49) Kobe has just eaten another cookie and his total utility increased. This means that Kobe's marginal utility for this additional cookie is A) positive. B) negative. C) zero. D) not determinable without more information. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 50) Kobe has just eaten another hot dog and his total utility decreased. This means that Kobe's marginal utility for this additional hot dog is A) positive. B) negative. C) zero. D) not determinable without more information. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 51) Katie has decided that she would enjoy eating another cupcake. Which of the following statements is consistent with Katie's decision? A) Katie's marginal utility has decreased with a corresponding decrease in total utility. B) Katie's marginal and total utility remain unchanged. C) Katie's marginal utility has decreased but it is unclear what has happened to total utility. D) Katie's total utility has increased but it is unclear what has happened to her marginal utility. Answer: D Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

52) A student athlete loves cookies. He receives 200 utils for the first cookie, an additional 160 for the second, an additional 120 for the third, another 80 for the fourth, and another 40 for the fifth. The marginal utility of the fourth cookie is ________ and the total utility of consuming four cookies is ________. A) 40; 80 B) 80; 600 C) 80; 560 D) 40; 40 Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 53) Brandi loves cookies. She receives 200 utils for one cookie, 360 for two cookies, 490 for the third, 560 for four cookies, and 600 for five cookies. The marginal utility of the third cookie is A) 130. B) 490. C) 70. D) cannot be determined Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

54) Refer to the above table. The marginal utility of the 6th movie for Michael is A) 25 units of utility. B) 30 units of utility. C) 35 units of utility. D) 40 units of utility. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 55) Refer to the above table. The marginal utility of the 5th movie for Michael is A) 40 units of utility. B) 50 units of utility. C) 60 units of utility. D) 390 units of utility. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

56) Refer to the above table. The marginal utility of the 7th movie for Michael is A) 15 units of utility. B) 20 units of utility. C) 35 units of utility. D) 435 units of utility. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 57) Refer to the above table. The marginal utility of the 2nd movie for Rosie is A) 95 units of utility. B) 90 units of utility. C) 80 units of utility. D) 190 units of utility. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 58) Refer to the above table. The marginal utility of the 5th movie for Rosie is A) 400 units of utility. B) 50 units of utility. C) 60 units of utility. D) 70 units of utility. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 59) Refer to the above table. The marginal utility of the 8th movie for Rosie is A) 30 units of utility. B) 20 units of utility. C) 420 units of utility. D) 5 units of utility. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 19 Copyright © 2021 Pearson Education, Inc.

60) Refer to the above table. What is the marginal utility for the 10th unit for Michael and for Rosie? A) Michael: 50; Rosie: 50 B) Michael: 15; Rosie: 20 C) Michael: 10; Rosie: 10 D) Michael: -10; Rosie: 10 Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 61) Refer to the above table. What is the marginal utility for the 3rd unit for Michael and for Rosie? A) Michael: -10; Rosie: 20 B) Michael: 75; Rosie: 75 C) Michael: 75; Rosie: 80 D) Michael: 270; Rosie: 270 Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 62) Refer to the above table. In examining the utility schedules for Michael and Rosie, we can conclude that A) they like movies the same. B) they like the third movie the same. C) Michelle likes movies more than Robert does. D) they both received the same satisfaction from watching the fourth movie. Answer: D Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

63) The total utility of consuming 6 units of a good is 255. The marginal utility of the 6th unit is 45 and the marginal utility of the 5th unit is 65. The total utility of consuming 5 units of the good is A) 300. B) 150. C) 210. D) 195. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 64) When you buy something, you do so because of the satisfaction you expect to receive from having and using that good. Another term that can be used for satisfaction is A) need. B) purchasing power. C) utility. D) price elasticity. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 65) Economists once believed utility could be measured. This school of thought, known as utilitarianism, was developed by the English philosopher A) Jeremy Bentham. B) Henri Leconte. C) John Lennon. D) Bernard Mandeville. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

66) Kathleen has eaten ten cookies. The tenth cookie makes Kathleen sick. This means that for Kathleen, A) the tenth cookie has little utility. B) the tenth cookie has negative utility. C) the opportunity cost of cookies is high. D) cookies must have a zero price. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 67) Marginal utility A) at first rises and then declines as a person consumes more of a good or service. B) can be thought of as being the equivalent to total utility. C) equals the total satisfaction from consumption of goods and services. D) is stable, but then as a person consumes more of a good or service, has a propensity to increase. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 68) The additional utility or satisfaction that one derives from consuming one more unit of any good or service is referred to as A) total utility. B) diminishing utility. C) average utility. D) marginal utility. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

69) The change in satisfaction derived when an individual consumes one more unit of a good or service is called A) total utility. B) marginal utility. C) average utility. D) fixed utility. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 70) Marginal utility is calculated as A) total utility/number of units consumed. B) change in total utility/number of units consumed. C) change in total utility/change in number of units consumed. D) total utility/change in number of units consumed. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 71) In economics, the term "marginal" refers to A) total. B) a change in the total. C) average change. D) inverse. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

72) In utility analysis, a consumer's tastes and preferences are assumed to be A) dependent on income and education. B) predetermined and constant. C) dependent on national origin. D) non-existent. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 73) When total utility is at a maximum, A) marginal utility is at a minimum. B) marginal utility is negative. C) marginal utility is zero. D) marginal utility is equal to total utility. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 74) Total satisfaction is maximized when A) marginal utility is positive. B) marginal utility is negative. C) marginal utility is zero. D) marginal utility is equal to average utility. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 75) As more of a product is consumed, total utility increases until A) marginal utility increases at an increasing rate. B) average utility increases at an increasing rate. C) marginal utility is negative. D) average utility decreases. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 24 Copyright © 2021 Pearson Education, Inc.

76) When marginal utility is negative, total utility A) increases at a decreasing rate. B) is zero. C) is at its maximum. D) decreases. Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 77) When marginal utility is positive, total utility is A) increasing. B) zero. C) at its minimum. D) decreasing. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 78) When marginal utility is zero, total utility is A) increasing. B) at its maximum. C) at its minimum. D) decreasing. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

79) The marginal utility derived from viewing the next movie download is the A) average utility per minute of viewing. B) additional utility from viewing the movie. C) average utility per hour of viewing. D) additional utility from viewing the first minute of the movie. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 80) A rational person will NEVER consume a product when its A) marginal utility is negative. B) total utility is increasing at a decreasing rate. C) marginal utility is decreasing. D) total utility is decreasing at an increasing rate. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 81) In economics, people make decisions regarding consumption based on comparing A) additional units of satisfaction with additional costs. B) average satisfaction with additional costs. C) average satisfaction with average costs. D) additional units of satisfaction with average costs. Answer: A Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

82) If the commercial is TRUE that every additional bite of food tastes as good as the first, the marginal utility from consuming more of the advertised product must be A) increasing. B) decreasing. C) constant. D) zero. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 83) If you have been consuming large quantities of ice cream on a hot summer afternoon and you decide to refrain from any additional consumption, it can be concluded that A) total utility has reached a minimum and the marginal utility of an additional drink would be large. B) total utility has reached a maximum and the marginal utility of an additional drink would be small. C) total utility has reached a maximum and the marginal utility of an additional drink would be zero. D) total utility has reached a minimum and the marginal utility of an additional drink would be negative. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Reflective thinking 84) If marginal utility is zero, A) a rational consumer will consume more units next time. B) a rational consumer will consume fewer units next time. C) a rational consumer will not consume additional units. D) a rational consumer will consume more units if the price is zero. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

85) Michael loves donuts. He receives 100 units of utility for the first donut, an additional 80 for the second, an additional 60 for the third, another 50 for the fourth, and another 20 for the fifth. The marginal utility of the fourth donut is ________ and the total utility from consuming four donuts is ________. A) 50; 40 B) 50; 290 C) 140; 290 D) 290; 100 Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 86) If the total utility derived from consuming three oysters was 50 utils and the total utility derived from consuming four oysters was 62 utils, what was the marginal utility derived from the consumption of the fourth oyster? A) 112 utils B) 52 utils C) 12 utils D) It is impossible to determine. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 87) Assuming that the marginal utility of the first four pieces of candy was 30, 28, 20, and 18 respectively, how much total utility was derived from eating the first three pieces of candy? A) 96 B) 78 C) 58 D) 100 Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

88) Utility analysis deals with A) the formation of tastes and preferences. B) the differences of tastes and preferences across individuals. C) the consumption decisions of people based on utility maximization. D) how consumers determine the utility they receive from consumption. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 89) Utility theory assumes that a consumer tries to A) maximize her average utility. B) maximize her marginal utility. C) maximize the difference between total and marginal utility. D) maximize her total utility. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 90) When marginal utility is positive but decreasing, total utility is A) decreasing. B) negative. C) increasing. D) zero. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 91) When total utility is falling, A) marginal utility is at a maximum. B) marginal utility is at zero. C) marginal utility is negative. D) marginal utility has decreased, but is now increasing. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

92) If marginal utility is positive but diminishing, then A) average utility must be negative. B) total utility must also be diminishing. C) total utility must be positive. D) marginal utility must be more than total utility. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 93) If marginal utility is zero, total utility is A) falling. B) zero. C) at its maximum. D) negative. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 94) When we graph total utility, the total utility curve will A) always be increasing. B) always be decreasing. C) be increasing as long as marginal utility is positive. D) be horizontal if marginal utility is positive. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

95) If marginal utility declines but remains positive, then A) total utility continues to increase but at a decreasing rate. B) total utility also declines. C) total utility continues to be zero. D) none of these Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

96) Refer to the above figures. Which panel best represents marginal utility? A) Panel A B) Panel B C) Panel C D) Panel D Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

97) Refer to the above figures. Julie's total utility for consuming donuts reaches a maximum at 4 cookies. Which panel best represents marginal utility? A) Panel A B) Panel B C) Panel C D) Panel D Answer: B Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 98) Which of the following statements is NOT true about marginal utility when total utility is at its maximum point? A) Marginal utility is zero. B) Marginal utility is decreasing. C) A rational consumer will not consume additional units beyond this point. D) Marginal utility is negative. Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

99) If marginal utility is zero, A) total utility increases at a decreasing rate. B) total utility increases at an increasing rate. C) total utility is at a maximum. D) people will consume more of the good only if the price is zero. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 100) If the price of a good is zero, a rational consumer will A) buy all of the units available. B) not consume the good at all since it must not be valuable if it has a zero price. C) stop consuming the good when marginal utility is zero. D) consume the good up to the point where total utility is just below zero. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

101) In the above table, what is the marginal utility of the fourth hotdog consumed? A) 10 B) 30 C) 120 D) 130 Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

102) In the above table, what is the marginal utility of the second hotdog consumed? A) 10 B) 90 C) 30 D) 40 Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 103) In the above table, what is the marginal utility of the sixth hotdog consumed? A) 7 B) 137 C) 120 D) -17 Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

104) Using the above table, what is the total utility of consuming 2 bottles of soda? A) 115 B) 120 C) 140 D) 240 Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

105) Using the above table, what is the total utility of consuming 3 bottles of soda? A) 115 B) 120 C) 240 D) 135 Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 106) Using the above table, what is the marginal utility of the 4th soda? A) 23.2 B) 5 C) 10 D) 15 Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

107) Given the above figure, when David eats a third piece of pizza his marginal utility is ________ and his total utility is ________. A) falling; falling B) falling; rising C) rising; falling D) rising; rising Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 108) Given the above figure and suppose that David is a rational consumer, then he will NOT eat more than ________ piece(s) of pizza. A) 1 B) 5 C) 4 D) 6 Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

109) Given the above figure, marginal utility becomes negative when David consumes the ________ piece of pizza. A) 1st B) 3rd C) 4th D) 5th Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 110) When marginal utility is decreasing but still positive, then total utility is A) increasing at a decreasing rate. B) negative. C) decreasing. D) increasing at an increasing rate. Answer: A Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 111) The statement that "as more of a good is consumed, its extra benefit declines" refers to A) the law of demand. B) the law of diminishing marginal product. C) the law of diminishing marginal utility. D) the law of comparative advantage. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

112) If your guest is serious when he said that he just could not get enough of the lasagna you cooked and that the more he ate the more he wanted, you would conclude that the marginal utility of lasagna for him was A) positive. B) negative. C) zero. D) undefined. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 113) If a person claims, "I wouldn't eat anchovies if you paid me," we can assume that his marginal utility of anchovies is A) positive. B) positive, but decreasing. C) zero. D) negative. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 114) If Mary complains that she doesn't feel very well because she ate too many hotdogs, we would conclude that the marginal utility of the last hotdog eaten was A) positive. B) zero. C) very large. D) negative. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

115) According to the law of diminishing marginal utility, the marginal utility for a particular product A) remains constant, regardless of how much of the product is consumed. B) remains constant as long as the product is still considered useful. C) decreases as more of the product is consumed. D) increases as more of the product is consumed. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 116) Typically, an individual takes only one newspaper from the bin because A) of the low marginal utility of additional newspapers. B) total utility will rise with consumption of more than one newspaper. C) marginal utility increases with the first consumption of newspapers. D) there are limited amounts of newspapers in the bin. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 117) According to the principle of diminishing marginal utility, A) total utility always falls with additional consumption. B) total utility is usually negative. C) the consumer will never tire of additional units of a good. D) the rate at which utility increases diminishes as more of a good is consumed. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

118) Regretting the last unit of consumption of beer implies that A) the total utility from drinking beer is negative. B) beer is an inferior good. C) the marginal utility of the last unit of beer consumed is negative. D) the demand curve for beer is horizontal. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 119) A rational individual will never consume a unit of a good if its A) marginal utility is diminishing. B) marginal utility is greater than the price of the good. C) marginal utility is increasing. D) marginal utility is negative. Answer: D Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 120) If marginal utility is negative, A) total utility increases at a decreasing rate. B) the consumer will not consider extra units of the good even if its price is zero. C) the consumer will want to consume the unit only if it is free. D) the consumer likes the commodity, but not as much as he or she once did. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

121) As an individual consumes more of a particular good, the total level of utility derived from that consumption usually A) increases at a constant rate. B) increases at an increasing rate. C) increases at a decreasing rate. D) decreases at an increasing rate. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 122) Which economic principle accounts for the fact that all-you-can-eat buffet restaurants can be profitable? A) the law of demand B) the principle of diminishing marginal utility C) the principle of comparative advantage D) the law of supply Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

123) Refer to the above table. At what quantity does diminishing marginal utility set in? A) 1st B) after 4 C) after 5 D) after 6 Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 41 Copyright © 2021 Pearson Education, Inc.

124) Refer to the above table. At what quantity does diminishing marginal utility set in? A) after 0 B) after 1 C) after 2 D) after 10 Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

125) Refer to the above table. At what quantity does diminishing marginal utility set in? A) after 3 B) after 2 C) after 10 D) after 15 Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

126) Refer to the above table. Which of the four people have utility schedules characterized by the law of diminishing marginal utility? A) Amy, Brook, and Kate only B) Dave only C) Dave and Kate only D) Amy and Brook only Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 127) Refer to the above table. Amy's utility schedule shows A) diminishing marginal utility throughout her entire schedule. B) initially increasing marginal utility and then decreasing marginal utility. C) initially decreasing marginal utility and then increasing marginal utility. D) increasing marginal utility throughout her entire schedule. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

128) Refer to the above table. Brook's utility schedule shows A) diminishing marginal utility throughout her entire schedule. B) initially increasing marginal utility and then decreasing marginal utility. C) initially decreasing marginal utility and then increasing marginal utility. D) increasing marginal utility throughout her entire schedule. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 129) Refer to the above table. Kate's utility schedule is characterized by A) diminishing marginal utility. B) increasing marginal utility. C) constant marginal utility. D) decreasing marginal utility. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 130) Refer to the above table. Dave's utility schedule is characterized by A) diminishing marginal utility. B) increasing marginal utility. C) constant marginal utility. D) constant total utility. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 131) Refer to the above table. The one who likes the good the most is A) Dave. B) Kate. C) Brook. D) uncertain since we cannot compare utility across people. Answer: D Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 44 Copyright © 2021 Pearson Education, Inc.

132) As you consume more of a particular commodity, your total level of utility derived from that consumption will A) increase at an increasing rate. B) increase at a decreasing rate. C) increase at a constant rate. D) remain constant. Answer: B Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 133) Which of the following is NOT consistent with the law of diminishing marginal utility? A) Newspaper vending machines are not as secure as soft drink machines. B) A student selects to eat at an all-you-can-eat restaurant rather than at a restaurant that charges for refills. C) A student's enjoyment of a movie increases the more she watches it. D) A symphony has free throat lozenges in their lobby. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 134) Increases in total utility from the consumption of a good decrease as more is consumed. This statement is A) the law of diminishing marginal utility. B) the law of average utility. C) the consumer optimum. D) not consistent with the assumption of rational behavior. Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

135) Maria buys a cup of coffee every day after her economics class. The first cup of coffee always tastes wonderful. The second does not taste quite as good as the first. The third does not taste quite as good as the second. Maria is experiencing A) irrational behavior. B) the law of diminishing marginal utility. C) the income effect. D) the substitution effect. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 136) On a hot summer day, a construction worker enters a McDonald's fast-food restaurant. He orders the first Big Mac. He consumes it within 3 minutes. He then orders a second Big Mac and consumes it in 10 minutes. He eats only half of the third one in 18 minutes and throws away the rest. The store manager offers him the fourth for free. The construction worker says: "No thanks." Why? A) For the construction worker, total utility increased at an increasing rate. B) Marginal utility increased at an increasing rate. C) Marginal utility declined as he consumed additional Big Macs. D) The law of diminishing marginal utility does not apply to consumption of Big Macs. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 137) A student enters a McDonald's fast-food restaurant. He orders the first Big Mac. He consumes it within 3 minutes. He then orders a second Big Mac and consumes it in 10 minutes. He eats only half of the third one in 18 minutes and throws away the rest. The store manager offers him the fourth for free. The student says: "No thanks." For the student described above, we can say that A) diminishing marginal utility set in only after he had consumed the second Big Mac. B) diminishing marginal utility began as soon as he had eaten the first Big Mac. C) diminishing marginal utility did not occur, he simply wanted to quit eating. D) the law of diminishing marginal utility only applies to durable goods. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

138) Carol is very hungry. She has just sat down to eat. Her first bite gives her a certain level of utility. Her second bite increases her utility by more than the first bite. Her third bite increases her utility by more than the second bite. Carol has 40 bites left before she finishes. Which of the following statements is TRUE about Carol? A) Carol is being inconsistent with the law of diminishing marginal utility. B) Carol's total utility decreases with each bite. C) Carol's marginal utility will be negative when she takes her last bite. D) Carol will eventually experience diminishing marginal utility by the time she finishes eating, if her marginal utility begins to decline. Answer: D Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 139) Brad ate four bags of chips at the baseball game. The first bag tasted best, but he found that as he ate more chips the amount of extra satisfaction he was receiving was beginning to fall. This would demonstrate A) the law of total utility maximization. B) the law of zero utility. C) the law of diminishing marginal utility. D) the law of diminishing costs. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 140) The reason that all-you-can-eat restaurants can make a profit is due to A) the law of demand. B) the law of increasing relative costs. C) the law of diminishing marginal utility. D) the law of diminishing marginal returns. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

141) If a restaurant guest said, "Every bite, including the last bite, tasted as good as the first," then the marginal utility for her A) is decreasing. B) is increasing. C) is constant. D) is positive. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 142) Diminishing marginal utility means that as more of a good is consumed, A) the rate at which total utility increases starts to diminish. B) the rate at which total utility increases stays the same. C) the rate at which total utility increases starts to increase. D) there is no impact on the rate of change of total utility. Answer: A Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 143) Which of the following statements is TRUE with respect to total utility and marginal utility? A) Marginal utility always rises as total utility increases. B) Marginal utility can decline as total utility rises. C) Total utility is not related to marginal utility. D) Total utility can decline while marginal utility rises. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

144) In the above table, the total utility of three slices of pizza is A) 20. B) 70. C) 50. D) 80. Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 145) In the above table, the marginal utility of fifth slice of pizza is A) -10. B) 10. C) 0. D) 20. Answer: C Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 146) In the above table, marginal utility begins to diminish after consumption of the A) second slice of pizza. B) third slice of pizza. C) fourth slice of pizza. D) fifth slice of pizza. Answer: A Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

147) After consuming what quantity of donuts does the consumer in the table below experience diminishing marginal utility?

A) 1 B) 2 C) 3 D) 4 Answer: A Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

148) Using the above table, what is the maximum number of slices of pizza a rational consumer would buy? A) 4 B) 3 C) 2 D) 1 Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

149) Using the above table, what is the total utility of the third piece of pizza? A) 75 utils B) 0 utils C) 25 utils D) -25 utils Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 150) Using the above table, what is the total utility of the first piece of pizza? A) 0 utils B) 50 utils C) 75 utils D) 100 utils Answer: B Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 151) When you tell your mother, "I'll never be tired of your cooking," you are saying the A) total utility of her cooking to you is constant. B) total utility of her cooking to you is equal to 1. C) marginal utility of her cooking to you is 0. D) marginal utility of her cooking to you will never be 0. Answer: D Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

152) Using the above table, diminishing marginal utility begins after the ________ glass of water is consumed. A) 1st B) 2nd C) 6th D) 5th Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 153) Using the above table, the marginal utility for the sixth glass of water is A) -5 utils. B) 255 utils. C) 5 utils. D) 260 utils. Answer: A Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 154) Newspaper vending machines are often built so that customers can pay to lift a door and take a paper off a pile of daily newspapers. Newspaper distributors are NOT concerned about customers taking the whole stack of papers because A) the total utility of a daily newspaper is zero. B) the marginal utility of any one daily newspaper is zero. C) the marginal utility of a second daily newspaper is zero. D) the price of a daily newspaper is relatively low. Answer: C Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 52 Copyright © 2021 Pearson Education, Inc.

155) What is utility and what are its characteristics? Answer: Utility is the want-satisfying power of a good or service. It is subjective, so that it cannot be measured objectively or by scientific instruments, and one person's utility cannot be compared to another's utility. It is not necessarily useful or utilitarian either. If an individual chooses a banana instead of an apple, we can say the person expects to receive more utility from the banana than from the apple. Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 156) What is marginal utility? Why is the term "marginal" important in utility analysis? Answer: Marginal utility is the change in total utility due to a one-unit change in the quantity of a good consumed. Marginal means additional or incremental. "Marginal" is important in utility analysis because an individual contemplating increasing consumption of an item by one additional unit compares the utility gain from that one additional unit consumed per dollar spent with the additional utility per dollar spent on all other items. Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Reflective thinking 157) What is utility analysis? What is the goal of this analysis? Answer: Utility analysis is the analysis of consumer decision making based on utility maximization. Economists assume individuals act so as to maximize their utility. The goal of the analysis is to explain and predict consumer behavior. An important part of this is that utility analysis can be used to derive a demand curve, because utility governs people's preferences for goods and services. Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 158) What do we know about total utility when marginal utility is zero? Answer: Marginal utility is the extra utility from consuming another unit of a good. If marginal utility is 0, total utility does not increase further when the consumer consumes the next unit, so total utility must be at its maximum value. Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

159) Suppose that Jacob is going to a buffet restaurant that allows him to eat as many chicken wings as he wants at a fixed price. How would you predict the number of chicken wings that Jacob will eat using utility theory? Answer: Utility theory predicts that Jacob will try to maximize his utility from his chicken wing consumption at the restaurant. This means that he will continue to eat one more chicken wing until his marginal utility becomes zero and so his total utility from the chicken wings is maximized. Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 160) What is the relationship between marginal utility and total utility? What happens to total utility as marginal utility declines? Answer: Marginal utility is the change in total utility resulting from a one-unit change in the consumption of a good or service. As marginal utility declines, the additional utility per unit consumed decreases, so total utility rises at a decreasing rate. When marginal utility reaches zero, total utility is at its maximum. If marginal utility continues to decline below a value of zero, so that marginal utility becomes negative, then total utility begins to fall. Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 161) "As an individual consumes more units of a good, her total utility falls because of the law of diminishing marginal utility." Do you agree or disagree? Explain. Answer: Disagree. The law of diminishing marginal utility suggests that marginal utility eventually declines. Total utility continues to rise as long as marginal utility is positive. Total utility falls only when marginal utility is negative. Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 162) Why does total utility rise at a decreasing rate as an individual's consumption of an item increases? Answer: This is due to the principle of diminishing marginal utility. As more of any good or service is consumed, its extra benefit declines, meaning that the extra utility from consuming each additional unit of the item falls off as consumption increases. Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

163) What is the principle of diminishing marginal utility? Answer: The principle of diminishing marginal utility is that as more of any good is consumed the extra satisfaction derived declines. Increases in total utility from the consumption of a good becomes smaller and smaller as more of the good is consumed in a given time period. Diff: 1 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 164) Restaurants that allow customers to eat as much as they want for a fixed price must make money or they would not remain in business. How can they earn profits when people can always eat more so that the restaurant's costs keep getting higher? What practice that regular restaurants use will not be used by all-you-can-eat places? Answer: Restaurants are relying on the principle of diminishing marginal utility. Eventually the marginal utility of the food will go so low or even become negative so people will quit eating. Such restaurants do not offer "doggie bags," because this would allow people to take extra food and eat it later when the marginal utility would again be higher, thereby increasing the costs of "all-you-can-eat" restaurants. Diff: 3 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 165) Jill likes lobsters but she does NOT eat lobsters in every meal. How can utility theory explain this? Answer: Even though Jill likes lobsters, she is probably facing diminishing marginal utility from lobster consumption over a given period of time. Her marginal utility from eating more lobsters within a week after a meal of lobsters might be zero. Thus, she does not want to eat any more lobsters in that week. Diff: 2 Topic: 20.1 Utility Theory Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

20.2 Optimizing Consumption Choices 1) In order to maximize utility, a consumer should allocate money income so that A) the marginal utility of the last unit of each product consumed is greater than the total utility of each product consumed. B) the total utility derived from each product consumed is the same. C) the marginal utility obtained from the last dollar spent on each product is the same. D) the elasticity of demand on all products purchased is the same. Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 2) Suppose Jeremy's marginal utility from attending his 10th San Antonio Spurs game was 50 and the marginal utility from attending his 1st Rihanna concert was 70. Assume that the price of a Spurs ticket is $30 and the price of a Rihanna ticket is $100. Which of the following would be TRUE? A) Jeremy would attend more Rihanna concerts and less Spurs games. B) Jeremy would attend more Spurs games and less Rihanna concerts. C) Jeremy would not alter his behavior. D) Jeremy would attend less of both Spurs games and Rihanna concerts. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 3) If a consumer concludes that the marginal utility of the last dollar spent on vegetables exceeds the marginal utility of the last dollar spent on junk food, he will respond by A) consuming relatively more junk food and fewer vegetables. B) consuming relatively more vegetables and less junk food. C) consuming equal amounts of vegetables and junk food. D) halting consumption of junk food altogether. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

4) For good A and good B, the consumer maximizes personal satisfaction when A) MUA/PA = PB/MUB. B) PB/MUA = PA/MUB. C) MUA/PA = MUB/PB. D) MUA × MUB = PA × PB. Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking Jerry's Marginal Utility for consuming beer and pizza with $8.00 in income

5) In the above table, Jerry experiences diminishing marginal utility after consuming how many hotdogs? A) 1 B) 2 C) 3 D) 4 Answer: A Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 6) In the above table, Jerry experiences diminishing marginal utility after consuming how many beers? A) 1 B) 2 C) 3 D) 4 Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 57 Copyright © 2021 Pearson Education, Inc.

7) In the above table, how much total utility does Jerry get from consuming 4 beers? A) 10 utils B) 45 utils C) 125 utils D) 115 utils Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 8) According to the above table, how much total utility does Jerry get from 3 hotdogs? A) 30 utils B) 85 utils C) 115 utils D) 130 utils Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 9) In the above table, how many hotdogs and beers will Jerry consume if the price of one hotdog is $2.00 and the price of a beer is $2.00? A) 1 hotdog and 3 beers B) 2 hotdogs and 2 beers C) 2 hotdogs and 3 beers D) 3 hotdogs and 1 beer Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

10) Referring to the above table, suppose Jerry's ratios of marginal utility of beer to the price of beer and the marginal utility of hotdogs to the price of hotdogs are equal. If the price of beer increases, A) Jerry will probably consume more beer and fewer hotdogs. B) Jerry will probably consume less beer and fewer hotdogs. C) Jerry will probably consume less beer and more hotdogs. D) Jerry will still consume the same amount of beer and hotdogs. Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 11) Assume that Carlo concludes that he should eat less and play video games more. In this situation, it must be TRUE that the marginal utility of Carlo's last dollar spent on food is A) more than the marginal utility of the last dollar spent on video games. B) less than the marginal utility of the last dollar spent on video games. C) equal to the marginal utility of the last dollar spent on video games. D) negative and less than the marginal utility of the last dollar spent on video games. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 12) For any two goods, A and B, if MUA divided by PA equals 2.5 and MUB divided by PB equals 4.0, then with given income and prices the consumer should A) buy more of good A and less of good B. B) buy more of good B and less of good A. C) buy all of good B and no A. D) stop because an equilibrium is achieved. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

13) Mr. Smith is consuming beer and wine. At his current level of consumption, the marginal utility per dollar is 30 units for beer and 20 units for wine. Mr. Smith should A) consume twice as much beer as wine. B) consume twice as much wine as beer. C) increase his consumption of beer relative to wine. D) increase his consumption of wine relative to beer. Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 14) Despite the fact that water is necessary to sustain life, it is less expensive than milk. Economic theory suggests that this is so because A) there is a conspiracy among milk producers to hold prices artificially high. B) although the total utility of water consumption is high, its marginal utility per dollar spent is low when compared to milk. C) consumers are irrational. D) sellers of water hold the price of water artificially low because of its importance. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 15) The consumer optimum for consuming two goods is achieved when A) the total utility from each good is equal. B) the price of each good is equal. C) the price multiplied by the marginal utility is equal for the two goods. D) the marginal utility per last dollar spent is equal for the two goods. Answer: D Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

16) The consumer optimum (for two goods, A and B) is reached when A) TUA = TUB. B) MUA = MUB. C) TUA/PA = TUB/PB. D) MUA/PA = MUB/PB. Answer: D Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 17) The price of good X is $5 and the price of good Y is $15. If the marginal utility of good X is 20 then the marginal utility of good Y must be ________ to have an optimum combination of goods purchased. A) 4 B) 20 C) 60 D) 80 Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 18) The marginal utility of good A is 6 and the marginal utility of good B is 18. The price of good A is $2. The price of good B must be ________ if the consumer is optimizing her utility. A) $5 B) $6 C) $18 D) $15 Answer: B Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

19) When the marginal utility per dollar of good A exceeds the marginal utility per dollar of good B, A) the consumer should consume more of good A. B) the consumer is consuming too much of good A. C) good B must have a negative marginal utility. D) the consumer is in an optimal situation if the price of good A exceeds the price of good B. Answer: A Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 20) Assume that the marginal utility from good A is 10 units and that the price of good A is $5 per unit. The marginal utility from good B is 15 units and its unit price is $7. In this situation, a utility-maximizing consumer should A) consume more of good A. B) consume only good B. C) consume more of good B. D) consume neither good A nor good B. Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 21) Using the utility-optimizing model, which of the following would induce a consumer to increase consumption of good A, a normal good? A) an increase in the marginal utility of A B) a decrease in the total utility of B C) an increase in the marginal utility of good B D) a decrease in income Answer: A Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

22) In a restaurant we can observe people consuming coffee, tea, and juices. All are priced the same. If Ann consumes coffee and Bob consumes a juice, we can conclude that A) Carl, another restaurant guest, will be drinking tea. B) Ann likes coffee more than Bob does, and Bob likes juices more than Ann does. C) Ann derives more utility from coffee than from tea or juices, and Bob derives more utility from juices than from tea or coffee. D) the utility Ann receives from coffee consumption equals the utility that Bob receives from consuming juices. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 23) Consumers do NOT buy as many units of each good as they want because A) of the law of diminishing marginal utility. B) they have limited incomes. C) they do not know what they want in all situations. D) eventually marginal utility equals zero. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 24) The consumer optimum is the set of goods and services, subject to the limited income of the consumer, that A) the consumer can afford to buy. B) is characterized by zero marginal utility on each good and service. C) maximizes the level of satisfaction for each consumer. D) is characterized by increasing marginal utility. Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

25) A consumer with unlimited income will continue consuming goods until A) the marginal utility of each is equal to zero. B) the marginal utility of each is negative. C) total utility rises. D) marginal utility equals total utility. Answer: A Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 26) The price of a hotdog is $1, the price of a movie ticket is $5, and the consumer has $13. A consumer has purchased 3 hotdogs and two movie tickets, receiving 10 units of utility for the last hotdog and 10 units of utility for the last movie. The set of goods A) is an optimum since the entire income is spent and the marginal utility is the same for the last unit of each good. B) is an optimum because the consumer has maximized her utility given the limited income she had. C) is not an optimum because the marginal utility per dollar spent is greater for the hotdog than for the movie. D) is not an optimum because the marginal utility for the second hotdog was less than the marginal utility for the first hotdog. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 27) A consumer has spent all of his funds on hamburgers and movies. The price of a hamburger is $1 and the price of a movie is $5. The marginal utility of the last hamburger is 5 and the marginal utility of the last movie is 40. This consumer has A) not maximized utility. To maximize utility, he should cut back on movies and buy more hamburgers. B) not maximized utility. To maximize utility, he should cut back on hamburgers and buy more movies. C) not maximized utility. To maximize utility, he should cut back consumption of each. D) maximized utility. Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

28) Refer to the above table. Assume the consumer spends his entire income. If the consumer's optimum at the current price of a movie is at 4 hotdogs and 4 movies, and the price of a hotdog is $1, what is the consumer's income? A) $28 B) $20 C) $16 D) $40 Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 29) Refer to the above table. Assume the consumer spends his entire income. The price of a hotdog is $1, the price of a movie is $6, and the consumer has $15. What is the consumer's optimum? A) 2 hotdogs and 2 movies B) 3 hotdogs and 2 movies C) 4 hotdogs and 4 movies D) 0 hotdogs and 2.5 movies Answer: B Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

30) When Sally increases the consumption of pizza and decrease the consumption of soda, her marginal utility of A) pizza falls and the marginal utility of soda will increase. B) both pizza and soda will decrease. C) pizza increases and the marginal utility of soda will fall. D) both pizza and soda will increase. Answer: A Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

31) The price of a magazine is $2, the price of a novel is $5, and the consumer has $33. According to the above table, the rational consumer will purchase A) 1 magazine and 2 novels. B) 2 magazines and 3 novels. C) 4 magazines and 5 novels. D) 5 magazines and 6 novels. Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 32) Refer to the above table. If a consumer's optimum consists of 3 magazines and 6 novels, then A) the price of a magazine is six times more than the price of a novel. B) the price of a magazine is three times more than the price of a novel. C) the price of a novel is more than five times more than the price of a magazine. D) the price of a novel is six times more than the price of a magazine. Answer: A Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

33) According to utility theory, consumer purchase decisions are made such that A) the value of the ratio of marginal utility to price for the last units purchased and consumed is equal. B) the difference between the value of the marginal utility of the last unit purchased and the price paid is maximized. C) the total utility of the last unit purchased is equal to the price of that unit. D) the total utility from consuming the good is less than the marginal utility of the last unit consumed. Answer: A Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 34) Consumers usually buy fewer units of a good than the quantity that would maximize total utility from consuming the good because A) they are not rational. B) of the law of demand. C) they have limited incomes. D) marginal utility becomes zero after just a few units of the good. Answer: C Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 35) The consumer optimum is defined as A) the set of goods and services that maximizes marginal utility for each good. B) the set of goods and services such that the marginal utility of each good equals zero. C) the set of goods and services that maximizes the marginal utility of each good consumed. D) the set of goods and services, subject to the limited income of the consumer, that maximizes the total utility of the consumer. Answer: D Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

36) The set of goods and services that maximizes the level of satisfaction for each consumer subject to limited income is A) the consumer optimum. B) diminishing marginal utility. C) increasing marginal utility. D) substitution effect. Answer: A Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 37) A consumer's optimum is found when A) the marginal utility of the last dollar spent equals zero for each good. B) the marginal utility of each good is increasing and the total income is spent. C) the total utility of each good is the same and the total income is spent. D) the marginal utility of the last dollar spent on each good is the same and all income is spent. Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 38) A consumer's optimum is found when A) prices of goods go down. B) the consumer is achieving the maximum level of utility given market prices and their limited income. C) the marginal utility of the last dollar spent equals 0 for every good. D) the consumer saves part of their income. Answer: B Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

39) A consumer has spent all of his income on pizza and movies. The price of a piece of pizza is $1 and the price of a movie is $6. The marginal utility of the last piece of pizza is 5 and the marginal utility of the last movie is 24. The consumer has A) maximized utility. B) not maximized utility. He should cut back on movies and buy more pizza. C) not maximized utility. He should cut back on pizza and buy more movies. D) not maximized utility. He should cut back consumption of each good. Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 40) The price of a piece of pizza is $1, and the price of a movie is $6. The consumer has purchased 2 pieces of pizza and 2 movies, and her marginal utility from the second piece of pizza is 20 and from the second movie is 120. The consumer has an income of $21. This combination of goods A) maximizes utility and is an optimum because the marginal utility of the last dollar spent on each good is the same. B) maximizes utility because the marginal utility of the last dollar spent on each good is the same, but it is not an equilibrium because marginal utility is not zero. C) is not an optimum because the consumer has not spent all of her money. D) is not an optimum because the marginal utility of the last dollar spent on each good is not the same. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

41) The price of a piece of pizza is $1 and the price of a movie is $6 and the consumer has $14. A consumer has purchased 2 pieces of pizza and 2 movies, receiving 20 units of utility for the second piece of pizza and 100 units of utility for the second movie. When the consumer spends all her income, the set of goods A) is an optimum since the entire income is spent and the marginal utility per dollar spent is the same for the last unit of each good. B) is an optimum since the entire income is spent and total utility is maximized. C) is not an optimum because the marginal utility per dollar spent is greater for pizza than for movies and the consumer is not spending all of her income. D) is not an optimum because the marginal utility for each good is not equal. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 42) The price of a piece of pizza is $1 and the price of a movie is $4 and the consumer has $10. A consumer has purchased 2 pieces of pizza and 2 movies, receiving 25 units of utility for the second pizza and 100 units of utility for the second movie. The set of goods A) is an optimum since the entire income is spent and the marginal utility per dollar spent is the same for the last unit of each good. B) is an optimum since the entire income is spent and total utility is minimized. C) is not an optimum because the marginal utility per dollar spent is greater for pizza than for movies. D) is not an optimum because the consumer has not spent all of his money. Answer: A Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

43) The price of one piece of pizza is $2 and the price of movies is $4. The consumer has $14 of income. The consumer is purchasing 3 pieces of pizza and receiving 20 utils for the last piece. He is also purchasing 2 movies and receiving 40 utils for the last movie. This set of goods A) is an optimum since the entire income is spent and the marginal utility per dollar spent is the same for the last unit of each good. B) is an optimum since the entire income is spent and total utility is minimized. C) is not an optimum because the marginal utility per dollar spent is greater for pizza than for movies. D) is not an optimum because the consumer has not spent all of his money. Answer: A Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 44) The price of hamburgers is $2 and the price of brownies is $4. The consumer has $16 of income. The consumer is purchasing 3 hamburgers and receiving 20 utils for the last hamburger. He is also purchasing 2 brownies and receiving 40 utils for the last brownie. This set of goods A) is an optimum since the entire income is spent and the marginal utility per dollar spent is the same for the last unit of each good. B) is an optimum since the entire income is spent and total utility is maximized. C) is not an optimum because the marginal utility per dollar spent is greater for hamburgers than for brownies. D) is not an optimum because the consumer has not spent all of his money. Answer: D Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 45) The price of hamburgers is $2 and the price of brownies is $4. The consumer has $14 of income. The consumer is purchasing 3 hamburgers and receiving 30 utils for the last hamburger. He is also purchasing 2 brownies and receiving 40 utils for the last brownie. This set of goods A) is an optimum since the entire income is spent and the marginal utility per dollar spent is the same for the last unit of each good. B) is an optimum since the entire income is spent and total utility is maximized. C) is not an optimum because the marginal utility per dollar spent is greater for hamburgers than for brownies. D) is not an optimum because the consumer has not spent all of his money. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

46) Josh is going to spend all of his income. For the last unit of Good X consumed Josh gets 20 utils and for the last unit of Good Y consumed he gets 10 utils. The price of Good X is $4. The price of Good Y is $1. If Josh wants to maximize his utility he should A) continue to purchase the same amount of Good X and Good Y. B) increase the consumption of Good X and decrease the consumption of Good Y. C) decrease the consumption of Good X and increase the consumption of Good Y. D) decrease the consumption of Good X and decrease the consumption of Good Y. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 47) Juan is going to spend all of his income. For the last unit of Good X consumed Juan gets 20 utils and for the last unit of Good Y consumed he gets 10 utils. The price of Good X is $4. The price of Good Y is $2. If Juan wants to maximize his utility he should A) continue to purchase the same amount of Good X and Good Y. B) increase the consumption of Good X and decrease the consumption of Good Y. C) decrease the consumption of Good X and increase the consumption of Good Y. D) decrease the consumption of Good X and decrease the consumption of Good Y. Answer: A Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 48) Juan is going to spend all of his income. For the last unit of Good X consumed Juan gets 20 utils and for the last unit of Good Y consumed he gets 10 utils. The price of Good X is $1. The price of Good Y is $10. If Juan wants to maximize his utility he should A) continue to purchase the same amount of Good X and Good Y. B) increase the consumption of Good X and decrease the consumption of Good Y. C) decrease the consumption of Good X and increase the consumption of Good Y. D) decrease the consumption of Good X and decrease the consumption of Good Y. Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

49) Juan is currently spending all of his income. For the last unit of Good X consumed Juan gets 20 utils and for the last unit of Good Y consumed he gets 10 utils. The price of Good X is $10. The price of Good Y is $1. If Juan wants to maximize his utility he should A) continue to purchase the same amount of Good X and Good Y. B) increase the consumption of Good X and decrease the consumption of Good Y. C) decrease the consumption of Good X and increase the consumption of Good Y. D) decrease the consumption of Good X and decrease the consumption of Good Y. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 50) Juan is currently spending all of his income. For the last unit of Good X consumed Juan gets 20 utils and for the last unit of Good Y consumed he gets 10 utils. The price of Good X is $2. The price of Good Y is $5. If Juan wants to maximize his utility he should A) continue to purchase the same amount of Good X and Good Y. B) increase the consumption of Good X and decrease the consumption of Good Y. C) decrease the consumption of Good X and increase the consumption of Good Y. D) decrease the consumption of Good X and decrease the consumption of Good Y. Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 51) Jason is currently spending all of his income. For the last unit of Good X consumed Jason gets 20 utils and for the last unit of Good B consumed he gets 10 utils. The price of Good X is $10. The price of Good Y is $5. If Jason wants to maximize his utility he should A) continue to purchase the same amount of Good X and Good Y. B) increase the consumption of Good X and decrease the consumption of Good Y. C) decrease the consumption of Good X and increase the consumption of Good Y. D) decrease the consumption of Good X and decrease the consumption of Good Y. Answer: A Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

52) When Bruce increases the consumption of Good X and decrease the consumption of Good Y, his marginal utility of A) X falls and the marginal utility of Y will increase. B) both X and Y will decrease. C) X increases and the marginal utility of Y will fall. D) both X and Y will increase. Answer: A Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

53) Refer to the above table. If the price of a hamburger is $2, the price of a concert ticket is $60, and the consumer has $128, what is the consumer optimum? A) 2 hamburgers and 2 concerts B) 2 hamburgers and 3 concerts C) 3 hamburgers and 2 concerts D) 4 hamburgers and 2 concerts Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 54) Refer to the above table. If the price of a hamburger is $2, the price of a concert ticket is $60, and the consumer has $190, what is the consumer optimum? A) 4 hamburgers and 2 concerts B) 5 hamburgers and 3 concerts C) 6 hamburgers and 0 concerts D) 0 hamburgers and 6 concerts Answer: B Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 74 Copyright © 2021 Pearson Education, Inc.

55) If the price of A is $3 and the price of B is $5, then, in a consumer optimum A) the quantity purchased of B must be 60 percent of the quantity of A purchased. B) the quantity purchased of B must be 67 percent of the quantity of A purchased. C) the marginal utility of B must be 67 percent more than the marginal utility of A. D) the marginal utility of A must equal 3 and the marginal utility of B must equal 5. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

56) Refer to the above table If the price of a movie download is $2 and the price of an apple pie is $5 and the consumer has $40, the rational consumer will purchase A) 2 movies and 2 apple pies. B) 2 movies and 3 apple pies. C) 5 movies and 6 apple pies. D) 6 movies and 6 apple pies. Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 57) Refer to the above table. If the price of a movie download is $2 and the price of an apple pie is $5 and the consumer has $19, the rational consumer will purchase A) 2 movies and 2 apple pies. B) 2 movies and 3 apple pies. C) 5 movies and 6 apple pies. D) 6 movies and 6 apple pies. Answer: B Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

58) Refer to the above table. If the price of a movie download is $2 and the price of an apple pie is $5 and the consumer has $33, the rational consumer will purchase A) 2 movies and 2 apple pies. B) 2 movies and 3 apple pies. C) 5 movies and 6 apple pies. D) 4 movies and 5 apple pies. Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 59) Refer to the above table. If the consumer's equilibrium consists of 4 movies and 4 apple pies, then we know that A) the price of a movie download is 5 times more than the price of an apple pie. B) the price of a movie download is 6 times more than the price of an apple pie. C) the price of an apple pie is 5 times more than the price of a movie download. D) the price of an apple pie is 3 times more than the price of a movie download. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 60) Refer to the above table. If the consumer's equilibrium consists of 3 movies and 6 apple pies, then we know that A) the price of a movie download is 4.5 times more than the price of an apple pie. B) the price of a movie download is 6 times more than the price of an apple pie. C) the price of an apple pie is 2 times more than the price of a movie download. D) the price of an apple pie is 3 times more than the price of a movie download. Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

61) Based on the information in the above table, the price of product X is $3, the price of product Y is $2, and you have $18 to spend. What combination of product X and product Y will give you the most satisfaction? A) 5 units of product X; 1 unit of product Y B) 4 units of product X and 3 units of product Y C) 2 units of product X and 5 units of product Y D) 3 units of product X and 5 units of product Y Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

62) Based on the information in the above table, the price of A is $3, the price of B is $2, and the price of C is $5. If Lauren has $22 to spend, what combination of products A, B, and C should she buy in order to maximize her satisfaction? A) 3 units of product A; 3 units of product B; 1 unit of product C B) 3 units of product A; 4 units of product B; 1 units of product C C) 3 units of product A; 4 units of product B; 0 units of product C D) 2 units of product A; 1 unit of product B; 4 units of product C Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

63) Based on the information in the above table, what is the total satisfaction Lauren can achieve if she is a rational consumer? A) 111 utils B) 85 utils C) 74 utils D) 30 utils Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

64) Adam has 3 apples and 3 oranges. Eve has 2 apples and 2 oranges. The marginal utilities for Adam and Eve are summarized in the above table. Adam asks Eve to exchange one of her apples for an orange. A) Eve will be willing to make the exchange, because her total satisfaction will remain unchanged. B) Eve will be willing to make the exchange, because her total satisfaction will increase. C) Eve will be unwilling to make the exchange, because she loses 5 utils of satisfaction. D) Eve will be unwilling to make the exchange, because she loses 15 utils of satisfaction. Answer: B Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 65) Use the above table. Adam has 3 apples and 3 oranges. Eve has 2 apples and 2 oranges. Eve asks Adam to give her an apple in exchange for an orange. Should Eve go through with this exchange? A) Yes. This way she will have 3 apples, which will give her more total satisfaction. B) Yes. She is indifferent between consuming apples and oranges. C) No. She gives up more satisfaction than she gets. D) No. Adam likes apples more than oranges. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 78 Copyright © 2021 Pearson Education, Inc.

66) Your allergies are bad this summer so your allergist writes you a prescription to relieve your symptoms. When you get to the pharmacy, you notice the name brand allergy medicine is more expensive than its generic equivalent. You purchase the generic equivalent and demonstrate all of the following EXCEPT A) the principle of substitution of one product for another. B) the principle of diminishing marginal utility. C) when price decreases, the quantity demanded increases. D) a price change may affect consumer optimum. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 67) A consumer is buying the optimal amount of goods when A) the total utility from the purchases on all the goods purchased is the same. B) the marginal utility from the purchases of all the goods purchased is the same. C) the marginal utility per last dollar spent on all of the goods purchased is the same. D) the marginal utility from the purchases of all the goods is equal to 1. Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 68) When a consumer is at the consumer optimum, A) MUa = MUb = MUc = . . . = MUn. B) MUa/Pa = MUb/Pb = MUc/Pc = . . . = MUn/Pn = 1. C) TUa = TUb = TUc = . . . = TUn. D) MUa/Pa = MUb/Pb = MUc/Pc = . . . = MUn/Pn. Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

69) Which of the following best describes the consumer optimum? A) MUa/Pa = TUb/Pb B) MUa/TUa = Pa C) MUa/Pa = MUb/Pb = . . . = MUz/Pz. D) change in TU/change in P = MU Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 70) A consumer who has chosen the right mix of goods and services to maximize his or her utility is said to have achieved A) consumer equilibrium. B) consumer benefit. C) consumer surplus. D) consumer optimum. Answer: D Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 71) When DVDs and hamburgers were the same price, Mavis consumed 3 hamburgers and 5 DVDs, and Mavis received 10 utils from the last hamburger and 15 utils from the last DVD consumed. What should be Mavis' consumption strategy? A) consume more DVDs and fewer burgers B) consume more burgers and fewer DVDs C) consume more of both items D) consume less of both items Answer: A Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

72) The idea that consumers continue to adjust their purchases until the marginal utility per last dollar spent on all items is equal is called the A) law of increasing costs. B) law of diminishing marginal utility. C) rule of 72. D) consumer optimum. Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 73) Peter consumes bags of potato chips and cans of soft drink. The marginal utility of bags of potato chips is 10 utils per bag and the marginal utility of cans of soft drink is 50 utils per can. Potato chips cost $0.50 a bag, and a can of soft drink costs $1.00. What should Peter do? A) Peter should eat more chips, because they cost less. B) Peter should buy more chips and less soft drink. C) Peter should buy more soft drink, because it costs less. D) Peter should buy more soft drink and fewer potato chips. Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 74) According to the text, can we conclude that people will consume goods until the marginal utility of each good is zero? A) Yes, because at that point total utility is maximum. B) Yes, because at that point marginal utility is minimum. C) No, because consumption is determined by total utility. D) No, because consumption is determined by the marginal utility/price ratio. Answer: D Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

75) The price of a can of soft drink is $1.25 and the marginal utility of the second can consumed is 10 utils. The marginal utility of the third hotdog is 4 utils. You should only consume the third hotdog if the price of the hotdog is less than or equal to A) $0.41. B) $0.625. C) $0.25. D) $0.50. Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 76) If the last $5 spent on movies added 30 utils to your total satisfaction and the last $8 spent on books added 56 utils, A) you can increase your satisfaction by buying more books and seeing fewer movies. B) your total satisfaction is 86 utils. C) you can increase your satisfaction by buying fewer books and seeing more movies. D) you can increase your satisfaction by buying only books. Answer: A Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 77) The state of consumer optimum is reached when the consumer's A) total utility/marginal utility ratio for all items is equal. B) total utility/price ratio for all items is equal. C) marginal utility for a product is zero. D) marginal utility/price ratios for all items are equal. Answer: D Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

78) You consider yourself to be a rational consumer. The marginal utility/price ratio of coffee is 12 utils per dollar. If the price of a donut is $0.75, you should only buy the donut if it gives you at least A) 16 utils of satisfaction. B) 9 utils of satisfaction. C) 12 utils of satisfaction. D) The answer cannot be determined with this information. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 79) When a consumer shifts her purchases from product A to product B, the marginal utility of A) A falls and the marginal utility of B will increase. B) both A and B will decrease. C) A increases and the marginal utility of B will fall. D) both A and B will increase. Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 80) In order for a consumer to choose between two different goods, he has to take into consideration the A) marginal utility of production. B) marginal utility divided by the price. C) marginal utility plus the price. D) total utility divided by price. Answer: B Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

81) The consumer optimum is found by using A) marginal utility. B) total utility. C) total utility minus marginal utility. D) total utils. Answer: A Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

82) Using the above table, if the price of Pepsi is $3, how many cans of Pepsi would have to be consumed in order to have a marginal utility to price ratio of 3? A) one can B) two cans C) three cans D) four cans Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 83) Assume that Kelly has the preferences shown in the above table. Also assume that the price of a can of Pepsi is $3.00 and that the price of a slice of pizza is $2.00. If she has $16 available to spend, what combination of Pepsi and pizza will be her consumer optimum? A) 1 can of Pepsi, 4 slices of pizza B) 2 cans of Pepsi, 5 slices of pizza C) 4 cans of Pepsi, 2 slices of pizza D) 6 cans of Pepsi, 0 slices of pizza Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

84) Assume that Kelly has the preferences shown in the above table. Also assume that the price of a can of Pepsi is $3.00 and that the price of a slice of pizza is $1.00. If she has $16 available to spend, what combination of Pepsi and pizza will be her consumer optimum? A) 4 cans of Pepsi, 1 slice of pizza B) 3 cans of Pepsi, 2 slices of pizza C) 2 cans of Pepsi, 4 slices of pizza D) 4 cans of Pepsi, 4 slices of pizza Answer: D Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 85) The expression "getting the most bang for your buck" is an illustration of the A) total utility/price ratio. B) total utility/marginal utility ratio. C) marginal utility/price ratio. D) marginal utility/total utility ratio. Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 86) Suppose that a consumer is currently at an optimum when consuming goods A and B. Which of the following must be TRUE? A) The total utility from A is equal to the total utility from B. B) The price of A is equal to the price of B. C) The marginal utility of A is equal to the marginal utility of B. D) The marginal utility to price ratio of A is equal to the marginal utility to price ratio of B. Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

87) Refer to the above table. Suppose the price of a hamburger is $2, the price of a movie is $5, and the income of the consumer is $29. How many hamburgers and movies will this consumer buy to be at an optimum? A) 1 hamburger and 5 movies B) 6 hamburgers and 3 movies C) 4 hamburgers and 4 movies D) 2 hamburgers and 5 movies Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 88) Refer to the above table. Suppose the price of a hamburger is $2, the price of a movie is $5, and the income of the consumer is $29. What will the consumer's total utility equal at an optimum? A) 70 B) 1025 C) 1060 D) 1118 Answer: C Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

89) Refer to the above table. The price of a hamburger is $2, the price of a movie is $5, and the consumer's income is $29. What is the marginal utility per last dollar spent on movies equal to if the consumer is at an optimum? A) 50 B) 40 C) 20 D) 10 Answer: D Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge

90) Refer to the above table. If the price of Good A is $2, the price of Good B is $1, and the consumer has $9, the rational consumer will purchase A) 6 units of Good A and 0 units of Good B. B) 6 units of Good A and 3 units of Good B. C) 2 units of Good A and 5 units of Good B. D) 5 units of Good A and 6 units of Good B. Answer: C Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 91) Refer to the above table. If the price of Good A is $2, the price of Good B is $2, and the consumer has $14, the rational consumer will purchase A) 3 units of Good A and 4 units of Good B. B) 6 units of Good A and 6 units of Good B. C) 6 units of Good A and 0 units of Good B. D) 3 units of Good A and 3 units of Good B. Answer: A Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 87 Copyright © 2021 Pearson Education, Inc.

92) Refer to the above table. If the price of Good A is $1, the price of Good B is $2, and the consumer has $13, the rational consumer will purchase A) 3 units of Good A and 4 units of Good B. B) 1 units of Good A and 1 units of Good B. C) 6 units of Good A and 0 units of Good B. D) 5 units of Good A and 4 units of Good B. Answer: D Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 93) What is consumer optimum according to utility theory? Answer: Consumer optimum is the set of goods and services that maximizes the level of satisfaction for a consumer, given the consumer's income and the prices of the goods and services. At consumer optimum, the marginal utility per dollar spent is equal across all goods and services purchased. Diff: 1 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 94) Explain how a consumer maximizes utility. Answer: To maximize utility, the consumer allocates income among goods and services such that the last dollar spent on each good purchased yields the same amount of marginal utility. This occurs if (MUa/Pa) = (MUb/Pb) = . . . = (MUz/Pz). Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

95) Suppose that an individual consumes only two goods. What will happen to the individual if her last dollar spent on one good yields more marginal utility than that from another good? Answer: The individual will consume more of the good that yields more marginal utility. However, because of the principle of diminishing utility, the marginal utility declines as she consumes more of the good with higher marginal utility. She will continue to consume the good with higher marginal utility until an optimum point at which the last dollar spent on each good purchased yields the same amount of marginal utility. Diff: 2 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 96) Suppose a family purchases 10,000 gallons of water a year at 20 cents a gallon and one diamond ring at a price of $1,000. Can we conclude that the diamond ring provides more utility to the family than water? Explain. Answer: No. In fact, the water provides more total utility than the diamond. We know that the (MU of the last gallon of water)/($0.20) = (MU of the ring)/($1,000). This implies the MU of the ring is 5,000 times more than the MU of the last gallon of water. Further, the total utility of the ring equals marginal utility since only one ring was purchased. Given the law of diminishing marginal utility, the total utility must be more than 10,000 times greater than the marginal utility of the 10,000th gallon, so the total utility for the water must be greater than the total utility of the diamond. Diff: 3 Topic: 20.2 Optimizing Consumption Choices Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 20.3 How a Price Change Affects Consumer Optimum 1) Suppose a consumer is currently buying 5 goods so that utility is maximized. The price of one of the goods falls while the prices of the other 4 goods do not change. The consumer should A) buy less of all goods being consumed to get to the optimal position. B) buy more of all of the goods but the one that experiences the decline in price, to get to the optimal position. C) buy more of all goods being consumed to get to the optimal position. D) buy more of the good that has experienced the fall in price to get to the optimal position. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

2) If Francisco has been consuming 7 tacos per week at a consumer optimum, and the price of tacos falls, how will Francisco respond? A) He will save more income. B) He will buy more of everything. C) He will buy more tacos. D) He will buy more of everything except tacos. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 3) To remain in consumer optimum, A) a price increase requires an increase in consumption. B) a price decrease requires an increase in consumption. C) a price decrease requires a decrease in consumption. D) prices must remain static. Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 4) The change in people's purchasing power that occurs when the price of a good they purchase changes, assuming all else is held constant is known as A) the substitution effect. B) the real income effect. C) the elasticity effect. D) the multiplier effect. Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

5) Suppose that a consumer is at an optimum consuming A and B. If the price of A falls, then to get to a new equilibrium the consumer must A) purchase less A and more B. B) purchase less B and less A. C) purchase more A. D) purchase more B. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 6) Suppose a consumer is at an optimum. What happens when the price of one good she has been consuming increases? A) The value of the marginal utility of the last unit consumed decreases. B) The value of the marginal utility of the last unit consumed increases. C) The marginal utility per dollar spent on the last unit consumed of that good increases by the same proportion as the price increases. D) The marginal utility per dollar spent on the last unit consumed of that good is now smaller than the marginal utility per dollar spent on other goods the person consumes. Answer: D Diff: 3 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 7) A consumer is at an optimum when the price of one good she has been consuming decreases. As a result A) the value of the marginal utility of the last unit consumed has increased. B) the value of the marginal utility of the last unit consumed has decreased. C) the price of the other good must decrease too. D) the marginal utility of the last dollar spent on this good is now greater than the marginal utility of the last dollar spent on other goods. Answer: D Diff: 3 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

8) A consumer has been buying 2 magazines and 1 book each month. The price of magazines then decreases, which directly causes the marginal utility per dollar spent on A) magazines to increase, thereby inducing the consumer to purchase fewer magazines and more books. B) magazines to increase, thereby inducing the consumer to purchase more magazines and fewer books. C) books to increase, thereby inducing the consumer to purchase fewer magazines and more books. D) books to decrease, thereby inducing the consumer to purchase fewer magazines and more books. Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 9) The real-income effect shows that A) a decrease in the price of a good increases the purchasing power of the consumer's income. B) if the consumer's income rises, he or she buys more of inferior goods and less of normal goods. C) if a good is inferior, a decrease in the purchasing power of income results in less of the good being consumed. D) when the price of a good rises, consumers are able to buy more of other goods because of the increase in the purchasing power of income. Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 10) The real-income and the substitution effects reinforce each other by A) increasing the consumption of good B when the price of A falls. B) increasing the consumption of both goods A and B when income increases. C) decreasing the consumption of good A when the price of good B falls. D) decreasing the consumption of good A when the price of good A increases. Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

11) The real-income effect is typically small because A) the change in price of one particular item has little effect on total purchasing power. B) income has no relation to consumption. C) price changes tend to balance out over time. D) real-incomes are always rising. Answer: A Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 12) The real-income effect of a price change is most significant when A) the substitution effect is insignificant. B) the substitution effect is significant too. C) the good under consideration constitutes a major portion of the consumer's budget. D) the marginal utility per dollar spent on the last unit is high. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 13) The substitution effect shows that A) if the price of a good increases, consumers buy more of that good and less of all others. B) if the price of a good falls relative to all other goods, consumers buy less of that good and more of all others. C) if the price of a good falls, consumers buy less of all goods. D) if the price of a good rises, consumers buy less of that good and more of others. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

14) The substitution effect argues that a consumer A) will always use the additional purchasing power from a price decrease to purchase more of both goods. B) will not purchase more of a good when its price falls. C) will purchase more of a good that has become relatively cheaper, and less of a good that has become relatively more expensive. D) will purchase less of both goods if his or her real income increases. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 15) When you purchase the lower-priced store brand bread instead of the more expensive name brand, you are experiencing A) the substitution effect. B) the income effect. C) a fall in total utility. D) diminishing marginal product. Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 16) The fact that consumers will purchase more of a good that has become relatively cheaper A) is called the nominal income effect. B) is called the substitution effect. C) leads to an upward-sloping demand curve. D) leads to negative marginal utility. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

17) Other things being equal, when the money price of a good increases, its relative price A) stays the same. B) increases. C) decreases. D) falls to zero. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 18) The price of a large pepperoni pizza used to be $12, but this week the price rose to $18. With a budget of just $28, you can't afford as many pizzas at the higher price. This change in consumer behavior reflects the A) real income effect. B) substitution effect. C) nominal income effect. D) concept of diminishing marginal utility. Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 19) If a consumer is initially at an optimum, and then the price of X falls, then A) MUX/PX > MUY/PY. B) MUX/PX < MUY/PY. C) MUX/PX = MUY/PY. D) MUX/MUY < PY/PX. Answer: A Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

20) If a consumer is initially at an optimum, and then the price of Y decreases, then A) MUX/PX > MUY/PY. B) MUX/PX < MUY/PY. C) MUX/PX = MUY/PY. D) MUX/MUY < PY/PX. Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 21) If a consumer is at an optimum, consuming A and B, and the price of B decreases, then to get to a new equilibrium the consumer must A) purchase less A. B) purchase less B. C) purchase more A. D) purchase more of both A and B. Answer: A Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 22) If a consumer is at an optimum, consuming X and Y, and the price of Y increases, then to get to a new equilibrium the consumer must A) purchase less X. B) purchase less of both X and Y. C) purchase more X. D) purchase more of both X and Y. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

23) A higher price for a good implies that A) the marginal utility of the good has declined. B) the total value of the good to the consumer has increased. C) the sacrifice of utility of another good has increased. D) the marginal utility of another good has decreased. Answer: C Diff: 3 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 24) Initially, a consumer is at an optimum. Then the price of Y increases. Consequently A) MUX/PX < MUY/PY. B) MUX/PX > MUY/PY. C) MUX/PX = MUY/PY. D) MUX > MUY. Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 25) Initially, a consumer is at an optimum. Then the price of Y decreases. Consequently A) MUX/PX < MUY/PY. B) MUX/PX > MUY/PY. C) MUX/PX = MUY/PY. D) MUX > MUY. Answer: A Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

26) A consumer has been buying 2 magazines and 2 books a month for many months. The price of books then increases. To attain a new optimum, the consumer will A) buy more magazines because they are now relatively more valuable than they were before, while continuing to buy the same number of books. B) buy more books because they are now relatively more valuable than they were before. C) buy the same number of books and magazines as before because they provide different types of utility. D) buy fewer books than before because they are relatively more expensive than they were before. Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 27) Austin is undecided about whether to eat at a restaurant or to order pizza at home. He then obtains a coupon for 10 percent off at the restaurant and decides to go there to eat. This is an example of A) someone using criteria other than price to make a consumption decision. B) a lower price leading a consumer to substitute more of the less expensive good for the relatively more expensive good. C) a lower price leading a consumer to buy more of a good because of the income effect. D) a consumer making a decision irrationally. Answer: B Diff: 3 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 28) The substitution effect refers to A) the law of diminishing marginal utility. B) the want-satisfying power of a good or service. C) substitution of less expensive commodities for more expensive commodities. D) the change in purchasing power when the price of a good changes. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

29) The tendency of people to substitute cheaper commodities for more expensive commodities is the A) law of diminishing marginal utility. B) real-income effect. C) substitution effect. D) price income effect. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 30) The real-income effect refers to A) the law of diminishing marginal utility. B) the want-satisfying power of a good or service. C) substitution of less expensive commodities for more expensive commodities. D) the change in purchasing power when the price of a good changes. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 31) The change in people's purchasing power that occurs when the price of one good that they purchase changes is the A) law of diminishing marginal utility. B) real-income effect. C) substitution effect. D) price income effect. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

32) The price of a good that Joe is currently consuming has increased. A) Joe has experienced a decrease in purchasing power. B) Joe will experience a shift in the demand curve of the good whose price has increased. C) Joe will stop consuming this good. D) Joe will experience increasing marginal utility. Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 33) When the price of a normal good decreases, people increase their consumption of the good. The reason is A) the law of diminishing marginal utility. B) the substitution and income effects. C) the substitution effect only. D) the income effect only. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 34) The real-income effect is likely to be greater when A) the substitution effect is not very large. B) the marginal utility of the last unit is high. C) the marginal utility per dollar spent on the last unit is high. D) the good is an expensive good. Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

35) A decrease in the price of a good causes A) the utility of the good to decrease. B) the marginal utility of the good to decrease. C) purchasing power of a person's income to increase. D) the nominal wealth of a person to increase. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 36) For most goods, the real-income effect of a price change is A) small because the good accounts for a small part of the consumer's budget. B) small because the decision to buy a good depends only on the income of a consumer. C) large because the price of the good is in terms of the currency and the income of the person is also in terms of the currency. D) zero because the real-income effect only applies to durable goods. Answer: A Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 37) If your money income stays the same but the price of one good that you are buying goes up, your effective purchasing power A) rises. B) does not change. C) falls. D) cannot be determined. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

38) Your annual review is given to you at your place of employment, and you get a raise of 3 percent for the next year. On the subway home though, you read an article stating the price of homes in the area you are looking to buy will increase by 6 percent during the coming year. You determine from the article that if you buy in your favorite neighborhood A) your purchasing power declines. B) consumer optimum is reached. C) your real income actually increases. D) quantity demanded will increase. Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 39) When the price of DVDs falls relative to movie and restaurant prices, and consumers buy more of the DVDs, economists call this A) indifference. B) satisfaction. C) marginalization. D) substitution. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 40) Which of the following statements is FALSE regarding consumer choice? A) Each change in price has a substitution effect and a real income effect. B) When price falls, the consumer chooses in favor of the cheaper good. C) Diminishing marginal utility is one reason for a downward-sloping demand curve. D) Purchasing power has an inverse relationship with the rise in income. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

41) If a college student stays home and watches a Netflix movie for $2 rather than going out to a $15 movie, this is an example of the A) utility effect. B) value effect. C) substitution effect. D) income effect. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 42) When consumers shift away from relatively higher price goods and services in favor of those that are less expensive, this is known as the A) principle of utility. B) principle of substitution. C) principle of supply. D) principle of increasing opportunity costs. Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 43) If you regularly spend $100 a month on gasoline and the price of gasoline doubles, your purchasing power has A) increased. B) remained constant. C) became stable. D) decreased. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

44) With a given level of money income, when the price of a product that a consumer buys declines, the purchasing power of your money income A) decreases. B) increases. C) is unchanged. D) can increase or decreases depending on the goods being consumed. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 45) When the price of a good that a person is consuming falls, other things being constant, there is A) a decline in real income. B) a decline in purchasing power. C) a real income effect. D) no change in purchasing power. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 46) If the price of tea rises relative to all other prices, consumers are likely to A) buy more tea. B) buy less tea and more coffee. C) buy less coffee and less tea. D) buy less coffee. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

47) If the price of a slice of pizza falls from $2 to $1.5, a pizza-loving consumer will A) see her purchasing power fall. B) see her purchasing power rise. C) substitute more Chinese food for pizza. D) spend more on soft drinks and less on pizza. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 48) If the price of a slice of pizza falls, Tom can A) buy more pizza with his paycheck. B) buy fewer soft drinks with his paycheck. C) no longer afford pizza on his paycheck. D) Either A or B is possible. Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 49) The idea that people will substitute cheaper commodities for more expensive commodities is called A) the marginal effect. B) the real-income effect. C) the substitution effect. D) the utility effect. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

50) When an individual's purchasing power changes due to a change in the price of a good or service, this is referred to as A) marginal effect. B) real-income effect. C) substitution effect. D) utility effect. Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

51) Suppose the price of pizza is $2 and the consumer optimum is reached when MU/P = 3. Tom's preferences for pizza are shown in the above table. How many slices will Tom buy? A) 1 slice B) 2 slices C) 3 slices D) 4 slices Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 52) Suppose the price of pizza falls to $1 per slice. Assuming that Tom's preferences continue to be those shown in the above table, and assuming that MU/P = 3 is still the point at which his consumer optimum is reached, how many slices will Tom now buy? A) 1 slice B) 2 slices C) 3 slices D) 4 slices Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

53) Suppose Lois usually buys two cups of coffee for two dollars each and one scone for two dollars each. If the price of scones falls to one dollar each and she now buys two cups of coffee and two scones, this illustrates the A) substitution effect. B) marginal rate of substitution. C) total utility effect. D) real-income effect. Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 54) The negative relationship between the quantity demanded of a commodity and its price can be explained by the principle of A) increasing total utility. B) contingent valuation. C) indifference analysis. D) diminishing marginal utility. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 55) According to the substitution effect, if the price of a product goes down. A) the consumer will buy more of the good at the lower price than at a higher price, creating a downward-sloping demand curve. B) the consumer will buy more of the good at a lower price than at a higher price, creating a horizontal demand curve. C) the consumer will not change the level of purchases of the good when the price changes, making the demand curve a vertical line. D) the real income of the consumer will increase, causing the consumer to want to buy more of the good, creating a downward-sloping demand curve. Answer: A Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

56) The inverse relationship between quantity demanded and price of a good or service can be explained, in part, by A) a shift in the demand curve. B) diminishing marginal utility only. C) diminishing marginal utility and the rule of equal marginal utilities per dollar. D) the real income effect. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 57) Which of the following is FALSE? A) A consumer is maximizing total utility when he or she gets the same amount of marginal utility from the last dollar spent on each good purchased. B) As additional units of a good or service are consumed, marginal utility diminishes. C) Utility is want-satisfying power. D) Assuming that the law of diminishing marginal utility holds, the demand curve must be upward sloping. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 58) Given the utility-optimizing rule and the presence of diminishing marginal utility for a good, A) the demand curve for the good will be vertical. B) there will not be a well-defined demand curve. C) there will not be a substitution effect. D) the demand curve for the good will be negatively sloped. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

59) The law of demand is derived under the assumption of A) constant prices. B) constant real incomes. C) constant consumer tastes and preferences. D) constant marginal utility. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 60) The total utility of water is A) lower than the total and marginal utility of diamonds. B) lower than the total utility of diamonds, but the marginal utility is higher. C) higher than the total utility of diamonds, but the marginal utility of diamonds is higher. D) the same as the total utility of diamonds, but the marginal utilities are the same. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 61) The diamond-water paradox illustrates the idea that ________ determines what consumers are willing to pay for a particular good. A) total utility B) the real-income effect C) marginal utility D) the substitution effect Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

62) Refer to the above table. Suppose the price of a movie is $5 and the income of the consumer is $29. What are the quantities demanded of hamburger at prices of $2 and $1 respectively? A) 0; 1 B) 2; 4 C) 1; 2 D) 3; 5 Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 63) Refer to the above table. The price of a hamburger is $2, the price of a movie is $10, and the consumer has $44. What is the change in quantity demanded of hamburgers if the price of a hamburger decreases to $1? A) Quantity demanded increases by 1 hamburger. B) Quantity demanded increases by 2 hamburgers. C) Quantity demanded increases by 3 hamburgers. D) Quantity demanded increases by 4 hamburgers. Answer: B Diff: 3 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 64) An individual's demand curve slopes down because A) marginal utility falls as price falls. B) the value of the marginal utility falls as the price falls. C) of the rule that the marginal utility of the last unit must equal the price. D) of the law of diminishing marginal utility and the rule of equal marginal utilities per dollar. Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 110 Copyright © 2021 Pearson Education, Inc.

65) A consumer was at an optimum. She then discovers that the marginal utility per dollar spent on food is more than the marginal utility per dollar spent on movies. She knows then that A) the price of movies must have decreased. B) the price of food must have increased. C) the price of movies must have increased or the price of food must have decreased. D) the price of movies must have decreased or the price of food must have increased. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 66) To derive the law of demand, we assume that A) prices are constant. B) real prices are constant. C) marginal utility is constant. D) tastes are constant. Answer: D Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 67) The diamond-water paradox is an example that shows that A) necessities like water should have a higher price. B) marginal utility rather than total utility determines what people are willing to pay for a good. C) there are exceptions to the law of diminishing marginal utility. D) marginal utility can initially increase and then decrease. Answer: B Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

68) Why are diamonds more expensive than water? A) because the last glass of water has higher marginal utility than the last diamond B) because the last diamond has higher marginal utility than the last glass of water C) because you get more total utility from diamonds D) because water is a necessity Answer: B Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 69) The diamond-water paradox was solved by knowing that A) the total utility of water is greater than the total utility of diamonds. B) the marginal utility of water is greater than the marginal utility of diamonds. C) the price of water and diamonds is determined by total utility received, not marginal utility. D) the price of water and diamonds is determined by marginal utility, not total utility. Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 70) The reason that diamonds cost more than water is A) the marginal utility of each diamond a consumer purchases is quite high due to the small amount of diamonds that most consumers purchase. B) most consumers consume little water. C) diamonds are more beautiful than water. D) water is a necessity. Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

71) Refer to the above figure. All of the following are true concerning the diamond-water paradox EXCEPT A) the demand for water exceeds the demand for diamonds. B) the price of diamonds exceeds the price of water. C) since the price of diamonds is high, demand is great. D) marginal utility of diamond consumption is relatively high. Answer: C Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 72) Which of the following statements is FALSE, with respect to what economist Adam Smith called the diamond-water paradox? A) The total utility of water greatly exceeds the total utility derived from diamonds. B) Total utility does not determine what people are willing to pay for a unit of a particular commodity; marginal utility does. C) The demand for water is much smaller than the demand for diamonds. D) There are relatively few diamonds, so the marginal utility of the last diamond consumed is relatively high. Answer: C Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

73) Given the price of a good or service, what determines how much a person is willing to pay for that good or service? A) marginal utility B) total utility C) the substitution effect D) average utility Answer: A Diff: 1 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 74) The average demand curve slopes downward due to all of the following EXCEPT A) the law of increasing relative costs. B) the law of diminishing marginal utility. C) the real-income effect. D) the principle of substitution. Answer: A Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 75) If you could pay for a product according to the marginal utility that you gain from additional consumption, then as you consume more of a product the price you pay would A) remain the same. B) increase. C) be deferred. D) decline. Answer: D Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

76) Suppose a consumer is at an optimum, consuming 6 hamburgers a week at a price of $1.50 each and 10 donuts a week at 50 cents a donut. If the price of a hamburger increases to $2.00, what will the consumer do to arrive at a new equilibrium? Why? Answer: At the equilibrium, the MU of the last dollar spent on both goods is equal. After the price of a hamburger increases, the MU of the last dollar spent on hamburger is less than the MU of the last dollar spent on donuts. Either the MU of hamburger must increase or the MU of a donut must decrease. The latter cannot happen because the consumer cannot afford to buy more donuts. Therefore, the consumer must buy fewer hamburgers. Given the principle of diminishing marginal utility, MU will increase and a new equilibrium can be established. Diff: 3 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 77) Discuss the substitution and real-income effects of a price decrease. Answer: The substitution effect of a price decrease is for people to substitute cheaper goods for more expensive goods. So, a consumer will purchase more of a good whose price fell and less of a substitute good. A price decrease raises the real income of the consumer, so the consumer will want to buy more of all goods including the good whose price fell. The more important effect is the substitution effect since the change in real income from a price change of a single good is usually very small. Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 78) Why does a price increase of a product result in a decrease in the quantity demanded of that product, according to utility analysis? Answer: There are two effects associated with a price increase. The first is the substitution effect, which is the tendency of consumers to substitute cheaper goods for the more expensive good. The second effect is the real income effect, which is the lower overall purchasing power of the consumer as a result of the price increase. As a result of the two effects, a price increase results in a smaller quantity demanded. Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

79) Why is water much cheaper than diamonds even though water is essential to human lives while diamonds are NOT? Answer: This is called the diamond-water paradox. The total utility of water greatly exceeds the total utility of diamonds, but the marginal utility of diamonds far exceeds the marginal utility of water because of the much more limited supply of diamonds than water. The relative prices are determined by marginal utilities, not total utilities. Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 80) Explain how utility analysis can be used to derive a downward-sloping demand curve. Answer: Given the law of diminishing marginal utility and the equal marginal utilities per dollar rule, there is a negative relationship between price and quantity demanded of a good. A fall in price means people want to buy more of the good in order to get the marginal utility per dollar of this good in line with the other goods. The marginal utility must fall to get the marginal utility per dollar of this good in line with the other goods, and the law of diminishing marginal utility implies that more of the good must be purchased to get marginal utility to decrease. Diff: 3 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 81) Use the law of diminishing marginal utility to explain the diamond-water paradox. Answer: The diamond-water paradox refers to the fact that diamonds are less useful to humans than water but their prices are much higher. However, the price of a good is determined not based on its total utility but its marginal utility. Because of the limited supply of diamonds, the marginal utility of diamonds is much higher and so are the prices of diamonds. Diff: 2 Topic: 20.3 How a Price Change Affects Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

20.4 Behavioral Economics and Consumer Choice Theory 1) Observations of violations of consumer optimum predicted by consumer choice theory could provide support for I. utility analysis II. bounded rationality III. behavioral economics A) I only. B) III only. C) both I and II. D) both II and III. Answer: D Diff: 2 Topic: 20.4 Behavioral Economics and Consumer Choice Theory Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about consumer choice AACSB: Analytical thinking 2) Behavioral economists focus on the assumption that A) consumers have limitations that prevent them from examining all possible choices when they make decisions. B) consumer behavior cannot be predicted by economics. C) consumers are irrational and so they do not seek to maximize utility. D) consumer choice is perfectly predictable by basic economic theory. Answer: A Diff: 2 Topic: 20.4 Behavioral Economics and Consumer Choice Theory Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about consumer choice AACSB: Analytical thinking 3) The fact that the price of diamonds is higher than the price of water A) cannot be explained by behavioral economics or consumer choice theory. B) is an outcome of irrational behavior in consumer choice theory. C) can be explained only by behavioral economics but not by consumer choice theory. D) can be explained as the outcome of a consumer optimum in consumer choice theory. Answer: D Diff: 2 Topic: 20.4 Behavioral Economics and Consumer Choice Theory Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about consumer choice AACSB: Analytical thinking

4) Because the behavioral economics approach suggests many alternative behaviors that people might exhibit if they fail to behave as if they are rational, this approach A) often fails to provide clearly testable behavioral predictions. B) reproduces the same predictions as utility analysis. C) has an over reliance on the rationality assumption. D) ignores the possibility of bounded rationality. Answer: A Diff: 1 Topic: 20.4 Behavioral Economics and Consumer Choice Theory Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about consumer choice AACSB: Analytical thinking 5) Observations of real-world situations that appear to violate a consumer optimum could be offered as evidence favoring A) utility analysis. B) bounded rationality. C) diminishing marginal utility. D) zero marginal utility at a utility-maximizing point. Answer: B Diff: 1 Topic: 20.4 Behavioral Economics and Consumer Choice Theory Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about consumer choice AACSB: Analytical thinking 6) One piece of evidence that possibly supports the bounded-rationality assumption of behavioral economics is that experiments appear to have shown that A) people make different decisions in calm situations than in situations in which emotions come into play. B) people make the same decisions in calm situations than in situations in which emotions come into play. C) total utility is maximized when marginal utility is equal to zero. D) total utility is declining when marginal utility is negative. Answer: A Diff: 1 Topic: 20.4 Behavioral Economics and Consumer Choice Theory Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about consumer choice AACSB: Analytical thinking

7) Behavioral economics suggests that people face human limitations that prevent them from examining every possible choice available to them, with the implication that A) the consumer optimum implied by utility theory is an inappropriate approach to deriving demand curves. B) the consumer optimum implied by utility theory is an appropriate approach to deriving demand curves. C) marginal utility is always equal to zero. D) marginal utility is always negative. Answer: A Diff: 2 Topic: 20.4 Behavioral Economics and Consumer Choice Theory Learning Outcome: Micro-11: Explain how to measure consumer preferences and discuss the major theories about consumer choice AACSB: Analytical thinking 20.5 Appendix F: On Being Indifferent 1) An indifference curve provides the set of consumption alternatives that A) yield the same total amount of satisfaction. B) maximize the utility of the consumer. C) can be purchased for the same amount of money. D) yield the same marginal utility for the last unit consumed of each good. Answer: A Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 2) An indifference curve shows A) the combinations of goods that a consumer does not like very much. B) the combinations of goods that generate the same ratio of marginal utilities. C) the set of consumption alternatives that yield the same amount of total utility. D) the set of consumption alternatives that yield the same amount of marginal utility. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

3) A curve where every combination of the two goods being considered yields the same level of satisfaction is known as A) a marginal utility curve. B) a total utility curve. C) an indifference curve. D) a budget constraint. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 4) Along an indifference curve, A) every combination of goods the consumer can purchase with their income is given. B) the prices of goods will change. C) utility increases as you move to the right. D) every combination of the goods give the same level of satisfaction. Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 5) Along an indifference curve, A) the marginal utility of all items is equal. B) the total satisfaction is the same. C) the prices of all goods are equal. D) the marginal utility/price ratios of all items are equal. Answer: B Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

6) A curve that shows a set of consumption alternatives that give the same level of satisfaction is A) a substitution curve. B) a budget line. C) an indifference curve. D) an income curve. Answer: C Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 7) An indifference curve cannot be positively sloped because A) the law of diminishing marginal utility would be violated. B) the substitution effect would be violated. C) a point to the right of another point will represent a lower quantity of both goods and a reduction in utility. D) a point to the right of another point will represent a higher quantity of both goods and an increase in utility. Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 8) An indifference curve between one dozen eggs and several dozens of eggs would be A) bowed in to the origin. B) bowed out from the origin. C) a downward-sloping straight line. D) a straight line from the origin. Answer: C Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

9) If the marginal utility of each good is constant as consumption increases, the indifference curves are A) horizontal. B) vertical. C) straight lines. D) positively sloped. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 10) Which of the following is NOT true about indifference curves? A) Indifference curves slope downward. B) Indifference curves show equally preferred combinations of two goods. C) Indifference curves are not straight lines because the marginal rate of substitution falls. D) Indifference curves shift when prices change. Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 11) Indifference curves A) are vertical. B) are horizontal. C) slope upward. D) slope downward. Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

12) Assume that good X and good Y each have diminishing marginal utility for a consumer. In this case, A) an indifference curve linking the two goods will have a constant slope. B) an indifference curve will be convex to the origin. C) the demand curves for these goods will be positively sloped. D) the demand curves for these goods will be horizontal. Answer: B Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 13) Which of the following is FALSE about indifference curves? A) They are downward sloping. B) They are convex to the origin. C) They intersect. D) They can shift. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 14) The indifference curve between eggs and dozens of eggs would be A) bowed in to the origin. B) bowed out from the origin. C) a rectangular hyperbola. D) a downward-sloping straight line with a slope of -12. Answer: D Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

15) Refer to the above figures. Which panel best represents an indifference curve? A) Panel A B) Panel B C) Panel C D) Panel D Answer: C Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 16) An indifference curve A) must slope downward towards the right. B) is positively sloped. C) is upsloping and is concave to the origin. D) may be upsloping or downsloping, depending on whether the two products are complements or substitutes. Answer: A Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

17) An indifference curve A) must be convex to the origin. B) must be concave to the origin. C) may be convex or concave to the origin. D) depends on the prices of the products and the consumer's income. Answer: A Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 18) One characteristic of indifference curves is that A) they must intersect at the origin. B) they cannot intersect. C) they have a positive slope. D) they are straight lines. Answer: B Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 19) The marginal rate of substitution is the A) rate at which the consumer can exchange one good for the other. B) change in the quantity of one good that just offsets a one-unit change in the consumption of another good such that the total satisfaction remains constant. C) change in the quantity of one good that changes the utility received by one unit. D) same thing as the marginal utility of a good. Answer: B Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

20) The marginal rate of substitution is measured along A) the demand curve. B) the total utility curve. C) a given indifference curve. D) a given budget line. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 21) The marginal rate of substitution is A) equal to unit changes in the quantities of both goods so that utility rises. B) the slope of the budget line at all points. C) the change in the quantity of one good that just offsets a unit change in another good, keeping utility constant. D) found by adding additional units. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 22) The marginal rate of substitution is A) the change in the quantity of one good that just offsets a one unit change in the consumption of another such that the total satisfaction remains constant. B) the additional satisfaction from consuming an additional unit of a good or service. C) positively related to the level of income. D) the set of goods and services that are available to the consumer given his income. Answer: A Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

23) The marginal rate of substitution is the A) rate at which the consumer will give up one good for an additional unit of the other good, such that total satisfaction is constant. B) rate at which the consumer can trade one good for the other in the marketplace. C) change in the quantity of one good that changes the utility received by one unit. D) same thing as the marginal utility of a good. Answer: A Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 24) Along a given indifference curve, a consumer reduces the quantity of one good in favor of more units of the other. In this situation A) the marginal rate of substitution falls. B) the marginal utility of the first rises and the marginal utility of the second good falls. C) total utility rises. D) both A and B are correct. Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

25) Refer to the above table. The table gives the various combinations of Good A and Good B along Jane's indifference curve. The marginal rate of substitution when Jane goes from combination A to combination B is A) 4:1. B) 3:1. C) 2:1. D) 0. Answer: A Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

26) Refer to the above table. The table gives the various combinations of Good A and Good B along Jane's indifference curve. The marginal rate of substitution when Jane goes from combination B to combination C is A) 4:1. B) 3:1. C) 2:1. D) 0. Answer: B Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 27) Refer to the above table. The table gives the various combinations of Good A and Good B along Jane's indifference curve. The marginal rate of substitution when Jane goes from combination C to combination D is A) 4:1. B) 3:1. C) 2:1. D) 0. Answer: C Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 28) Along an indifference curve, as the consumer reduces the quantity of Good A in favor of more Good B the marginal rate of substitution of Good A for Good B will A) fall. B) rise. C) stay the same. D) fall and eventually turn negative. Answer: A Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

29) The change in the consumption of one good that just offsets a one-unit change in the consumption of another good is the A) marginal utility. B) marginal rate of consumption. C) marginal rate of substitution. D) marginal rate of satisfaction. Answer: C Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 30) The marginal rate of substitution measures A) the impact of product substitution. B) the changes in marginal utility along the indifference curve. C) the consumer's willingness to substitute one product for another so that total utility will remain unchanged. D) the consumer's willingness to substitute one product for another so that marginal utility will remain unchanged. Answer: C Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 31) Mathematically the marginal rate of substitution is A) always a negative number. B) always a positive number. C) is equal to 1. D) sometimes a positive and sometimes a negative number. Answer: A Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

32) In a map showing three indifference curves a consumer is most well off on A) the curve which is closest to the origin of the coordinate axes. B) the curve which is most farther away from the coordinate axes. C) the curve that is in the middle. D) none of these. Answer: B Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 33) An indifference map shows A) that money income is constant, but product prices may change. B) that utility is at a maximum at the origin. C) that curves closer to the origin represent higher levels of utility. D) that curves further from the origin represent higher levels of utility. Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 34) If an individual's total utility from consuming two goods increases, then there must be A) a downward rotation of the individual's indifference curve. B) an inward rotation of the individual's indifference curve. C) an outward shift of the individual's indifference curve. D) an inward shift of the individual's indifference curve. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 35) If an individual's total utility from consuming two goods decreases, then there must be A) a downward rotation of the individual's indifference curve. B) an inward rotation of the individual's indifference curve. C) an outward shift of the individual's indifference curve. D) an inward shift of the individual's indifference curve. Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 130 Copyright © 2021 Pearson Education, Inc.

36) A set of indifference curves on a graph is called A) a difference map. B) an indifference map. C) a budget map. D) a cluster. Answer: B Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 37) Basket of goods A is on an indifference curve that lies further from the origin than basket B. From this we know that A) the prices of the goods in A are more than the prices of the goods in B. B) the satisfaction from consuming A is more than the satisfaction from consuming B. C) the marginal utility from consuming A is more than the marginal utility from consuming B. D) all other consumers would also rank B above A. Answer: B Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 38) Basket of goods A is on an indifference curve that lies closer to the origin than basket B. From this we know that A) the prices of the goods in A are less than the prices of the goods in B. B) the satisfaction from consuming A is more than the satisfaction from consuming B. C) the marginal utility from consuming A is less than the marginal utility from consuming B. D) the satisfaction from consuming A is less than the satisfaction from consuming B. Answer: D Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

39) Refer to the above figure. Which point represents the highest level of utility? A) Point A B) Point B C) Point C D) Point D Answer: D Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 40) Refer to the above figure. Which point(s) represents the lowest level of utility? A) Points A & C B) Point B C) Point C only D) Point D Answer: A Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 41) Refer to the above figure. Which point represents the second highest level of utility? A) Point A B) Point B C) Point C D) Point D Answer: B Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 132 Copyright © 2021 Pearson Education, Inc.

42) Suppose that indifference curve I1 lies to the left of indifference curve I2. We can conclude that A) some, but not all, points on indifference curve I1 will correspond to higher utility than points along indifference curve I2. B) some, but not all, points on indifference curve I1 will correspond to lower utility than points along indifference curve I2. C) all points along indifference curve I1 will correspond to higher utility than points along indifference curve I2. D) all points along indifference curve I1 will correspond to lower utility than points along indifference curve I2. Answer: D Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 43) Suppose that indifference curve I1 lies to the right of indifference curve I2. We can conclude that A) some, but not all, points on indifference curve I1 will correspond to higher utility than points along indifference curve I2. B) some, but not all, points on indifference curve I1 will correspond to lower utility than points along indifference curve I2. C) all points along indifference curve I1 will correspond to higher utility than points along indifference curve I2. D) all points along indifference curve I1 will correspond to lower utility than points along indifference curve I2. Answer: C Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

44) If an individual's utility from consuming two goods increases, then there must be A) a downward rotation of the individual's indifference curve. B) an inward rotation of the individual's indifference curve. C) an outward shift of the individual's indifference curve. D) in inward shift of the individual's indifference curve. Answer: C Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 45) What are the key properties of indifference curves? Answer: Indifference curves have a downward slope and are convex to the origin. Also, the utility level is constant along an indifference curve. Diff: 1 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 46) Why can't an indifference curve be a straight line? Answer: A straight-line indifference curve indicates that the consumer will always be willing to give up the same number of one good to get one more unit of another good. This is not plausible, because if the consumer consumes many units of one good and none of another good, she should be willing to give up more units of the former good to consume some of the latter good. Therefore, indifference curves must be convex to the origin. Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 47) What is the marginal rate of substitution between two goods and how is it related to the indifference curve? Answer: The marginal rate of substitution between two goods is the change in the quantity of one good that just offsets a one-unit change in the consumption of another good, so that total satisfaction between the two goods remains constant. The marginal rate of substitution is reflected by the slope of the indifference curve between the two goods. Diff: 2 Topic: 20.5 Appendix F: On Being Indifferent Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

20.6 Appendix F: The Budget Constraint and the Consumer Optimum 1) The slope of the budget line is A) zero since prices of the goods and income are assumed to be constant. B) negative since to purchase more of one good means that some of the other good must be given up. C) negative because of the marginal rate of substitution. D) positive since prices and income are positive. Answer: B Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 2) The possible combinations of goods that can be purchased with a specific income are called the A) budget constraint. B) indifference map. C) marginal rate of substitution. D) income-consumption curve. Answer: A Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 3) If incomes fall, then A) the budget constraint shifts inward. B) the budget constraint shifts out. C) there is no change in the budget constraint. D) there is no relationship between the budget constraint and income. Answer: A Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

4) The budget constraint shows that A) the consumer faces a trade-off in the consumption of goods. B) the consumer can have as many goods as he wants. C) as consumers spend more on one good, they spend more on others. D) total income equals total spending on one good. Answer: A Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 5) Which of the following shows the feasible combinations of two goods that a consumer could afford given her money income? A) the budget constraint B) the indifference map C) the income consumption curve D) the price consumption curve Answer: A Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 6) An increase in consumer income will A) shift the budget constraint and increase its slope. B) reduce consumption of all normal goods. C) pivot the budget constraint on the axis with the good that has the higher price. D) shift out the budget constraint and increase the consumption of both goods, if they are normal goods. Answer: D Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

7) If the quantity of tacos is measured along the horizontal axis and the quantity of movies is measured along the vertical axis, and the price of a taco is $2.00 while the price of a movie is $12, then the slope of the budget line is A) -1/3. B) -3.5. C) -1/6. D) -6. Answer: C Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Application of knowledge 8) The slope of the budget constraint line is the A) income of consumers divided by the price of each good. B) ratio of this year's income to last year's income. C) rate of exchange between the two goods. D) ratio of different levels of income. Answer: C Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 9) Suppose that the quantity of good y is measured along the vertical axis and that the quantity of good x is measured along the horizontal axis. If the price of good x is $5 and the price of good y is $10 when income is $200 per time period, the slope of the consumer's budget constraint will be A) -0.5. B) -2. C) -5. D) -10. Answer: A Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

10) The budget constraint shows the A) combinations of goods that generate the same amount of total satisfaction. B) possible combinations of goods that can be purchased with a specified income. C) changes in consumption of goods that a consumer makes when his income increases. D) amount of a good the consumer will buy at various prices. Answer: B Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 11) All possible combinations of goods that can be purchased at fixed prices with a specific income is A) a marginal utility curve. B) a total utility curve. C) an indifference curve. D) a budget constraint. Answer: D Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 12) The consumption possibilities curve is the A) supply curve. B) demand curve. C) budget constraint. D) indifference curve. Answer: C Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

13) Let the quantity of hamburgers be measured along the vertical axis and the quantity of movies be measured along the horizontal axis. If the price of a hamburger is $1.50 and the price of a movie is $6, then the slope of the budget line is A) -6. B) -4. C) -3. D) -0.25. Answer: B Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 14) The quantity of good A is measured along the vertical axis, and the quantity of good B is measures along the horizontal axis. If the price of Good A falls, A) the vertical intercept of the budget line moves along the vertical axis away from the origin. B) the vertical intercept of the budget line moves along the vertical axis toward the origin. C) the horizontal intercept (along Good B) of the budget line will increase. D) none of these Answer: A Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 15) The quantity of good Y is measured along the vertical axis, and the quantity of good X is measured along the horizontal axis. If the prices of both good Y and good X rise, the budget line A) shifts outward to the right and the vertical and horizontal intercepts will both rise. B) shifts inward to the left and both intercepts will decline. C) rotates, rising along the vertical axis but falling along the horizontal axis. D) none of these Answer: B Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

16) The quantities of Good M are plotted on the vertical axis while the quantities of Good N are plotted on the horizontal axis. The prices of both M and N fall. The intercepts of the budget line would A) decline along both axes. B) rise on the vertical axis and also rise on the horizontal axis. C) rise on the horizontal axis but stay unchanged on the vertical axis. D) rise on the vertical axis but stay unchanged along the horizontal axis. Answer: B Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 17) The quantity of good M is measured along the vertical axis, and the quantity of good N is measured along the horizontal axis. If the prices of both goods M and N declines by 50% each, then the budget line A) shifts inward to the left by 50%. B) shifts outward to the right by 50%. C) shifts outward to the right by 100%. D) rotates clockwise by 180 degrees. Answer: C Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 18) The budget line A) shifts to the left as income increases. B) has a positive slope. C) is a vertical line. D) shows the combination of goods that can be purchased at fixed prices and with a given income. Answer: D Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

19) A budget constraint shows A) all of the combinations of sets of goods that yield the same level of satisfaction. B) all of the possible combinations of goods that can be purchased with a specific budget. C) all of the goods the consumer gets positive marginal utility from when the goods are consumed. D) all of the goods that a consumer substitutes for other goods when prices fall. Answer: B Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 20) An increase in income will A) shift the budget constraint to the right. B) make the budget constraint steeper. C) make the budget constraint flatter. D) make the budget constraint more bowed. Answer: A Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

21) Using the above figure, we can conclude that A) the consumer will purchase goods at combination M. B) the consumer is indifferent between J and M. C) K is the optimal combination of goods. D) L is preferred to K. Answer: C Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

22) In the above figure, if the budget line is the line DE, the consumer will maximize utility at point A) A. B) B. C) C. D) G. Answer: B Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 23) In the above figure, if the budget line is the line DF, the consumer will maximize utility at point A) A. B) B. C) C. D) G. Answer: C Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

24) In the above figure, the budget line will change from line DE to line DF when A) income rises. B) the price of bagels increases. C) the price of coffee increases. D) the price of coffee decreases. Answer: D Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 25) In the above figure, if the budget line is originally line DE and the price of coffee decreases, the consumer will A) drink less coffee and increase bagel consumption slightly. B) drink more coffee and increase bagel consumption slightly. C) drink more coffee and decrease bagel consumption slightly. D) leave consumption of both coffee and bagels unchanged. Answer: B Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 26) In the above figure, point C is A) preferred to points G, A, and B. B) preferred to points A and B. C) less preferred than point G. D) less preferred than point H. Answer: B Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

27) In the above figure, budget line DF would swivel in to the left if A) the price of bagels increased. B) the price of bagels decreased. C) the price of coffee increased. D) the price of coffee decreased. Answer: C Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 28) Using indifference curve analysis, an optimum is characterized by A) the marginal rate of substitution of one good divided by its price equal to the marginal rate of substitution of the other good divided by its price. B) the marginal rate of substitution being equal to one. C) the marginal rate of substitution being equal to zero. D) the marginal rate of substitution being equal to the ratio of the prices of the two goods. Answer: D Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 29) If an individual consumes only two goods and consumption of one good increases, then in order to keep the consumer on the same indifference curve, consumption of the other good must A) increase. B) decrease. C) increase proportionately. D) become negative. Answer: B Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

30) A consumer is maximizing utility when A) the slope of the budget constraint has reached -1. B) diminishing marginal utility has set in. C) the slope of the budget constraint equals the marginal rate of substitution. D) the consumer has spent all of his income. Answer: C Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 31) A consumer will achieve the highest level of utility possible when she consumes A) at the point at which the highest indifference curve is tangent to the budget constraint. B) at the point at which the indifference curve crosses the budget constraint. C) at a point to the left of the budget constraint. D) just below the point where the indifference curve crosses the budget constraint. Answer: A Diff: 1 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

32) Refer to the above figure. Given the indifference map and budget constraint represented above, the consumer will maximize utility when she consumes at A) point A. B) point B. C) point C. D) either points A or B. Answer: C Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 146 Copyright © 2021 Pearson Education, Inc.

33) Refer to the above figure. Given the indifference map and budget constraint represented above, what are all possible points at which that the individual can consume? A) points A and C only B) point B only C) point D only D) points A, B and C only Answer: D Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 34) Refer to the above figure. Given the indifference map and budget constraint represented above, what would make all possible points attainable for the individual to consume? A) an increase in the price of Good X B) a decrease in income C) an increase in the price of Good Y D) a decrease in the price of Good X Answer: D Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

35) Use the above figure. The optimal position for the consumer is at A) J or L. B) M. C) K. D) N. Answer: C Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 36) Use the above figure. What would make all possible points attainable for the individual to consume? A) a decrease in the price of good y B) an increase in the price of good y C) an increase in the price of good x D) a decrease in income Answer: A Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

37) Use the above figure. What does point N represent? A) a consumer maximizing her satisfaction B) a consumer not maximizing her satisfaction C) a consumer is spending more than her current income D) a less satisfying point than compared to point J Answer: B Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 38) When indifference curve analysis is used, a consumer optimum occurs at the point at which A) the indifference curves intersect. B) the indifference curve is tangent to the budget line. C) total utility is maximum. D) marginal utility/price ratio of all goods consumed is equal. Answer: B Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 39) If a consumer chooses a combination of goods that are inside of her budget line, than A) the consumer is maximizing her satisfaction. B) the consumer is spending more than her current income. C) the consumer has a constant marginal rate of substitution for the two goods. D) the consumer is not maximizing her satisfaction. Answer: D Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

40) A consumer optimum is characterized by A) the marginal rate of substitution of one good divided by its price equal to the marginal rate of substitution of the other good divided by its price. B) the marginal rate of substitution equal to unity. C) the marginal rate of substitution equal to the ratio of the prices of the two goods. D) the marginal rate of substitution divided by the price ratio of the two goods equal to the income of the consumer. Answer: C Diff: 2 Topic: 20.6 Appendix F: The Budget Constraint and the Consumer Optimum Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 20.7 Appendix F: Deriving the Demand Curve 1) If the quantity of hamburgers is measured along the horizontal axis and the quantity of movies is measured along the vertical axis, an increase in the price of a movie would be shown by A) shifting the budget constraint in towards the origin. B) shifting the budget constraint out. C) rotating the budget constraint around the horizontal intercept such that the new vertical intercept is closer to the origin. D) making the budget constraint steeper. Answer: C Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

2) Use the above figure. When the budget line rotates from "b" to "c" A) the price of product J increases. B) the price of product J decreases. C) the price of product K increases. D) the price of product K decreases. Answer: C Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 3) Use the above figure. When the budget line rotates from "b" to "c" A) fewer units of J and fewer units of K will be purchased. B) more units of J and more units of K will be purchased. C) fewer units of J and more units of K will be purchased. D) more units of J and fewer units of K will be purchased. Answer: D Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 4) Use the above figure. When the budget line rotates from "c" to "b" A) the price of product J increases. B) the price of product J decreases. C) the price of product K increases. D) the price of product K decreases. Answer: D Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 151 Copyright © 2021 Pearson Education, Inc.

5) Use the above figure. When the budget line rotates from "c" to "b" A) fewer units of J and fewer units of K will be purchased. B) more units of J and more units of K will be purchased. C) fewer units of J and more units of K will be purchased. D) more units of J and fewer units of K will be purchased. Answer: C Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 6) If price of a product falls, A) the marginal utility of the product also falls. B) the budget line rotates to the right. C) the budget line rotates to the left. D) the indifference curve will shift to the left. Answer: B Diff: 1 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

7) Use the above figure. Last week Joe consumed combination "B" of goods "X" and "Y." This week he purchased combination "A." The reason for this change is that the A) price of good X has increased. B) price of good X has decreased. C) price of good Y has decreased. D) price of good Y has increased. Answer: D Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 152 Copyright © 2021 Pearson Education, Inc.

8) Use the above figure. Last week Joe consumed combination "A" of goods "X" and "Y." This week he purchased combination "B." The reason for this change is that the A) price of good X has increased. B) price of good X has decreased. C) price of good Y has decreased. D) price of good Y has increased. Answer: C Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 9) The slope of the budget line will change A) when the consumer's income increases. B) when the consumer's taste changes. C) when the total satisfaction changes. D) when the price of one of the products changes. Answer: D Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 10) Holding all other prices and money income constant, if the price of food rises, then the consumer will adjust her expenditures and A) reach an optimum on a higher indifference curve. B) reach an optimum on a lower indifference curve. C) reach an optimum on the same indifference curve. D) her level of satisfaction may go up or down. Answer: B Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

11) If the budget line rotates, then we know that A) income has changed. B) there has been a change in the consumer's tastes. C) the price of one of the goods had changed. D) the consumer was not maximizing their utility. Answer: C Diff: 1 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 12) If the price of a product increases, then A) the budget line rotates and the optimal quantity demanded, which corresponds to the higher price, decreases. B) the budget line rotates and the optimal quantity demanded, which corresponds to the higher price, increases. C) the budget line shifts outward and the optimal quantity demanded, which corresponds to the higher price, decreases. D) the budget line shifts inward and the optimal quantity demanded, which corresponds to the higher price, increases. Answer: A Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 13) To derive the demand curve from the indifference map, A) vary the price of one good while holding the price of the other good and income constant. B) vary the prices of both goods while holding income constant. C) vary the price of one good and income while holding the price of the other good constant. D) vary income while holding the prices constant. Answer: A Diff: 1 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

14) The information on a demand curve is also on a(n) A) indifference curve. B) budget constraint. C) income-consumption curve. D) price-consumption curve. Answer: D Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 15) Suppose that the quantity of hamburgers is measured along the vertical axis and that the quantity of popcorn is measured along the horizontal axis. The vertical intercept is 10 hamburgers, and the slope of the budget line is -2. If the price of popcorn falls from $1 to $0.50, then we know that A) the vertical intercept shifts to 20 hamburgers. B) the vertical intercept shifts to 5 hamburgers. C) the horizontal intercept shifts to 10 bags of popcorn. D) the horizontal intercept shifts to 20 bags of popcorn. Answer: C Diff: 3 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 16) Suppose that the quantity of hamburgers is measured along the vertical axis and that the number of bags of popcorn is measured along the horizontal axis. The budget constraint has a vertical intercept of 10 hamburgers, and the slope of the line is -1. If the price of popcorn doubles, we know that A) the consumer will buy half as many bags of popcorn as before. B) the new equilibrium will have a marginal rate of substitution of -2. C) the new equilibrium will have a marginal rate of substitution of -0.5. D) the vertical axis of the budget line shifts to 5 hamburgers. Answer: B Diff: 3 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

17) Use the above figure. The consumer's choice changes from YB to YA. Which of the following statements is TRUE? A) This change in the consumer's choice results from a rise in the price of good Y. B) This change in the consumer's choice results from a fall in the price of good X. C) This change in the consumer's choice results from a rise in the price of good X. D) This change in the consumer's choice results from an increase in the consumer's income. Answer: A Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 18) Use the above figure. The consumer's choice changes from YB to YA. Which of the following statements about good Y is TRUE? A) Price has increased and the quantity demanded has risen. B) Price has decreased and the quantity demanded has risen. C) Price has decreased and the quantity demanded has fallen. D) Price has increased and the quantity demanded has fallen. Answer: D Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

19) Use the above figure. The consumer's choice changes from YA to YB. Which of the following statements about good Y is TRUE? A) Price has increased and the quantity demanded has risen. B) Price has decreased and the quantity demanded has risen. C) Price has decreased and the quantity demanded has fallen. D) Price has increased and the quantity demanded has fallen. Answer: B Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 20) To derive the demand curve for good X, all the following are constant EXCEPT A) the price of good X. B) income. C) the price of good Y. D) tastes and preferences. Answer: A Diff: 1 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

21) Use the above figure. When the budget line rotates from "b" to "c" A) the price of product J increases and the quantity demanded of product J decreases. B) the price of product J decreases and the quantity demanded of product J increases. C) the price of product K increases and the quantity demanded of product K decreases. D) the price of product K decreases and the quantity demanded of product K increases. Answer: C Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 157 Copyright © 2021 Pearson Education, Inc.

22) Use the above figure. When the budget line rotates from "c" to "b" A) the price of product J increases and the quantity demanded of product J decreases. B) the price of product J decreases and the quantity demanded of product J increases. C) the price of product K increases and the quantity demanded of product K decreases. D) the price of product K decreases and the quantity demanded of product K increases. Answer: D Diff: 2 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking 23) How does an increase in the price of an individual good or service affect a consumer optimum, and how does this help explain the law of demand? Answer: Each person makes choices such that the marginal utility per dollar spent is equal for all goods consumed. If an item's price increases, an individual responds by reducing the quantity of that item demanded, which boosts the marginal utility of that item. Consequently, when the price of an item increases, the quantity of the item demanded declines, so the law of demand emerges. Diff: 3 Topic: 20.7 Appendix F: Deriving the Demand Curve Learning Outcome: Micro-10: Explain how the factors of utility and budgets influence consumer decisions AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 21 Rents, Profits, and the Financial Environment of Business 21.1 Economic Rent 1) Pure economic rent is A) a payment to a resource owner over and above what is necessary to keep the resource in its current use. B) a payment to a resource owner just sufficient to keep its supply constant. C) the inverse of economic profit. D) the competitive rental rate on capital. Answer: A Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 2) A payment for the use of any resource over and above its opportunity cost is called A) accounting profit. B) economic profit. C) normal cost. D) economic rent. Answer: D Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 3) Economic rent is defined as A) any payment that has a contract period. B) a payment to an owner of a factor that is in perfectly elastic supply. C) a payment to an owner of a factor greater than the opportunity cost of utilizing the factor. D) the opportunity cost or return to a productive factor such as capital. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

4) Economic rent is a concept that can be applied A) only to land, as that is the only resource that is in limited supply. B) only to land and natural talent. C) to any factor of production that is fixed in supply. D) to any resource or factor of production that has a supply curve with a positive (upward) slope. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 5) Economic rent is broadly defined as A) a payment received by a landowner. B) a payment for the use of any resource that has a fixed supply. C) the return to owners of farmland. D) the dividend return on a share of stock. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 6) Economic rent applies to A) land only and nothing else. B) real property only. C) all resources. D) any resource in fixed supply. Answer: D Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 7) Economic rent is any payment A) received by the owner of a resource in perfectly elastic supply. B) received by the owner of a resource with a supply curve that is not horizontal. C) in excess of the resource's opportunity cost. D) below that of a normal profit or return. Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) Pure economic rent is a payment to a resource that A) has a high opportunity cost. B) has a perfectly inelastic supply. C) has a negative opportunity cost. D) has a perfectly elastic demand. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 9) David Ricardo's assumption for economic rents for land was based on A) the supply of land being a fixed quantity. B) a shortage of land. C) a surplus of land. D) total government control of land. Answer: A Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

10) Refer to the above figure. What can we say about economic rent? A) Economic rent equals the area IJK0. B) Economic rent equals the area HJI. C) Economic rent equals the area HJK0. D) There is no economic rent represented in the figure. Answer: A Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 11) In analyzing land rent, David Ricardo constructed a model based on A) perfectly elastic demand for land. B) a perfectly elastic supply of land. C) land being available in infinite quantities. D) the supply of land being perfectly inelastic. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

12) A key assumption of David Ricardo's economic rent concept was that A) all land is equally productive. B) land is too differentiated to be able to measure. C) only land in large cities matters. D) land is always cheap and needs development. Answer: A Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 13) The concept of economic rent is associated with the economist A) Adam Smith. B) Karl Marx. C) David Ricardo. D) John Maynard Keynes. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 14) According to David Ricardo's explanation of land rent, what happens when the demand for land increases? A) The supply curve shifts to the right just enough to keep the price per acre constant. B) Revenues to owners of land increase but economic rent declines. C) The amount of economic rent stays constant, constrained by a perfectly inelastic supply curve. D) Both revenues to owners of land and economic rent increase. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

15) For an individual who has special talent as a singer, a large proportion of her salary can be considered A) a fixed cost. B) economic rent. C) a payment below opportunity cost. D) opportunity cost. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 16) For an actor whose natural talent is almost impossible to duplicate, A) all of his earnings consist of economic rents. B) none of his earnings consist of economic rents since rent applies only to land. C) part of his earnings consists of economic rents. D) all of his earnings consist of interest payments. Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 17) A portion of a worker's earnings is economic rent if the worker A) has skills that make him more productive than an unskilled worker. B) would accept a small reduction in pay without quitting. C) was the last person hired at the going wage rate. D) has been on the job for at least a year. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

18) A dedicated professor loves being in the classroom and would teach for $50,000 per year, but she is actually paid $80,000 per year. This individual A) receives economic rent of $130,000. B) has an opportunity cost of $30,000. C) has an opportunity cost of $130,000. D) receives economic rent of $30,000. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 19) World-class models receive significant economic rents because A) their talents and abilities are in fixed supply. B) there is a shortage of world-class models. C) there is a surplus of world-class models. D) there is no equilibrium quantity of world-class models. Answer: A Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 20) A singer would willingly perform in a concert for $500,000. If she is paid $200,000 for the concert, she is A) receiving $300,000 to cover her opportunity cost. B) not being paid her full opportunity cost. C) receiving $300,000 of economic rent. D) certainly being paid more than warranted by the level of demand. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

21) Supermodel Linda Evangelista has been quoted as saying, "[I] don't wake up for less than $10,000 a day." If Ms. Evangelista is paid $15,000 for her next daylong photo shoot, then A) she is being paid $15,000 to cover her opportunity cost. B) the first $10,000 she receives is economic rent to labor and the next $5,000 is more economic rent. C) the entire $15,000 would be considered economic rent to labor. D) she is receiving economic rent to labor equal to $5,000. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 22) If land is reallocated or switched from agricultural use to recreational use, then it is likely that A) food is not as important as recreation. B) the demand for food is less today than in previous decades. C) land earns a higher rent in recreational use than in agricultural use. D) the demand curve for land in the agricultural industry is shifting to the right. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 23) Suppose that Lady Gaga sells 1,000 tickets to a concerts at $480 each. If the equilibrium price is $600 per ticket for a fixed supply of 1,000 tickets, what is the value of the additional economic rent that Lady Gaga could earn if she charged the market clearing price? A) $1,080,000 B) $120,000 C) $600,000 D) $480,000 Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge

24) If a factor of production with a fixed supply is earning $500 in its current use and its next best use would yield earnings of $400, the factor is earning a pure economic rent equal to A) $0. B) $100. C) $90. D) $600. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 25) If Lady Gaga insists that tickets to her concert be sold for $300 each rather than the $500 each that could be charged as reflected by demand for those tickets, then the result will be A) to create an excess supply of tickets. B) to eliminate $300 worth of economic rent per ticket. C) that part of the economic rent will be dissipated to scalpers, radio station owners, etc. D) that the demand for tickets will decrease. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 26) Economic rent directs resources to A) the people who can use them most efficiently. B) people only. C) large corporations. D) labor-intensive industries only. Answer: A Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

27) The Hawaiian island of Lana'i is privately owned by Castle & Cooke and for generations, most of its land was used to grow pineapples. Now, many of the pineapple fields have been replaced by tourist accommodations, including a pair of world-class hotels and a top rated golf course. What would an economist say about this change in land-use patterns? A) While growing pineapples used the island's land more efficiently, tourism provides utility to the largest number of people. B) Economic rent has allocated the island's resources to their highest valued use: tourism. C) Agriculture is still the land's highest-valued and most efficient use, but tourism earns more profits for Castle & Cooke. D) To find the land's economic rent, add the price per acre that land on Lana'i would be worth if used to grow pineapples to the value per acre when used for a golf course. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 28) Economic rent is A) the return to owners of farmland. B) the return to landlords. C) a payment for the use of any resource above its opportunity cost. D) a payment for land, an apartment, or a house that one does not own. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 29) The payment for the use of a resource in an amount higher than the resource's opportunity cost is A) a proprietorship. B) an irrational economic concept. C) economic rent. D) reinvestment. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

30) The payment for a factor of production that is completely inelastic in supply is A) opportunity cost. B) economic rent. C) discounting. D) limited liability. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 31) Pure economic rent involves situations where A) the supply curve is perfectly inelastic. B) the supply curve is perfectly elastic. C) the uses to which a resource can be used can be varied but the quality of the resource cannot be varied. D) the quality of a resource can be varied but the price cannot be varied. Answer: A Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 32) When the supply curve of a resource is vertical, then the return to the resource owner is A) zero. B) partly economic rent and partly opportunity costs. C) partly economic rent and partly profits. D) pure economic rent. Answer: D Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

33) The first economist to analyze economic rent was A) Henry George. B) David Ricardo. C) Karl Marx. D) John Stuart Mill. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

34) Refer to the above figure. Which panel is consistent with Ricardo's view on the supply of land? A) Panel A B) Panel B C) Panel C D) Panel D Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

35) If all the return to a resource is economic rent, we know that A) the price of the resource is below its opportunity cost. B) the price of the resource equals its opportunity cost. C) the price of the resource is above its opportunity cost. D) the resource has a price of zero. Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 36) Suppose the supply of land is perfectly inelastic and landowners are receiving payments equal to $100,000 an acre. If the government taxed the landowners' income with a tax rate of 20 percent, how much tax would the government collect? A) zero, because the owner would do something else with the tax rather than pay such a high tax B) less than $20,000 because the owners would change their behavior so as to pay less tax C) more than $20,000 because the combined effects of all the owners trying to change their behavior actually would generate higher returns D) $20,000 because the use of the land doesn't depend on the price the landowners receive for the land Answer: D Diff: 3 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 37) The concept of economic rent can be applied to A) land only. B) land and natural resources only. C) land, natural resources, and paintings by dead masters only. D) any resource that cannot be replicated exactly. Answer: D Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

38) Rents A) have no useful economic purpose. B) have an allocative function since they help decide to which use a resource will be put. C) have a distributional function since they affect incomes, but have no allocative function since the resource is in fixed supply. D) have an economic purpose only if they are taxed and provide revenue to the government. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 39) Economic rents are useful because A) they increase the income of the owner. B) they make it easy to calculate opportunity cost. C) resources will go to their most efficient use. D) they increase tax revenue. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 40) For superstar athletes A) their entire earnings are economic rent. B) part of their earnings are economic rent. C) none of their earnings are economic rent since rent doesn't apply to labor. D) none of their earnings are economic rent since they will do some other work once they are too old to be an athlete. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

41) In which field of jobs would economic rents likely be greatest for the best workers in the field? A) farming B) teaching C) hockey D) car repairing Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 42) Superstars in sports or entertainment presumably would be willing to continue working in their specific areas for lower income than they are currently earning. This implies that A) the large salaries serve no allocative function and only serve to make the superstars richer. B) superstars are exploiting their fans by receiving such a large salary. C) superstars do not respond to monetary incentives. D) the high salaries are used to allocate their time but fail to bring in new sources of supply (other superstars) that are exactly like themselves. Answer: D Diff: 3 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 43) A popular entertainer gives a concert in a 50,000 seat stadium. To give her fans a break, she charges only $50 a seat instead of the customary $75 a seat. At $75 a ticket, there would have been 50,000 tickets sold, and at $50, there are 80,000 people who want tickets. As a consequence of the generosity of the entertainer A) her fans are made better off. B) a more fair system of pricing the tickets has been found. C) another type of system will have to be found to allocate the tickets, making some of her fans better off and others worse off. D) her fans are made worse off since there is an excess demand of 30,000 tickets. Answer: C Diff: 3 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

44) Economic rent serves A) a descriptive function by making some wealthier than others, but serves no allocative function. B) an allocative function by guiding available supplies to the most efficient use. C) only to make the rich richer and the poor poorer. D) no useful function in a modern economy. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 45) When economic rent exists, A) the price is equal to the opportunity cost of the resources. B) price is the same as the discount rate. C) resources are allocated inefficiently. D) resources are allocated efficiently. Answer: D Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 46) Paul is debating whether to concentrate on playing professional football or professional baseball. He is offered $7 million a year to play baseball and $8 million a year to play football. If he chooses to play football A) the economic rent in his salary is $8 million. B) the economic rent in his salary is $7 million. C) the economic rent in his salary is $1 million. D) the economic rent in his salary is $15 million. Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

47) The opportunity cost of owner-provided labor is the A) wage rate paid to the owner. B) explicit part of the wage rate paid to the owner. C) salary the owner could have made if she worked at her best alternative job. D) profit after all of the bills have been paid. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 48) Emily is debating whether to take a job as a professional therapist or a florist. She will earn $40,000 a year as a therapist or $30,000 a year as a florist. If Emily chooses to be a therapist, the opportunity cost is A) $40,000. B) $30,000. C) $10,000. D) unable to determine. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 49) Yvone is debating whether to take a job as a professional therapist or a florist. She will earn $40,000 a year as a therapist or $25,000 a year as a florist. If Yvone chooses to be a therapist, the economic rent is A) $40,000. B) $25,000. C) $15,000. D) unable to determine. Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

50) A portion of a worker's earnings is economic rent if A) the worker was the last person hired at the going wage rate. B) the supply curve of labor is horizontal. C) the worker would accept a small wage cut without quitting or working for someone else. D) the worker has industry-specific skills. Answer: C Diff: 3 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

51) Refer to the above figure. If demand curve D1 is the relevant demand curve, economic rent is A) zero. B) OG. C) area FHGO. D) area KHG. Answer: A Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

52) Refer to the above figure. Suppose demand is D2 and then increases to D3. Economic rent after the change is A) zero. B) area CIHF. C) area CIGO. D) area BJC. Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 53) Refer to the above figure. Suppose demand is D2 and then increases to D3. The change in economic rent is A) zero. B) area CIHF. C) area CIGO. D) area BJC. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 54) Refer to the above figure. At demand curve D2, price equals ________ and economic rent equals ________. A) OF; KHG B) OF; FHGO C) OE; EKGO D) OE; KHG Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

55) A payment to an owner of a resource in excess of its opportunity cost is know as A) real wages. B) economic rent. C) financial interest. D) accounting profits. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 56) The concept of economic rent is associated with the British economist David Ricardo (17721823). Ricardo analyzed economic rent for land. Which of the following is FALSE with respect to determining land rent? A) The supply curve for land is vertical (perfectly inelastic). B) Rent is payment for a resource above its opportunity cost. C) Payment for a resource below its opportunity cost is rent. D) Ricardo assumed the quantity of land in a country is fixed. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 57) A payment for a resource above the opportunity cost of the resource is A) economic rent. B) social rent. C) nominal rent. D) real rent. Answer: A Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

58) When a resource has a perfectly inelastic supply curve, A) the amount of economic rent for this resource is determined by its supply. B) the amount of economic rent for this resource is determined by demand for the resource. C) the amount of economic rent for this resource is determined by the government. D) there is no economic rent being earned by this resource. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 59) When a resource has a perfectly elastic supply curve, A) the amount of economic rent for the resource is determined by its supply. B) the amount of economic rent for this resource is determined by demand for the resource. C) there is no economic rent being earned by this resource. D) the entire payment received by this resource is economic rent. Answer: C Diff: 3 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 60) The supply curve for land in the city of San Francisco is most likely A) horizontal or perfectly elastic. B) a downward-sloping straight line. C) an upward-sloping straight line. D) vertical or perfectly inelastic. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

61) If the supply curve for land was a vertical line, then any payment made for land would be considered A) as economic rent. B) as economic lease. C) as economic interest. D) as an opportunity lease payment. Answer: A Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 62) The British economist most often associated with the issue of economic rent for land was A) John Maynard Keynes. B) Adam Smith. C) A. W. Phillips. D) David Ricardo. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 63) Which of the following would be most likely to receive high economic rent payments? A) engineer B) professional baseball player C) factory worker D) school teacher Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

64) A famous opera star made $2 million per year. He said he would rather sell insurance if he couldn't make more than $100,000 per year. If he is telling the truth, what's his opportunity cost as an opera star? A) $2.0 million B) $100,000 C) $1.9 million D) $2.1 million Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 65) A famous opera star made $2 million per year. He said he would rather sell insurance if he couldn't make more than $500,000 per year. If he is telling the truth, how much is he being paid in economic rent? A) $2.0 million B) $500,000 C) $1.5 million D) $2.5 million Answer: C Diff: 3 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 66) The term "economic rent" refers to payments A) to owners of real estate. B) for the use of any resource above its opportunity cost. C) equal to the opportunity cost of the use of land. D) for the use of housing in company owned properties. Answer: B Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

67) David Ricardo used the example of land to demonstrate the concept of rent, as the supply of land is A) perfectly elastic. B) relatively elastic. C) perfectly inelastic. D) negatively sloped. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 68) A payment for the use of an input that exceeds the opportunity cost of the input is known as A) real interest. B) economic profit. C) economic rent. D) economic cost. Answer: C Diff: 1 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 69) In the market for land, if the supply of land is perfectly inelastic, an increase in the demand for land will result in a(n) A) increase in the real interest rate. B) increase in economic rent. C) decrease in the equilibrium price. D) increase in the quantity supplied of land. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

70) If a major league baseball player would be willing to work for $700,000 per year and is currently being paid $1,200,000 per year, that player is earning an annual economic rent of A) $700,000. B) $1,900,000. C) $1,200,000. D) $500,000. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 71) If a major league baseball player would be willing to work for $500,000 per year and is currently being paid $1,200,000 per year, the opportunity cost of his decision to play baseball is A) $500,000. B) $1,200,000. C) $1,700,000. D) $700,000. Answer: A Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 72) Suppose that Oprah Winfrey was not a superstar, then she would have been a judge making $100,000 per year. If she makes $65 million dollars this year, her economic rent is A) $65.0 million. B) $65.1 million. C) $100,000. D) $64.9 million. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge

73) Let us suppose that if Oprah Winfrey was not a superstar she would have been a judge making $100,000 per year. If she makes $63 million dollars this year, her opportunity cost is A) $63.0 million. B) $63.1 million. C) $100,000. D) $62.9 million. Answer: C Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 74) Suppose the supply of ocean front property in San Diego is perfectly inelastic. Any increases in demand for this property increases the A) economic rent. B) opportunity cost of land owners. C) present discounted value. D) real interest rate. Answer: A Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 75) Suppose Trevor Noah of the "Daily Show" makes an annual income of $2,000,000. If he quit his television job and went into producing he could make $400,000 per year. Trevor Noah's annual economic rent to labor is A) $1,400,000. B) $2,000,000. C) $400,000. D) $1,600,000. Answer: D Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

76) Suppose Trevor Noah of the "Daily Show" makes an annual income of $1,000,000. If he quit his television job and went into producing he could make $400,000 per year. Trevor Noah's opportunity cost as a producer is A) $1,400,000. B) $1,000,000. C) $400,000. D) $600,000. Answer: B Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 77) Consider the late NBA superstar Kobe Bryant and one of your economics professors. Who is likely to receive more economic rent in his/her job? Explain your answer. Answer: Economic rent is a payment for the use of any resource above its opportunity cost. Because it is harder to duplicate a highly paid NBA superstar like Kobe Bryant than an economics professor, it is more likely that the NBA superstar, who has a rather inelastic supply curve, receives more economic rent. Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 78) "Economic rent reflects a waste of resources." Do you agree or disagree? Explain. Answer: Disagree. Economic rent is indeed a payment for the use of a resource above its opportunity cost. However, as determined by the demand for the resource, economic rent directs the resource to its highest-valued or most efficient use and thus is not a waste of resources. Diff: 2 Topic: 21.1 Economic Rent Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

21.2 Firms and Profits 1) The fundamental goal of a firm or a business is to A) produce the largest number of output units possible. B) employ labor in the most socially responsible manner possible. C) organize the factors of production and take risks. D) earn the highest possible returns. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 2) A business which is owned by two or more people is called a A) proprietorship. B) partnership. C) corporation. D) none of these Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 3) Which of the following is a disadvantage of the corporate form of business organization? A) limited liability B) limited financing C) double taxation D) unlimited liability Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 4) Which of the following is the most common form of business organization in the United States? A) proprietorship B) partnership C) corporation D) S-corporation Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

5) Economic profit can be calculated as A) total revenue - explicit costs. B) total revenue - implicit costs. C) total revenue - explicit costs - implicit costs. D) total revenue - fixed costs. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 6) Accounting profit can be calculated as A) total revenue - explicit costs. B) total revenue - implicit costs. C) total revenue - explicit costs - implicit costs. D) total revenue - opportunity costs. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 7) Which of the following participants in the working of a firm are referred to as residual claimants? A) workers B) managers C) entrepreneurs D) all of these Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 8) A proprietorship is A) difficult to form. B) taxed twice—once when it pays business taxes and again when its owner pays personal income taxes. C) not often found in developed economies, in which corporations have become the most common form of business organization. D) risky for its owner, who is personally responsible for the firm's debts. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 30 Copyright © 2021 Pearson Education, Inc.

9) The most common type of firm in the United States is the A) proprietorship. B) partnership. C) corporation. D) limited partnership. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 10) Which of the following options is NOT a characteristic of a proprietorship? A) single ownership B) unlimited liability C) double taxation D) easy to form and dissolve Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 11) A proprietorship is A) two or more individuals in business together. B) a corporation that is taxed like an individual. C) a business owned by one individual who makes all of the decisions. D) a government-owned franchise. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 12) The disadvantages of proprietorships include A) limited liability for the owner. B) double taxation of business profits. C) the fact that the proprietorship can continue even after the owner dies. D) the fact that the proprietor is solely responsible for all the firm's debts. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

13) By definition, a proprietorship is A) owned by many shareholders. B) a large manufacturing concern. C) owned by a single individual. D) managed by a large group called the "board of directors." Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 14) An advantage of proprietorships is A) the ease with which they can be formed and dissolved. B) their ability to raise large amounts of equity capital. C) the fact that their profits are not taxed. D) the breadth of management expertise that comes from having a board of directors. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 15) One advantage of a proprietorship is that A) it is relatively easy to raise financial capital for a proprietorship. B) a proprietorship is relatively easy to form and to dissolve. C) there are limits to the possible liabilities of the owner. D) depreciation rates on capital are higher. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 16) A proprietorship is A) a business with annual sales of less than $50,000 a year. B) a business owned by one individual that employs 10 or fewer workers, and has been in business less than 15 years. C) a business owned by one individual who receives the profits and is legally responsible for the debts of the firm. D) a form of business in which the stock of the company is closely held by members of one family. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 32 Copyright © 2021 Pearson Education, Inc.

17) The most common form of business organization, as far as the number of such firms in business, is the A) proprietorship. B) partnership. C) corporation. D) S corporation. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 18) One disadvantage of a partnership is A) limited liability. B) lower monitoring costs. C) difficulty raising funds. D) it permits greater specialization. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 19) In a partnership, legal responsibility for all debts is A) shared by the partners. B) passed to the shareholders. C) paid by the principle owner. D) handled by the bondholders. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 20) One advantage of a partnership is A) lower costs. B) they are easy to form. C) all the profits go to the older partner. D) they are double taxed. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

21) In a partnership, debts accumulated by one partner A) are the responsibility of that partner only. B) are the responsibility of the other partners as well. C) are the responsibility of all the employees of the partnership, regardless of whether those employees are partners. D) are the responsibility of the other partners only up to the amount each partner initially invested in the partnership. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 22) Compared to a proprietorship, an advantage of a partnership is A) that profits are not taxed twice. B) double taxation. C) the ability to take advantage of greater specialization. D) the limited liability of the partners. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 23) Comparing proprietorships with partnerships, which is TRUE? A) In both cases, profits are taxed only once. B) Partnerships outnumber proprietorships 2-to-1 in the United States. C) Proprietorships generally end with the death of the owner, but partnerships continue as long as at least one partner survives. D) A proprietor faces unlimited liability for her firm's debts, but in a partnership each partner is only responsible for an even share of the firm's indebtedness. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

24) Of the owners of the following firms, which does NOT have unlimited liability for the business' debts? A) Roy Ray's Grocery Store, Roy Ray, proprietor B) the partnership of Reese and Jones, Attorneys-at-Law C) the Microsoft Corporation D) Wren's Feed and Seed Store, a proprietorship Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 25) Corporations account for A) the largest proportion of business revenues generated in the United States. B) the largest amount of taxes paid to the U.S. government. C) the largest number of firms in the United States. D) the smallest amount of revenues in the United States. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 26) Which of the following is NOT a characteristic of a corporation? A) limited liability for shareholders B) double taxation C) separation of ownership problems D) limited ability to raise capital funds Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 27) The main advantage of a corporate form of organization is that A) shareholders have limited liability. B) shareholders have unlimited liability. C) shareholders are not subject to double taxation. D) all corporate profits must be distributed as dividends. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

28) In general, which form of business organization has the greatest capacity to raise large sums of financial capital? A) sole proprietorships B) partnerships C) limited partnerships D) corporations Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 29) The form of business organization responsible for generating the greatest portion of business revenues in the United States is the A) corporation. B) dual proprietorship. C) proprietorship. D) partnership. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 30) The owners of a corporation are A) the employees of the firm. B) the shareholders. C) completely in control of the firm. D) taxed only once. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 31) Corporations have a separation and control problem because A) owners and managers frequently have different incentives. B) most of the profits are reinvested. C) the shareholders control the firm. D) taxes are paid only by the board of directors. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

32) The double taxation of corporate profit in the United States refers to the fact that A) tax rates on partnerships are very high. B) depreciation is not a deductible expense. C) corporate profit is first taxed and then any dividends paid are subject to personal income tax. D) proprietorships are not subject to any tax on earnings. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 33) An advantage of a corporation is A) the ability to raise large sums of financial capital. B) unlimited liability on the part of shareholders. C) the fact that ownership and control are never separated. D) the fact that the corporation is dissolved when one of its owners dies. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 34) Limited liability is a characteristic of A) partnerships only. B) corporations only. C) partnerships and proprietorships only. D) proprietorships only. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 35) Monitoring the performance of the people managing the firm is easiest in the case of A) proprietorships. B) partnerships. C) corporations. D) S corporations. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

36) Owners may have little to do with the management of the firm in the case of A) partnerships. B) corporations. C) proprietorships. D) either corporations or proprietorships. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 37) Accounting costs represent A) explicit costs paid by the firm. B) opportunity costs. C) both sunk and future costs. D) long run costs only. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 38) Implicit costs are measured by A) the value of the next-best alternative uses of inputs. B) actual expenses paid by a firm. C) total revenues minus total costs. D) the lowest value of all alternative uses of inputs. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 39) The implicit cost incurred by a firm to use its resources to produce its output is the firm's A) fixed cost. B) explicit cost. C) opportunity cost. D) accounting cost. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

40) Which is the best example of a firm's implicit costs? A) wages B) the opportunity cost of owner-provided labor C) depreciation on equipment and supplies D) taxes Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 41) Explicit costs are A) the opportunity costs of all resources used by the firm. B) the costs associated with the resources that the firm owns. C) actual expenditures that a firm must make. D) all costs associated with the short run. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 42) Implicit costs are A) the costs of using factors that a producer hires or rents. B) the opportunity costs of using factors that a producer does not buy or hire but already owns. C) costs that are taken into consideration by accountants. D) costs that are variable in the short run and fixed in the long run. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 43) Economists also refer to the normal rate of return on investment as A) a residual cost. B) the opportunity cost of capital. C) the equity kicker. D) the fixed cost of entrepreneurship. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

44) The normal rate of return on capital is also known as the A) fixed cost of capital. B) depreciation cost of capital. C) opportunity cost of capital. D) monopoly rent. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 45) The normal rate of return is the A) average rate of return earned in an industry at a given point in time. B) opportunity cost of capital. C) return on capital associated with zero accounting profits. D) the amount paid to an investor when the firm is an on-going concern. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 46) The opportunity cost of capital is A) the rate of return realized on an investment. B) the rate of return that could be earned by the owner's capital were it used elsewhere. C) the rate used to calculate a firm's tax liability. D) the rate of interest the government uses to calculate legal business tax penalties. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 47) Which of the following is NOT a correct description of opportunity cost of capital? A) It is the normal rate of return on investment. B) It is normally included in accounting costs. C) It is the income sacrificed by not investing in another firm. D) It is an implicit cost. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

48) When an entrepreneur invests his own financial capital in order to start a business, A) the opportunity cost of capital should be included in the economic cost of doing business. B) the investment is treated as a fixed cost, so it should not be considered as a cost of doing business. C) the firm's economic profits will exceed its accounting profits. D) the accounting costs increase because the funds would otherwise have to be borrowed. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 49) Suppose the best investment you could make with $100,000 in cash is to purchase a government bond that pays 5 percent interest per year. If you decide to invest the money in your own business instead of buying the government bond, the opportunity cost of this financial capital is A) $500 per year. B) $50,000 per year. C) $5,000 per year. D) zero, because you already had the $100,000. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 50) Single-owner proprietorships often unintentionally exaggerate their profits because they A) forget their explicit losses. B) look at after-tax instead of pre-tax costs. C) pay their bills late and therefore incur large interest charges. D) neglect to consider the opportunity cost of the owner's labor. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

51) Often single-owner proprietorships seem more profitable than they really are. The reason for this is that A) they receive special tax benefits compared to corporations. B) they use different accounting procedures. C) they often fail to consider the opportunity cost of the labor provided by the owner. D) they are not allowed to deduct depreciation expense. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 52) If, as an entrepreneur, I am earning accounting profits of $70,000 per year and the opportunity cost of my time is $80,000, A) I am earning economic profits of $150,000. B) I am earning economic profits of $70,000. C) I should close my business. D) I am earning economic profits of $10,000. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 53) If, as an entrepreneur, I am earning accounting profits of $60,000 per year and the opportunity cost of my time is $50,000, A) I am earning economic profits of $10,000. B) I am earning economic profits of $110,000. C) I am earning economic losses of $10,000. D) I should close my business. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 54) Economic profits equal A) accounting profits. B) accounting profits less economic rents. C) total revenue less the opportunity costs of all factors of production. D) accounting profits plus the owner's labor opportunity costs. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 42 Copyright © 2021 Pearson Education, Inc.

55) If the explicit costs to a firm to produce a unit of output are $7 and the firm sells 200,000 units of output for $8 per unit, the accounting profit received by the producer is A) $100,000. B) $1.4 million. C) $1.6 million. D) $200,000. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 56) Which of the following statements is FALSE? A) A correct measure of a firm's economic cost includes both accounting and opportunity cost. B) The accounting profit earned by a firm will always be the same as its economic profit. C) The major difference between accounting and economic profit is that accounting profit does not reflect the opportunity cost of using resources. D) The accounting profit of a firm is its total revenue minus total explicit costs. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 57) Suppose a family-owned donut shop has $80,000 in total revenues, $36,000 in rent, and $20,000 in additional operating costs. The husband and wife work in the shop and pay no wages to themselves or others. The economic profits from the donut shop are A) $24,000. B) less than $24,000. C) more than $24,000. D) $80,000. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge

58) Suppose that you open your own business and earn an accounting profit of $40,000 per year. When you started your business, you left a job that paid you a $25,000 salary annually. Also, suppose that you invested $70,000 of your own funds to start up your business. If the normal rate of return on capital is 5 percent, your economic profit is A) $15,000. B) -$11,500. C) $11,500. D) -$55,000. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 59) Suppose that you open your own business and earn an accounting profit of $35,000 per year. When you started your business, you left a job that paid you a $30,000 salary annually. Also, suppose that you invested $70,000 of your own funds to start up your business. If the normal rate of return on capital is 10 percent, your economic profit is A) $5,000. B) -$5,000. C) $2,000. D) -$2,000. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 60) Economic profits are equal to A) total revenues minus total fixed costs. B) total revenues, after tax, minus cost of goods sold. C) total revenues minus the implicit and explicit costs of all inputs used. D) total revenues minus the opportunity cost of labor. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

61) Accounting profits are total revenues minus A) all relevant opportunity costs. B) explicit and implicit costs. C) explicit costs and all other relevant opportunity costs. D) explicit costs. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 62) Accounting profit is equal to A) total revenue minus dividends and interest. B) dividends paid. C) total revenue minus implicit costs. D) total revenue minus explicit costs. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 63) In comparing accounting profit with economic profit, we generally find that A) accounting profit is less than economic profit. B) economic profit and accounting profit are the same in the short run. C) accounting profit is greater than economic profit. D) economic profit exceeds accounting profit by the amount of opportunity costs. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 64) In considering economic profit in a market economy, it is correct to say that A) there should never be any economic profit. B) economic profit will only occur, even in the short run, as a result of imperfect competition. C) economic profit performs an important function in allocating resources to their most highly valued uses. D) economic profit tends to reduce the production efficiency of the economy, leading to wasted resources. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

65) Economic profits are A) the same as accounting profits when firms do not own capital equipment. B) always greater than accounting profits. C) equal to accounting profits plus the implicit costs of the firm. D) whatever remains after all opportunity costs have been taken into account. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 66) Accounting profit will always be A) more than economic profit. B) equal to sunk costs. C) less than economic profit. D) equal to implicit costs. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 67) Economic profit is always A) greater than accounting profit. B) equal to accounting profit. C) less than accounting profit. D) equally likely to be either greater or less than accounting profit. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 68) Suppose your coffee shop earns $250,000 in total revenues per month with explicit costs of $150,000 and opportunity costs of $100,000. Your economic profit is A) $160,000. B) $120,000. C) $50,000. D) zero. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge

69) Suppose your donut shop earns $25,000 in total revenues per month with explicit costs of $15,000 and opportunity costs of $8,000. Your accounting profit is A) $48,000. B) $10,000. C) $2,000. D) zero. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 70) If your business earns $100,000 in revenues, has explicit costs of $80,000, and implicit costs of $50,000, your economic profit is A) $20,000. B) -$30,000. C) $50,000. D) $30,000. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 71) If your business earns $200,000 in revenues, has explicit costs of $70,000, and implicit costs of $50,000, your accounting profit is A) $320,000. B) -$80,000. C) $80,000. D) $130,000. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge

72) The economy's current rate of interest is 10 percent and a firm has $10,000 of ownerinvested capital. Its total revenue is $5000 and the firm's explicit costs are $3500. From this we know that this firm's A) accounting profit is $500. B) economic profit is $1,500. C) accounting profit is $1,500. D) economic profit is $5,000. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 73) The economy's current rate of interest is 10 percent and a firm has $100,000 of ownerinvested capital. Its total revenue is $50,000 and the firm's explicit costs are $30,000. From this we know that this firm's A) accounting profit is -$500. B) economic profit is -$10,000. C) accounting profit is $50,000. D) economic profit is $10,000. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 74) To find economic profit from accounting profit, it is necessary to A) add revenues that the firm can never earn. B) add retained earnings. C) subtract the opportunity cost of capital. D) add depreciation expense. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

75) On a bar graph comparing a firm's economic profit with its accounting profit, it will always be TRUE that A) explicit costs will be greater in the column representing accounting profit. B) explicit costs will be greater in the column representing economic profit. C) total revenue will be greater in the column depicting accounting profit. D) opportunity costs will be missing from the column depicting accounting profit. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 76) The goal of the firm is A) low labor turnover. B) to maximize costs. C) to minimize sales. D) profit maximization. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 77) A basic tenet of the theory of the firm is that the firm's primary objective is to A) stay out of debt. B) produce a given level of output at a specified cost. C) maximize economic profits. D) operate for the benefit of society. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 78) Economists assume that the goal of a firm is to A) maximize economic profits. B) sell as many units as possible. C) maximize gross revenues. D) be the largest firm in its industry. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

79) The most commonly accepted objective for a firm is A) to stay in business at all cost. B) to maximize total revenue. C) to maximize economic profit. D) to minimize the variable cost outlay. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 80) The higher are a firm's risk-corrected returns, A) the lower are its labor costs. B) the higher are its opportunity costs. C) the more advantage it has in obtaining investor financing. D) the more difficulty it will have financing its expansion plans. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 81) A business organization that employs resources to produce goods and services for profit is A) economic rent. B) a firm. C) inside information. D) the opportunity cost of capital. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 82) An entrepreneur is A) the rate of return on capital. B) a legal form of business. C) one who takes risks and makes innovations in organizing a firm. D) the rate of discount. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

83) Which of the following is NOT a legal organization of a firm? A) corporation B) partnership C) entrepreneurship D) proprietorship Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 84) The most numerous or plentiful firms in the United States are found in this form of business. A) partnership B) proprietorship. C) monopoly D) corporation Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 85) A proprietorship is a business A) with annual sales below $100,000. B) in which the stock of the company is closely held by members of one family. C) which produces a service rather than goods. D) owned by one individual who is responsible legally for the debts of the firm. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 86) By definition, a firm is A) a business organization that makes profits. B) a business organization that utilizes resources to produce goods or services with the goal of making a profit. C) a business organization that consists of more than one person. D) an organization, whether private or public, that may or may not make a profit. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

87) In a firm, an entrepreneur is one who A) decides to hire or fire. B) works for the owner by running the firm. C) takes the risks associated with a business firm. D) represents the firm in legal proceedings. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 88) If the entrepreneur is also the manager of the firm, we would expect A) the manager to work hard because he or she is also the residual claimant. B) the manager to not work hard since there is no possibility of further advancement. C) the firm to operate poorly because the specialization of labor is not adequate. D) the firm to operate poorly because the entrepreneur is not as good at managing workers as a professional manager would be. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 89) Out-of-pocket expenses such as wages and raw materials are A) direct costs. B) an owner-provided capital cost. C) implicit costs. D) explicit costs. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 90) Expenses that a firm does NOT have to pay out of pocket are A) wages of employees. B) taxes. C) implicit costs. D) explicit costs. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

91) Which of the following is NOT an implicit cost? A) wages B) opportunity cost of using an owner's savings C) owner-provided capital D) owner-provided labor Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 92) Which of the following is NOT an explicit cost? A) taxes B) rent C) wages D) opportunity cost of using an owner's savings Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 93) Juanita has just started a business and is using her personal car to deliver goods. The use of her car is an example of A) an explicit cost to the business. B) an implicit cost to the business. C) financial capital. D) interest. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 94) A legal organization of a firm where the business is owned by one individual who makes the business decisions, receives all the profits, and is legally responsible for the debts of the firm is a(n) A) corporation. B) entrepreneur. C) proprietorship. D) partnership. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

95) The difference between explicit costs and implicit costs A) is that explicit costs are opportunity costs while implicit costs are not. B) is that implicit costs are the difference between explicit costs and opportunity costs. C) is that explicit costs are short-run costs and implicit costs are long-run costs. D) is that explicit costs involve resources that are purchased and implicit costs involve resources the firm already owns. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 96) Mary and Jane are partners in a business. Their business is growing but has not yet reached the point where they can afford a new delivery truck. Jane owns an old truck that she has not been using. She decides to donate it to their business for free. A) This transaction (donation) involves no economic cost. B) This transaction involves both economic cost and accounting cost. C) This transaction involves economic cost but no accounting cost. D) This transaction involves no economic cost and no accounting cost. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 97) An accountant shows an invoice for a resource to the manager of the firm. They are discussing A) explicit costs. B) implicit costs. C) economic profits. D) either explicit costs or implicit costs, but we can't tell without more information. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 98) Proprietorships are A) the most common form of business organization in the country. B) responsible for most of the profits in the country. C) generally large relative to other business organizations. D) easy to form but difficult to dissolve. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

99) All of the following are characteristics of a proprietorship EXCEPT A) the business is owned by one individual. B) one person is responsible for all the debts of the firm. C) one person gets all of the profits. D) the firm can form a corporation to protect itself against the debts. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 100) Which of the following is NOT an advantage of a proprietorship? A) They are easy to form and dissolve. B) Decision-making resides with one person—the owner. C) Liability of the owner is unlimited. D) Profits are only taxed once. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 101) Which of the following is NOT a disadvantage of a proprietorship? A) how profits are taxed B) ability to raise capital C) unlimited liability D) the disposition of the firm when the owner dies Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 102) Unlimited liability exists when A) the profits of the firm are taxed once. B) a firm dissolves when the owner dies. C) a corporation exists. D) the personal assets of the owner of a firm can be seized to pay off the firm's debts. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

103) The most likely source of investment funds for a proprietorship is A) sales of stocks. B) sales of bonds. C) loans from banks. D) the personal funds of the owner. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 104) A business owned by two or more joint owners, or partners, who share the responsibilities and the profits of the firm and are individually liable for all the debts is a(n) A) corporation. B) entrepreneur. C) proprietorship. D) partnership. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 105) In a partnership, debts accumulated by one partner are A) the responsibility of that partner only. B) the responsibility of that partner plus any partners who are actively involved in running the partnership. C) the responsibility of all of the other partners for the full amount of the debt. D) the responsibility of all of the other partners, up to the total value of the firm. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 106) Which of the following is NOT an advantage of a partnership? A) limited liability B) easy to form C) permits more effective specialization in occupations D) Profits are subject to only personal taxation. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

107) An advantage of a partnership over a proprietorship is A) limited liability. B) that profits are not taxed twice. C) the ability to take advantage of greater specialization. D) that it is easier to dissolve. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 108) The owner(s) of a corporation A) is the entrepreneur. B) are the shareholders. C) are the bondholders. D) is the CEO. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 109) Compared to a proprietorship, a disadvantage of a partnership is A) that profits are taxed twice. B) that it is harder to keep the firm going after the death of an owner. C) unlimited liability. D) that potential liability to each partner is greater. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 110) Which of the following is NOT an advantage of a partnership? A) the taxation of profits B) the issue of liability C) specialization of individuals D) separation of partners' duties Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

111) In a partnership, A) each partner's liability is limited to their investment in the company. B) profits are taxed at both the corporate rate and the personal income tax rate. C) upon the death of a partner it may be necessary to sell the business. D) there is a separation of ownership and management like in a corporation. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 112) A difference between a proprietorship and a partnership is that A) a proprietorship is easy to form while a partnership is hard to form. B) a proprietorship has only one owner while a partnership has only two owners. C) a partnership allows for specialization while a proprietorship does not. D) the profits in a proprietorship are taxed only once while in a partnership they are taxed twice. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 113) A legal entity that may conduct business in its own name just as an individual does is a(n) A) corporation. B) entrepreneur. C) proprietorship. D) partnership. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 114) Corporations are responsible for approximately what percentage of total business revenues? A) 19 percent B) 50 percent C) 72 percent D) 83 percent Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

115) The characteristic of limited liability enables corporations to A) avoid taxes on some of their profits. B) exist even when owners die. C) raise large amounts of financial capital. D) start up and dissolve easily. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 116) The concept of limited liability A) does not apply to a corporation. B) means that the owners of a corporation have liability limited to the value of the shares in the firm. C) means that owners of a firm are subject to double taxation. D) limits the amount of specialization that can occur in a firm. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 117) Limited liability exists when A) the liability of owners is limited to the value of the shares in the firm they own. B) the liability of owners is limited to the share of the debt they personally took on. C) partners specialize and each partner is responsible for the debts of his or her specialized area. D) bondholders must receive their payments before stockholders can earn any money. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 118) Dividends are A) the portion of a corporation's profits that are distributed to stockholders. B) the portion of a corporation's revenues that are distributed to bondholders. C) bonuses given to managers of corporations, to ensure that the managers perform in the way that stockholders want. D) taxes on the profits of corporations. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

119) Which of the following statements about business organizations is TRUE? A) Partnerships are more common than proprietorships and are responsible for a larger percentage of business receipts. B) Proprietorships are more common than either partnerships or corporations but are responsible for the smallest share of total business receipts. C) Corporations are larger in number than either proprietorships or partnerships and also receive a larger percentage of total business receipts. D) Partnerships are larger than both proprietorships and corporations but are less numerous than corporations. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 120) An important problem with corporations is A) the inability of the government to control and tax the firms. B) the possibility of large liabilities for the owners. C) the separation of ownership and control. D) the difficulties with raising financial capital. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 121) If the death of an owner causes the firm to dissolve, the firm must have been A) a partnership only. B) a proprietorship only. C) a corporation only. D) either a proprietorship or a partnership. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

122) It is likely that the owners have little to do with the day-to-day management of a firm in the case of A) partnerships only. B) proprietorships only. C) corporations only. D) partnerships and corporations. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 123) The problem with the separation of ownership from control is that A) the owner in a proprietorship may not always act in the profit-maximizing fashion because he or she may not have the experience or expertise that professional managers have. B) the managing partner of a firm may not always behave in the way that other managers would if they were the managing partners. C) the managers of the firm can make decisions that reduce the wealth of the owners while not reducing their own wealth. D) the owners of firms may not always know the best way to run a firm, yet they are the ones who elect the managers of the firm. Answer: C Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 124) Accounting profits are found by total revenues minus A) explicit costs. B) explicit and implicit costs. C) implicit costs. D) all opportunity costs. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

125) Normal rate of return is A) accounting profit. B) an explicit cost. C) economic profit. D) the amount that must be paid to obtain investment in a business. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 126) The amount that must be paid to an individual to get them to invest in the industry is A) a normal rate of return. B) the explicit costs. C) reinvestment. D) financial capital. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 127) The opportunity cost of capital is A) an explicit cost. B) a part of economic profits. C) usually unknown and must be estimated by looking at the price of capital goods. D) the normal rate of return. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 128) Economic profits are found by total revenues minus A) explicit costs. B) explicit and implicit costs. C) implicit costs. D) all opportunity costs. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

129) When economic profits are positive, accounting profits A) must be positive. B) will be negative. C) will equal zero. D) could be positive, negative or zero. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 130) When accounting profits are positive, economic profits A) must be positive. B) will be negative. C) will equal zero. D) could be positive, negative or zero. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 131) When economic profits are negative, accounting profits A) must be positive. B) will be negative. C) will equal zero. D) could be positive, negative or zero. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 132) When accounting profits are negative, economic profits A) must be positive. B) will be negative. C) will equal zero. D) could be positive, negative or zero. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

133) When economic profits are zero, accounting profits A) must be positive. B) will be negative. C) will equal zero. D) could be positive, negative or zero. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 134) What is the relationship between accounting and economic profits? A) Accounting profits are always larger than economic profits. B) Economic profits are always larger than accounting profits. C) There is no relationship between economic and accounting profits. D) Economic profits are always negative. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 135) Any business wanting to attract financial capital must expect to A) earn a positive economic profit. B) keep implicit costs as close to zero as possible. C) pay a normal rate of return. D) pay a below normal rate of return in order to make a positive rate of return itself. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 136) Joni starts her own business. She quits her $50,000 a year job, rents an office for $15,000 a year, pays wages and salaries of $50,000 a year, utilities of $4,000 a year, and materials of $20,000. Joni uses her own car for sales work rather than leasing an equivalent car for $6000 a year. If revenues are $140,000, her accounting profit and economic profit are respectively A) $45,000 and $1,000. B) $51,000 and $5,000. C) $51,000 and -$5,000. D) $45,000 and $51,000. Answer: C Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

137) Michael starts his own business after quitting his job in which he made $75,000. Expenses include $100,000 for wages and salaries, which includes a wage for the owner of $75,000, utilities of $5000, equipment of $50,000, and materials of $40,000. If revenues are $200,000, Michael's accounting and economic profits are respectively A) $80,000 and $5,000. B) -$70,000 and -$70,000. C) -$70,000 and $5,000. D) $5,000 and $5,000. Answer: D Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 138) A firm is making zero economic profits. From this, we know that A) the firm is going to go out of business. B) implicit costs are zero. C) the firm is going to stay in business, but will not be able to attract new financial capital. D) the firm will stay in business since it is covering all relevant opportunity costs. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 139) The goal of the firm, according to economists, is to A) stay in business for as long as possible. B) sell as many units of the good it produces as possible. C) grow as large as possible. D) make as much economic profit as is possible. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 140) A firm that is NOT maximizing profits A) would never be able to operate in the United States. B) must not be owned by stockholders. C) may find it difficult to raise financial capital from external capital markets. D) is likely to face legal prosecution from the Department of Commerce. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 65 Copyright © 2021 Pearson Education, Inc.

141) A disadvantage of corporations over a proprietorship or partnership is in the A) legal liability. B) ability to raise funds. C) taxation system. D) future of the firm when an owner dies. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 142) An organization that brings together the factors of production is called A) an industry. B) a conglomerate. C) a plant. D) a firm. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 143) Which of the following statements regarding accounting and economic profits is FALSE? A) Economic profits can be zero even if accounting profits are positive. B) Economic profits = total revenue - (explicit + implicit costs) C) Accounting profits can be negative if economic profits are positive. D) Accounting profits = total revenue - explicit costs Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 144) Another term for the opportunity cost of capital is A) the normal interest rate. B) the normal rate of return. C) a normal profit. D) a normal wage rate. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

145) Which of the following is the formula used for computing economic profits? A) economic profits = total revenue - implicit costs B) economic profits = total revenue - (implicit costs + explicit costs) C) economic profits = total costs - total revenue D) economic profits = total revenue - explicit costs Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 146) In economics we assume that the goal of a firm is to A) maximize costs. B) maximize revenue. C) maximize economic profits. D) maximize total sales. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 147) In analyzing the operation of a firm, an economist assumes the firm wants to A) maximize total sales. B) maximize total revenue. C) maximize total production. D) maximize total profits. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 148) Joni left her last job, in which she was earning $60,000, in order to form her own consulting business. Her revenues for the first year of consulting were $210,000. During that year, she hired two assistants for $25,000 each and spent $25,000 on office equipment. In addition, she incurred $75,000 in miscellaneous expenses. Joni's economic profit that first year was A) $0. B) $50,000. C) $200,000. D) $75,000. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 67 Copyright © 2021 Pearson Education, Inc.

149) Sara left her last job, in which she was earning $60,000, in order to form her own consulting business. Her revenues for the first year of consulting were $210,000. During that year, she hired two assistants for $25,000 each and spent $25,000 on office equipment. In addition, she incurred $75,000 in miscellaneous expenses. Sara's accounting profit that first year was A) $0. B) $60,000. C) $210,000. D) $50,000. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 150) Accounting profits are typically A) greater than economic profits because accounting profits do not include explicit costs. B) greater than economic profits because accounting profits do not include implicit costs. C) smaller than economic profits because accounting profits do not include explicit costs. D) equal to economic profits in the long run. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 151) Which of the following equations is CORRECT? A) accounting profit = total revenue - (explicit costs + implicit costs) B) normal profit = accounting profit + economic profit C) economic profit = accounting profit - implicit costs D) economic profit = accounting profit - explicit costs Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

152) Suppose that during a given time period the implicit cost for a business was $1,000 and that the explicit cost was $5,000. Also suppose that the firm sold 1,000 units of its products at $5 per item. We can conclude that the firm's A) accounting profit was $5,000, and its economic profit was $0. B) accounting and economic profits were both $0. C) accounting profit was $0, and economic profit was $1,000. D) accounting profit was $0, and economic profit was -$1,000. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 153) Suppose that during a given time period the implicit cost for a business was $1,500 and that the explicit cost was $6,000. Also suppose that the firm sold 1,000 units of its products at $8 per item. We can conclude that the firm's A) accounting profit was $2,000, and its economic profit was $500. B) accounting and economic profits were both $2,000. C) accounting profit was -$500, and economic profit was $2,000. D) accounting profit was $2,000, and economic profit was -$500. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 154) Which of the following is the formula used for computing an accounting profit? A) accounting profits = total revenue - implicit costs B) accounting profits = total revenue - (implicit + explicit costs) C) accounting profits = total costs - total revenue D) accounting profits = total revenue - explicit costs Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 155) When a business has implicit costs, A) economic profits are greater than accounting profits. B) economic and accounting profits are the same. C) economic profits are less than accounting profits. D) economic costs are the same as accounting costs. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 69 Copyright © 2021 Pearson Education, Inc.

156) An example of an implicit cost is A) payment of a salary to a CEO of a company. B) a business using a building owned by the business owner. C) a payment to a resource owner. D) the payment of interest on a bond. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 157) A business borrows $100,000 for a lease on a factory with an interest rate of 2 percent, the explicit cost is A) $120,000. B) $20,000. C) $2,000. D) $80,000. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 158) Suppose that the implicit cost for a business was $2,000 and the explicit cost was $5,000 and that the firm sold 1,000 units of its products at $7 per item. We can conclude that the firm's A) accounting profit was $7,000, and its economic profit was $0. B) accounting and economic profits were both $0. C) accounting profit was $2,000, and economic profit cannot be determined. D) accounting profit was $2,000, and economic profit was $0. Answer: D Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 159) Accounting profits are A) total revenue minus explicit costs. B) total revenue minus implicit costs. C) total revenue minus explicit and implicit costs. D) total revenue minus normal costs. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 70 Copyright © 2021 Pearson Education, Inc.

160) Owner-provided capital and owner-provided labor are examples of A) explicit costs. B) implicit costs. C) normal rate of return. D) accounting costs. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 161) Economic profits are A) total revenue minus explicit costs. B) total revenue minus implicit costs. C) total revenue minus explicit and implicit costs. D) total revenue minus accounting costs. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 162) Economic profit is A) total revenue × (explicit costs - implicit costs). B) total revenue - (explicit costs - implicit costs). C) total revenue + (explicit costs + implicit costs). D) total revenue - (explicit costs + implicit costs). Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 163) The three basic legal forms of business enterprise in the United States are A) monopolies, enterprises, and competitors. B) vertical, horizontal, and conglomerate corporations. C) national, global, and multinational corporations. D) proprietorships, partnerships, and corporations. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

164) Which of the following is the most common form of a business organization? A) corporation B) partnership C) sole proprietorship D) subchapter S corporation Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 165) The most common form of business organization in the United States is the A) proprietorship. B) partnership. C) corporation. D) cooperative. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 166) Which of the following is considered an advantage of a sole proprietorship? A) easy to raise large sums of capital B) limited liability for owner C) profit taxed only once D) permits effective specialization Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 167) An advantage of the proprietorship as a form of business organization is A) its limited liability. B) its limited access to capital, thus reducing the possible size of debt. C) that it is easy to form. D) that it can sell bonds to the public. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

168) A disadvantage of the proprietorship form of business organization is A) its limited access to capital. B) its limited liability. C) that it can issue only one class of stock. D) that the owner must fight a lot of red tape to form the firm. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 169) Numerically, the dominant type of business enterprise in the United States is A) the corporation. B) the partnership. C) the proprietorship. D) the multinational corporation. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 170) All of the following are advantages of organizing a business as a sole proprietorship EXCEPT A) ease of formation. B) limited liability. C) ease of decision-making. D) single taxation. Answer: B Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 171) When a business is owned and operated by a single individual who receives all of the profits and is responsible for all debts, it is known as a A) partnership. B) conglomerate. C) corporation. D) proprietorship. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

172) Tim has a toenail clipping business that is a sole proprietorship. If he is sued for a botched pedicure, A) he has limited liability. B) he has separation of ownership and control. C) all of his personal assets are at risk. D) he will be taxed doubly. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 173) Unlimited liability is found in A) proprietorships and corporations. B) partnerships and corporations. C) proprietorships and partnerships. D) proprietorships, partnerships, and corporations. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 174) In a partnership of two people, A) each person has 50 percent liability. B) it is more difficult to specialize with two persons than with one. C) each person has unlimited liability. D) the law releases each partner from legal liabilities. Answer: C Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 175) Owners face unlimited liability in A) national corporations and global corporations. B) partnerships and corporations. C) proprietorships and corporations. D) proprietorships and partnerships. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

176) An advantage of the partnership form of business organization is A) its limited liability. B) its limited access to capital, thus reducing the possible size of debt. C) the ability of its owners to specialize. D) that it is difficult to start up, because a lot of thought has to go into the establishment of the firm. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 177) A disadvantage of the partnership form of business organization is A) its limited access to capital. B) its limited liability. C) that it can issue only one class of stock. D) that the owners must fight a lot of red tape to form the firm. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 178) You have received your advanced degree in biochemistry with a specialty in recombinant DNA technology. Your colleagues wish to form a partnership to research adenovirus vectors. Your legal counsel advises you on the following aspects of a partnership, yet you tell her, based on your knowledge of economics, that you think one of the following points is INCORRECT. A) An advantage of the partnership would be that it is relatively easy to form, almost as easy as forming a proprietorship. B) The income of the partnership is treated as personal income and is subject only to personal taxation rates. C) The personal assets of each partner should be safe and would not necessarily be at risk due to claims by financial institutions. D) Partnerships often help reduce the costs of monitoring job performance in situations in which it is difficult to measure objectively. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

179) The majority of business revenues earned in the United States are earned by A) proprietorships. B) corporations. C) partnerships. D) cooperatives. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 180) Which statement is FALSE considering both advantages and disadvantages of corporations as a legal business organization? A) Perhaps the greatest advantage of corporations is that their owners (the shareholders) enjoy limited liability—limited to the value of their shares. B) Legally the corporation continues to exist even if one or more owners cease to be owners. C) Corporations usually are not as well positioned as proprietorships and partnerships to raise large sums of financial capital. D) Separation of ownership and control is a disadvantage of the corporate structure; owners and managers may have different incentives. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 181) Which form of business organization accounts for the largest proportion of sales in the United States? A) the corporation B) the partnership C) the proprietorship D) the subchapter S partner-based proprietorship. Answer: A Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

182) Most businesses in the United States are ________, and the type of business organization that accounts for the LEAST amount of total revenues is ________. A) proprietorships; partnerships B) corporations; proprietorships C) proprietorships; proprietorships D) corporations; partnerships Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 183) An advantage of the corporate form of business organization is A) unlimited liability. B) easier access to capital. C) that profits are taxed only on one level. D) government supervision of its activities. Answer: B Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 184) A disadvantage of the corporate form of business organization is A) double taxation. B) limited access to capital. C) that the corporation can only do business in the state where it was incorporated. D) unlimited liability for shareholders. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 185) You own $10,000 in personal property, $3,000 in Company X stocks, $1,000 in U.S. Savings Bonds and have $500 in your checking account. If Company X goes bankrupt, the most you could lose is A) $13,500. B) $11,500. C) $3,000. D) $500. Answer: C Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Application of knowledge 77 Copyright © 2021 Pearson Education, Inc.

186) When a business is considered by law to be a legal entity, it is known as a A) partnership. B) conglomerate. C) corporation. D) proprietorship. Answer: C Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 187) All of the following are advantages of a corporation EXCEPT A) double taxation. B) limited liability. C) ability to raise large sums of financial capital. D) unlimited life. Answer: A Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 188) The greatest advantage of a corporation is A) ease of setting up the business. B) the double taxation of dividends. C) separation of ownership and control of the business. D) limited liability. Answer: D Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 189) Corrina was working as a waitress in an Italian restaurant making an annual income of $25,000 per year when she decided to start up her own catering business. Corrina used $10,000 of her savings that was earning 5 percent annual interest to establish her business. After the first year she made an accounting profit of $20,000. Her economic profit was A) -$5,500. B) -$5,000. C) $20,000. D) $25,000. Answer: A Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 78 Copyright © 2021 Pearson Education, Inc.

190) A normal rate of return on investment is equal to A) accounting profit minus economic profit. B) the opportunity cost of capital plus any other implicit costs. C) accounting profit plus economic profit. D) total revenue plus total accounting profit. Answer: B Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 191) What is a normal rate of return? Answer: A normal rate of return is the amount that must be paid by an investor to induce investment in a business. It is the opportunity cost of capital. Diff: 1 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 192) Discuss the advantages and disadvantages of proprietorships. Answer: Proprietorships are easy to form and to dissolve. Furthermore, all the decisions are made by the proprietor, so decisions can be made quickly. The profits are taxed only once, which is not the case for corporations. However, there are also disadvantages. The biggest disadvantage is unlimited liability: the owner is personally responsible for all the debts of the firm, and could lose assets that are not part of the firm. This often makes it difficult to raise financial capital. Finally, the firm ends with the death of the owner, creating uncertainty for employees and creditors. Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 193) Why are there so many more proprietorships than corporations, yet corporations account for so much more of the sales of business firms in the country? Answer: Proprietorships are easy to form and can be run by an individual, so there can be many of them, especially in businesses in which large size is not necessary for success. However, large-scale business will usually be done by corporations because of the advantages corporations have in raising financial capital. Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking

194) What is the difference between accounting profits and economic profits? Which of the two concepts is more appropriate for explaining decisions made by entrepreneurs? Explain. Answer: The difference between accounting profits and economic profits is implicit costs, which represent the opportunity costs of factors of production that are owned, such as labor and capital. Opportunity cost is the highest value of alternatives to a firm's inputs. Economic profits take such implicit costs into consideration and so is a more appropriate for explaining the behavior of entrepreneurs. Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 195) Why is limited liability so important when firms try to raise large amounts of financial capital? How is this advantage of a corporation tied to a disadvantage of a corporation? Answer: Limited liability is important in raising large funds because the owners (stockholders) know that the total liability they have connected with the firm is limited to the investment they made in buying the shares of stock. It is easier to get people to buy a portion of the firm when their liability is limited. But, this large group of owners also means that the diverse ownership may make it difficult to monitor the performance of the management team. Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 196) For which type of organization is unlimited liability likely to be the greater problemproprietorships or partnerships? Why? Answer: Unlimited liability probably poses more problems for partnerships because each partner is liable for debts incurred by the firm, even if those debts are incurred by the other partner. A proprietor knows all the debts he or she has taken on, but a partner could be in the dark on some occasions. Diff: 3 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 197) Amber has opened a coffee shop for many years on a piece of land that she has also owned. She has also made accounting profits from the coffee shop. This year, rents in the area rose considerably, and Amber responded by deciding to sell the land and the coffee shop to an apartment builder. How can you explain Amber's decision to sell her business? Answer: Even though Amber has been making accounting profits, her decision to sell her business was based on the opportunity cost of the land, which obviously had risen to the point that she made a negative economic profit on her coffee shop business. Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 80 Copyright © 2021 Pearson Education, Inc.

198) "Economic profits are less than or at most equal to accounting profits." Do you agree or disagree? Explain. Answer: Agree. Economic profits are accounting profits less implicit costs, or the opportunity costs of inputs. Since the opportunity costs of capital and labor inputs are never negative, economic profits are less than or at most equal to accounting profits. Diff: 2 Topic: 21.2 Firms and Profits Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 21.3 Interest 1) Interest is paid to A) all holders of stock. B) individuals who own gold. C) owners of capital. D) borrowers of funds. Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 2) Which of the following is correct? A) real interest rate = nominal interest rate - anticipated inflation rate B) real interest rate = nominal interest rate + anticipated inflation rate C) real interest rate = nominal interest rate * anticipated inflation rate D) real interest rate = nominal interest rate / anticipated inflation rate Answer: A Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 3) Interest can be defined as A) the amount of funds loaned to a creditor. B) the participation of a shareholder in the operations of a firm. C) the return paid to owners of capital. D) the return above opportunity cost paid to owners of a firm. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 81 Copyright © 2021 Pearson Education, Inc.

4) In economic terms, interest is the payment for A) current command over resources. B) producers' goods. C) stocks. D) both consumer and capital goods. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 5) Which of the following characteristics is NOT likely to increase the interest on a loan? A) a high-risk proposal B) a non-creditworthy borrower C) a short-term loan D) a larger dollar loan Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 6) In most cases, the higher the quality of the collateral for a loan is, A) the higher is the interest rate. B) the lower is the interest rate. C) the riskier is the loan. D) the greater is the handling charge for the loan. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

7) Creditors require collateral in many cases because A) it helps offset the risks of lending the funds. B) the borrower is a low risk. C) the loan is small. D) none of these Answer: A Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 8) Because handling charges are relatively fixed, the interest rate on a loan generally A) increases with the size of the loan. B) decreases with the size of the loan. C) is constant regardless of the size of the loan. D) is unrelated to the size of the loan. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 9) People basically borrow in order to A) go into debt. B) have more funds. C) have interest payments. D) have current consumption rather than waiting to consume in the future. Answer: D Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 10) Interest rates are positive because A) people prefer future consumption over current consumption. B) people prefer current consumption over future consumption. C) usury laws require rates to be very high. D) banks are not competitive. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 83 Copyright © 2021 Pearson Education, Inc.

11) The greater is the risk of non-repayment of a loan, the A) higher is the expected rate of interest. B) longer is the expected time to repay the loan. C) lower is the handling charges for the loan. D) lower is the expected rate of interest. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 12) Which combination of circumstances will most likely raise the rate of interest for a loan the most? A) low handling charges and low risk B) low handling charges and a long length of time for repayment C) high risk and low handling charges D) high risk and a long length of time for repayment Answer: D Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 13) Under which one of the following situations would you be better off? A) You have $10,000 in your savings account paying 5 percent per year and unanticipated inflation is 8 percent per year. B) You have paid $500 for a $1,000 U.S. savings bond that matures in 10 years and unanticipated inflation is 10 percent per year. C) You lend a friend $1,000 at 6 percent to be repaid in one year and unanticipated inflation is 7 percent during the year. D) You borrowed $2,500 at 7 percent to pay for this year's college expenses and unanticipated inflation is 12 percent during the year. Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

14) Suppose that you borrow $100,000 from the bank to purchase some land and you agree to pay 2 percent interest on the loan. If the loan must be repaid in 12 months and the inflation rate is 3 percent during the year, then A) you will repay the bank with dollars with more purchasing power than you initially borrowed. B) you will repay the bank with fewer dollars than the bank initially loaned you. C) you will repay the bank with dollars with less purchasing power than it initially loaned you. D) the bank will receive fewer dollars, because of inflation, than it had initially expected to receive. Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 15) If the rate of inflation is zero, prices are expected to remain stable, and the nominal rate of interest is 3 percent, then the A) real rate of interest is equal to the nominal rate. B) real rate of interest is less than the nominal rate. C) nominal rate is greater than the real rate of interest. D) investment demand schedule will shift upward. Answer: A Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 16) When the anticipated rate of inflation declines, the real rate of interest A) increases. B) decreases. C) is not affected. D) increases exponentially. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

17) The real rate of interest will approximately be equal to A) the nominal interest rate plus the expected rate of inflation. B) the stated rate of interest in a high-inflation economy. C) the nominal interest rate minus the expected rate of change in the price level. D) the stated rate minus the opportunity cost of capital. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 18) The nominal rate of interest is A) the same as the price level. B) the real rate of interest minus the previous year's change in the price level. C) the interest rate actually paid by the borrower. D) lower than the real rate in a period of inflation. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 19) The real rate of interest is A) the nominal interest rate minus the anticipated rate of inflation. B) the interest rate actually paid explicitly by the borrower. C) the interest rate received by the lender minus the handling charges of the loan. D) the average rate of interest over the last 20 years. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 20) In an inflationary atmosphere that everyone anticipates will persist, lenders will A) desire a lower nominal interest rate to increase the real rate. B) desire a higher nominal interest rate to protect against the inflation. C) tend to see the real rate of interest increase, particularly if the inflation is unforeseen. D) have the real rate of interest guaranteed by the Federal Reserve Board. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

21) When the anticipated rate of inflation is 2 percent and the real rate of interest is 4 percent, the nominal rate of interest is A) 0 percent. B) 1 percent. C) 2 percent. D) 6 percent. Answer: D Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 22) Suppose that the nominal rate of interest is holding steady at 2 percent even as the anticipated rate of inflation rises. What is happening to the real rate of interest? A) It is unchanged. B) It is increasing. C) It is decreasing. D) It equals the nominal interest rate. Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 23) One role of the interest rate is to A) allocate capital to its most efficient uses. B) redistribute income from the wealthy to the poor. C) reduce the rate of inflation by encouraging government borrowing. D) discourage saving and encourage current consumption. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

24) A star basketball player signs a contract that newspaper reports indicate is worth $10 million. The player receives $2 million upon signing, and $2 million every year for four years. The contract is worth A) less than $10 million since the present value of $2 million received one or more years from now is less than $2 million. B) more than $10 million since the present value of $2 million received one or more years from now is more than $2 million. C) $10 million as reported in the press. D) some amount around $10 million. To determine whether it is more or less than $10 million we need to know whether the interest the player can earn is more or less than the market rate of interest. Answer: A Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 25) If the interest rate is 4 percent per year and you borrow $100 for one year, at the end of the year you must pay back A) $96. B) $100. C) $104. D) $4. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 26) If the interest rate is 5 percent per year and you borrow $100 for two years, at the end of the second year you must pay back A) $93.73. B) $103.00. C) $110.25. D) $106.99. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge

27) Given a discount rate of 10 percent, the present value of receiving $100,000 two years in the future is A) $12,000. B) $80,000. C) $82,645. D) $121,000. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 28) What is the future value of $1,000 in three years if the rate of discount is equal to 5 percent? A) $1,150.00 B) $1,005.00 C) $1,157.63 D) $863.84 Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 29) Suppose that you borrow $10,000 for one year, and at the end of the year, you must repay $10,350. The interest rate is A) 10.35 percent. B) 6.5 percent. C) 3.5 percent. D) 2.7 percent. Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge

30) Suppose that you borrow $10,000 for one year, and at the end of the year, you must repay $10,450. Also, during that year inflation was 2.5%. The real interest rate is A) 12.0 percent. B) 7.0 percent. C) 4.5 percent. D) 2.0 percent. Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 31) Suppose that you borrow $10,000 for two years, and at the end of the second year, you must repay $11,664. The interest rate is A) 16.7 percent. B) 8.0 percent. C) 7.0 percent. D) 9.0 percent. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 32) Assuming a market interest rate of 6 percent per year, what is the present value of $5,000 payable at the end of three years? A) $4,717 B) $4,450 C) $4,198 D) $4,317 Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge

33) The rate of discount is best described as the rate of A) return on physical capital after the cost of capital has been removed. B) return on financial assets after an inflation adjustment has been made. C) interest used to derive the present values of future sums. D) return on financial capital that has not been adjusted for inflation. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 34) The interest rate used to bring future sums back to present value is A) always negative. B) zero when there is no inflation. C) the rate of discount. D) the prime rate. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 35) When the rate of interest is 10 percent, the present value of $100 payable in two years is approximately A) $80. B) $83. C) $100. D) $110. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge

36) Present value is A) the value of a future amount expressed in today's dollars. B) the value of a dollar received a year from now, expressed in terms of its future value. C) the inverse of the interest rate. D) the nominal value instead of the real value of something. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 37) The present value of $120 to be received one year from now A) is $120. B) is $100. C) is $121. D) depends on the rate of discount. Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 38) If the present value of $110 to be received one year from now is $100, what will $100 be worth two years from now? A) $110 B) $121 C) $100 D) can't say since we don't know what the interest rate is Answer: B Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

39) Financial capital is A) the collection of stock and bond exchanges around the country. B) funds used to purchase capital goods. C) the foreign exchange market. D) assets of financial institutions. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 40) The funds used to purchase capital goods are called A) investment. B) savings. C) financial capital. D) dividends and interest. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 41) In economics, interest refers to all of the following EXCEPT A) the payment for current rather than future command over resources. B) the cost of obtaining credit. C) the return paid to owners of financial institutions. D) the return paid to the owners of capital. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 42) Businesses go to credit markets in order to A) obtain capital. B) obtain financial assets that can be used to buy capital. C) obtain capital so they can earn rents. D) channel their savings into investments. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 93 Copyright © 2021 Pearson Education, Inc.

43) The payment for current rather than future command over resources is A) an implicit cost. B) an implicit benefit. C) interest. D) opportunity cost. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 44) Interest rates are higher the A) shorter the duration of the loan. B) greater the risk. C) larger the amount of the loan, holding other things constant. D) lower the inflation rate. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 45) Larger loans, other things constant, have lower interest rates because A) only large, financially sound corporations obtain such loans. B) large loans always have collateral. C) large loans are always for short time periods. D) the fixed costs associated with the handling charges as a percent of the total loan are less. Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

46) Businesses demand funds because A) they prefer earlier consumption to later consumption. B) they have deficits to cover. C) they prefer to purchase capital goods in the current year. D) they make investments that they believe will increase productivity and profitability. Answer: D Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 47) The real rate of interest is A) equal to the nominal rate of interest less the anticipated rate of inflation. B) equal to the nominal rate of interest plus the anticipated rate of inflation. C) found by taking the nominal rate of interest and dividing it by the actual rate of inflation. D) found by taking the nominal rate of interest and adding the actual rate of inflation. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 48) The nominal rate of interest is A) the rate observed in the market that includes an inflation premium. B) not the rate observed in the market. C) not adjusted for inflation. D) expressed in dollars from the chosen base year. Answer: A Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 49) If the nominal interest rate is high and rising, a possible cause is A) increased lending activity. B) a rising inflation rate. C) a falling real interest rates. D) reduced government borrowing. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 95 Copyright © 2021 Pearson Education, Inc.

50) The real rate of interest is 4% and the anticipated rate of inflation is 2%. What is the nominal rate of interest? A) 1% B) 2% C) 4% D) 6% Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 51) The real rate of interest is 3% and the anticipated rate of inflation is 2%. What is the nominal rate of interest? A) 5% B) 0% C) -1% D) 1% Answer: A Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 52) The nominal rate of interest is 4% and the anticipated rate of inflation is 5%. What is the real rate of interest? A) 1% B) -1% C) 4% D) 9% Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge

53) The nominal rate of interest is 3% and the anticipated rate of inflation is 3%. What is the real rate of interest? A) 6% B) 3% C) -3% D) 0% Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 54) Interest rates perform the function of A) signaling information about the inflation rate. B) allocating funds, but only in the consumer sector. C) allocating funds, which determines the allocation of physical capital. D) rewarding those who save but has no direct allocative role. Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 55) Suppose the auto industry has several investment projects with an expected rate of return of 15 percent, the aluminum industry has projects with an expected return of over 20 percent, the publishing industry has projects with an expected return of 10 percent, the steel industry has projects with an expected return of 7 percent and the rubber industry has projects with an expected return of 5 percent. The current market rate of interest is 7 percent. A reduction in the supply of funds causes interest rates to rise to 11 percent. The effect is to A) cause the firms in the steel and publishing industries to cancel their projects, which would have been funded at the old interest rate. B) cause the firms in the steel and the rubber industries to go ahead with their projects. C) force the firms in the automobile industry and the publishing industry to rely on funding their projects through other means. D) make the projects of the aluminum industry and the steel industry unprofitable; the firms in these industries will not borrow the funds or make the investments. Answer: A Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

56) When interest rates allocate capital, A) many worthwhile projects fail to get funded and society is worse off. B) investment projects of firms tend to get funded while valuable social investments funded by the government tend not to get funded. C) only investment projects are funded for which the expected benefits of the projects equal or exceed the opportunity cost of the projects. D) there is an under investment in capital and overspending on durable consumer goods. Answer: C Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 57) The value of a future amount expressed in today's dollars is A) the interest rate. B) present value. C) the discount rate. D) the inflation rate. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 58) The most that someone would pay today to receive a certain sum at some point in the future is known as A) the interest rate. B) present value. C) future value. D) economic profit. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

59) What is the present value of $1,000 one year from now at an interest rate of 5%? A) $50 B) $952.4 C) $950 D) $1050 Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 60) What is the present value of $100 one-year from now at an interest rate of 6%? A) $97.09 B) $107 C) $94.34 D) $3 Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 61) What is the present value of $100 two years from now at an interest rate of 5%? A) $105 B) $95.24 C) $90.70 D) $5 Answer: C Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 62) What is the present value of $100 two years from now at an interest rate of 6%? A) $6 B) $89 C) $94.34 D) $106 Answer: B Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 99 Copyright © 2021 Pearson Education, Inc.

63) What is the present value of $100 three years from now at an interest rate of 5%? A) $85 B) $115.76 C) $90.70 D) $86.38 Answer: D Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 64) What is the present value of $100 three years from now at an interest rate of 6%? A) $83.96 B) $82 C) $94.34 D) $119.10 Answer: A Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 65) The present value of $1,000 to be received one year from now A) is always $1,000. B) is always $1,100. C) is always $900. D) cannot be determined without knowing the interest rate. Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

66) If the annual interest rate remains unchanged over the next two years, and the present value of $120 to be received one year from now is $100, what will $100 be worth two years from now? A) $120 B) $140 C) $144 D) Uncertain. We need to know the interest rate. Answer: C Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 67) The general form for discounting is A) PV = FVt * (1 + i)t. B) PV = FVt /(1 + i)t. C) PV = (1 + i)t/FVt. D) PV = 1/(1 + it)t. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 68) A firm is considering three projects. Each costs $1 million now. Project A will yield $400,000 a year for three years, beginning one year from now. Project B will yield $1.25 million three years from now, and Project C will yield $600,000 for two years, beginning two years from now. If the interest rate is 8 percent, which of these projects should the firm undertake? A) Project A B) Project B C) Project C D) none of these Answer: A Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

69) The present value of a sum to be received in the future is greater A) the greater the interest rate. B) the less the time period before receiving the sum. C) the greater the inflation rate. D) the greater the discount rate. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 70) A firm is considering an investment that will cost $2 million today and $2 million a year from now. It will generate revenues of $1 million a year for five years, beginning two years from now. If the interest rate is 10 percent, the firm should A) not make the investment because the present value of the net revenues is less than the present value of the investment spending. B) not make the investment because the present value of the net revenues is less than $4 million. C) make the investment because the present value of the net revenues is greater than the present value of the investment. D) make the investment because the project will generate a net profit of $1 million. Answer: A Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 71) The greater the interest rate, A) the greater the present value of a sum to be received a year in the future. B) the greater the opportunity cost of another dollar of current consumption. C) the less a dollar invested today will be worth a year from now. D) the lower the discount rate. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

72) A star basketball player signs a contract that newspaper reports say is worth $10 million. The player receives $5 million on signing, and $5 million a year for three years. The contract is worth A) $10 million as reported in the papers. B) less than $10 million since the present value of $5 million received one or more years from now is less than $5 million. C) more than $10 million because the present value of $5 million received one or more years from now is more than $5 million. D) either more or less than $10 million, depending on the value of the discount rate. Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 73) The difference between the nominal rate of interest and the real rate of interest is A) handling charges. B) government regulatory charges. C) administrative overhead charges. D) the anticipated rate of inflation. Answer: D Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 74) Assuming a market rate of interest equal to 7 percent, what is the present value of $200 to be received one year from today? A) $123 B) $156 C) $187 D) $210 Answer: C Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

75) Assuming a market rate of interest equal to 7 percent and anticipated inflation is 2 percent, what is the real (adjusted for inflation) present value of $200 to be received one year from today? A) $190 B) $214 C) $187 D) $210 Answer: A Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 76) How much money would you have to put into a savings account today to be worth $500 three years from now at a market rate of interest equal to 8 percent? A) $397 B) $351 C) $420 D) $459 Answer: A Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 77) If the bank advertises 6 percent annual interest rate on a one-year certificate of deposit and you anticipate the rate of inflation to rise to 3 percent during the year, then the real rate of interest on the certificate of deposit is A) 9 percent. B) 6 percent. C) 3 percent. D) 2 percent. Answer: C Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

78) The rate of interest that you pay on a home loan depends upon all of the following EXCEPT A) the supply of houses in the real estate market. B) the length of the loan. C) your credit rating. D) handling charges or loan fees. Answer: A Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 79) What is the present value of $104.25 that you could receive one year from now, given that the rate of interest is 4.25 percent? A) $108.50 B) $0.00 C) $4.25 D) $100.00 Answer: D Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 80) What is the real (adjusted for inflation) present value of $104.25 that you could receive one year from now, given that the rate of interest is 4.25 percent and the anticipated rate of inflation is 1 percent? A) $99.05 B) $100.97 C) $107.64 D) $100.00 Answer: B Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

81) The higher the expected rate of inflation, A) the lower is the nominal rate of interest. B) the higher is the real rate of interest. C) the lower is the real rate of interest. D) the higher the real and nominal rates of interest. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 82) The greater the risk of nonrepayment of a loan, other things being equal, A) the longer is the repayment term. B) the lower is the charged loan fees. C) the higher is the rate of interest. D) the smaller is the amount of collateral that is used. Answer: C Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 83) Present value is A) unrelated to the rate of interest. B) lower the longer the time horizon. C) not expressed in today's dollars. D) opposite the time value of money. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 84) The real interest rate is the A) nominal interest rate plus the anticipated interest rate. B) nominal interest rate minus the anticipated interest rate. C) nominal interest rate plus the anticipated inflation rate. D) nominal interest rate minus the anticipated inflation rate. Answer: D Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 106 Copyright © 2021 Pearson Education, Inc.

85) If the interest rate is 10 percent per year, and you have $100,000 now, which of the following is closest to what your $100,000 will be worth in one year? A) $105,000 B) $110,000 C) $100,000 D) $102,000 Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 86) The ABC Corporation earned a real rate return of 4.5 percent on an investment. In the economy, the nominal rate of interest was 6 percent and the rate of inflation was 3 percent. We can conclude that A) the investment was unprofitable. B) the investment was profitable. C) the real rate of interest was 9 percent. D) the real rate of interest was 1.5 percent. Answer: B Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 87) Last year, the nominal interest rate was less than the anticipated rate of inflation. A) This means that not enough loans were made by banks. B) This means that the real interest rate was negative. C) This means that the real interest rate was very high. D) This scenario is not possible. Answer: B Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

88) If the interest rate is 10 percent per year, and you have $100,000 now, which of the following is closest to what your $100,000 will be worth in three years? A) $155,000 B) $115,000 C) $120,000 D) $133,000 Answer: D Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 89) If the interest rate is 10 percent per year, and you have $100,000 now, which of the following is closest to what your $100,000 will be worth in four years? A) $175,000 B) $125,000 C) $146,000 D) $190,000 Answer: C Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 90) Suppose someone offered to give you $1,000,000 five years in the future and the anticipated interest rate is 5 percent. The present value of this offer would be worth approximately A) $784,000. B) $500,000. C) $1,050,000. D) $286,000. Answer: A Diff: 3 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 91) What are the two meanings of interest in economics? Answer: Interest refers to the price paid by debtors to creditors for the use of funds and refers to the market return earned by capital as a factor of production. Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 108 Copyright © 2021 Pearson Education, Inc.

92) Do people make decisions on the basis of the nominal interest rate or the real interest rate? What is the relationship between the two interest rates? Answer: People make their decisions on the basis of the real interest rate since decisions are always made on the basis of relative and not absolute prices. The nominal interest rate equals the real interest rate plus the anticipated rate of inflation. Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 93) How is inflation related to interest rates? Answer: People base their decisions on borrowing, lending, and investing on the basis of the real interest rate. If there is anticipated inflation, the nominal rate of interest will equal the real rate of interest plus the anticipated inflation rate. So, interest rates vary directly with anticipated inflation. Unanticipated inflation leads to a real interest rate different from what people thought, and the decisions people made turn out to be mistaken. Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 94) What is the main purpose of an interest payment? What major factors affect interest rates? Answer: Interest is the price paid by debtors to creditors for the use of loanable funds or financial capital. It represents the cost of obtaining credit and it compensates the creditors for their loss of current command over resources. Interest rates are affected by such factors as the length of loan, risk of nonrepayment of the loan and handling changes. Diff: 1 Topic: 21.3 Interest Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

95) You have won the lottery. There are two payment options for you. The first option is a lump sum payment of $10 million that you will receive immediately. The second option is an annual payment of $1 million for each of the next 12 years. Assume there is no inflation. How would you make a decision between the two options? Answer: You need to compare the present values of the two payment options and select the option with the higher present value. The present value of the lump sum payment is $10 million, but the total present value of the scheduled payments depends on the interest rate that you would use to discount the future payments back to present value. Diff: 2 Topic: 21.3 Interest Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 21.4 Corporate Financing Methods 1) A shareholder in a corporation A) may not sell his or her share of ownership in the business without the business dissolving. B) can earn interest, but not dividends, from the profits of the business. C) is a part owner of the business. D) is personally liable for the debts of the corporation. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 2) The part of corporate profits that is paid to the shareholders of a corporation is A) retained earnings. B) shareholders. C) dividends. D) business revenue. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

3) Each of the following is a source of financial capital for a corporation EXCEPT A) issuing new stock. B) reinvestment of profit or retained earnings. C) issuing bonds or borrowing funds from a bank. D) dividends. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 4) Corporations are able to raise large amounts of financial capital because A) of the tax breaks corporations are given relative to partnerships or proprietorships. B) of the elimination of the problem of separation of ownership and control. C) of limited liability and the treatment of a corporation as an individual entity. D) of their greater ability to monitor the performance of decision makers. Answer: C Diff: 3 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 5) In which of the following ways can a corporation raise new funds for investment? I. Issuing new shares of stock II. Having existing stock resold between two owners A) I only B) II only C) Both I and II D) Neither I nor II Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

6) A difference between a share of stock in a corporation and a corporate bond is that A) the share of stock is a legal claim while the bond is not. B) the bond owner has voting rights within the corporation whereas the stockholder does not. C) the bond owner is entitled to receive a fixed annual coupon payment plus a lump-sum payment at the bond's maturity date, whereas the stockholder is entitled to a share of future profits. D) stocks are issued in return for funds that are lent to the corporation. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 7) The owners of preferred stock A) receive preferential treatment in the payment of dividends. B) have the same voting rights as owners of common stock. C) are the original owners of the corporation. D) have the same rights as bondholders. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 8) When a firm uses profits to purchase new capital equipment, it is engaging in A) tax evasion. B) balance sheet accounting. C) reinvestment. D) the most risky way the firm can obtain investment funds. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

9) A share of stock in a corporation is A) a guarantee to a fixed amount of income from the corporation. B) a legal claim to a lump-sum payment at a specified point of time in the future. C) a legal claim to a dividend, regardless of the corporation's ability to pay its interest payments. D) a legal claim to a share of the company's future profits. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 10) The person least likely to receive a payment from a corporation in a year of losses is the A) bank that loaned money to the corporation. B) bondholder. C) preferred stockholder. D) common stockholder. Answer: D Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 11) If profits are reinvested in the corporation, then A) payments made to bondholders will be less. B) there are fewer funds available to distribute to stockholders. C) the company will sell more bonds in order to pay dividends to stockholders. D) the high profits indicate that common stockholders will get larger dividends than normal. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 12) If you want a say in the management of a corporation, you should buy A) common stock. B) preferred stock. C) bonds. D) either bonds or preferred stock. Answer: A Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 113 Copyright © 2021 Pearson Education, Inc.

13) A legal claim against a firm that usually entitles the owner of the claim to receive a fixed annual coupon payment, plus a lump-sum payment at some future date, is known as A) a bond. B) a share of common stock. C) a share of preferred stock. D) a reinvestment coupon. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 14) An investor who owns preferred stock has A) regular voting rights. B) preferential treatment in the payment of dividends. C) the same rights as a bond holder. D) unlimited liability for the debts of the firm. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 15) Bond coupon payments represent A) dividends paid to owners. B) interest on the amount borrowed. C) capital gains for tax purposes. D) payments to preferred shareholders. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

16) Which of the following modern methods of financing a corporation was not available to corporations four hundred years ago? A) selling stock B) selling bonds C) reinvestment. D) All of these methods were used then as well as now. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 17) A legal claim to a part of a corporation's future profits is called A) a bond. B) a share of stock. C) a dividend. D) a financial debt. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 18) Which legal claim comes with voting rights? A) common stock B) preferred stock C) bond D) debt Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

19) Which legal claim has a fixed annual coupon payment? A) common stock B) preferred stock C) bond D) reinvestment Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 20) Which legal claim comes with the most preferential treatment in the payment of dividends? A) common stock B) preferred stock C) bond D) interest Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 21) Which of the following is NOT a principal method of financing today? A) common stock B) bond C) reinvestment D) the entrepreneur's wealth Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

22) A bond is A) a legal claim to a part of a corporation's future profits that includes voting rights. B) a legal claim to a part of a corporation's future profits that does not include voting rights. C) a legal claim against a firm, providing a fixed annual coupon payment and a lump-sum payment at maturity. D) a nonlegal promise to provide an annual payment to the holder when the corporation makes profits. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 23) The most important source of financial capital for firms today is A) sale of bonds. B) sale of new issues of stock. C) trade of previously issued stock. D) reinvestment of profits. Answer: D Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 24) The person most likely to receive a payment from a corporation in a year of losses is the A) bondholder. B) common stockholder. C) preferred stockholder. D) investment banker. Answer: A Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

25) The more profits are reinvested into the firm, the A) less there is available to distribute to bondholders. B) less there is available to distribute to stockholders. C) more the firm will be able to raise in sales of new issues to stock. D) more bonds the firm will sell in order to pay their required dividends to preferred stockholders. Answer: B Diff: 3 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 26) A person who is willing to bear more risk will buy A) common stock. B) preferred stock. C) bonds. D) government bonds. Answer: A Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 27) The three primary sources of corporate funds are A) banks, friends, and family. B) government, other corporations, and the central bank. C) investment banks, brokerages, and insurance companies. D) stocks, bonds, and reinvestment of profits. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

28) If you own 100 shares of preferred stock, how many regular votes would you get to cast at the next stockholders meeting? A) 500 B) 100 C) 1 D) 0 Answer: D Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 29) When the Dutch East India Company was founded in 1602, it raised financial capital by issuing notes of indebtedness called A) stocks. B) bonds. C) funds. D) notes. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 30) When Peter sells his Alphabet common stock at the same time that Brian purchases the same amount of Alphabet stock from another party, Alphabet receives A) the dollar value of the transaction. B) only the par value of the common stock. C) nothing. D) the dollar amount of the transaction, less brokerage fees. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

31) Stocks are A) promises to repay loans. B) a liability of a proprietorship. C) a liability of a corporation. D) shares of ownership in a corporation. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 32) Bonds are A) promises to repay loans. B) promissory notes issued by partnerships. C) promissory notes issued by proprietorships. D) shares of ownership in a corporation. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 33) When a person buys stock in a company, that person is buying ________, but when a person buys a bond in a company, that person is ________ the company. A) ownership; borrowing funds from B) ownership; lending funds to C) debt; lending funds to D) debt; borrowing funds from Answer: B Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

34) A legal claim to a percentage of a company's future profits and assets is known as a A) share of stock. B) bond. C) dividend. D) random walk. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 35) A long-term loan that is given to a firm is known as a A) share of stock. B) bond. C) dividend. D) random walk. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 36) When a corporation uses profits to pay for the purchase of new capital equipment, this is known as A) reinvestment. B) a coupon payment. C) dividend. D) collusion. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

37) If a corporation fails, the first recipients of funds that may remain are A) preferred stockholders. B) common stockholders. C) bond holders. D) no one. Answer: C Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 38) If a corporation fails, the last recipients of funds that may remain are A) preferred stockholders. B) common stockholders. C) bond holders. D) government tax collectors. Answer: B Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 39) Suppose you own $15,000 of personal property, $5,000 of stock in XYZ Corporation, a $1,000 certificate of deposit, and $10,000 of government bonds. If XYZ Corporation goes bankrupt, the most you could lose is A) $31,000. B) $26,000. C) $15,000. D) $5,000. Answer: D Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

40) A company raises funds by selling 5 million shares of common stock to 5,000 shareholders and $1 million bonds to 1,000 bondholders. The number of individuals who vote for the company's board of directors is A) 6,000. B) 5,000. C) 1,000. D) 5,000,000. Answer: B Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 41) A legal claim entitling the owner of the claim to fixed annual payments and a lump-sum payment is called a(n) A) equity share. B) bond. C) stock. D) debit. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 42) If you want to vote for the management of the corporation, you should buy A) common stock. B) preferred stock. C) bonds. D) either common stock or preferred stock. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

43) Suppose a firm wanted to go out of business. The firm sells all its assets and pays off everything it owes to creditors. The stockholders would receive A) nothing. B) their annual dividend payment. C) one half of the funds; the other half of the funds goes to bondholders. D) the rest of the funds, after everyone who has a claim against the firm is paid. Answer: D Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 44) According to the random walk theory, A) today's stock price will be related to yesterday's stock price. B) successive prices of a stock are independent of each other. C) stock prices can easily be predicted for as much as 52 weeks into the future. D) stock prices rise and fall in predictable cycles that correspond with the overall business cycle. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 45) The random walk theory says that A) stock prices follow a trend for varying periods of time. B) successive stock prices increase more than they decrease. C) successive stock prices are dependent on the weighted average of the previous week's prices. D) successive stock prices are independent of each other. Answer: D Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

46) Which of the following statements about "inside information" is FALSE? A) It is information that is not available to the general public. B) It is illegal to knowingly use inside information when trading stocks. C) Profits can be made using inside information. D) The government never imposes fines or other penalties for abuse of inside information. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 47) The idea that any public information you will be able to find will prove of little value to you when buying and selling stocks, because that information is so quickly incorporated into the trading prices of stocks, is known as the A) theory of efficient markets. B) theory of fundamental analysis. C) principle of context. D) over-the-counter hypothesis. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 48) The yield percentage of a stock is calculated as A) the corporation's net worth divided by the number of shareholders. B) the book value of the stock divided by the number of shareholders. C) the stock dividend divided by the price of the stock. D) the expected appreciation of the stock. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

49) The PE ratio for a stock is A) the predicted earnings per share of the stock divided by its current yield. B) the current yield of the stock. C) the price of the stock divided by its earnings per share. D) the predicted volatility of the stock. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 50) A stock that has a price of $20 per share, earnings per share of $2.00, and a dividend of $1.50 will have A) a PE ratio of 20/1.50. B) a yield of 7.5 percent. C) a yield of 12 percent. D) a PE ratio of 1.333. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Application of knowledge 51) The most prestigious stock market in the world is the A) New York Stock Exchange. B) Chicago Mercantile Exchange. C) London Stock Exchange. D) Tokyo Stock Exchange. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

52) Stock markets for securities are important because A) they are where corporations raise financial capital. B) they are where proprietorships and partnerships raise financial capital. C) they permit individuals to transfer their savings directly into investment spending. D) they make the stocks and bonds more valuable. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 53) Exchanges of stocks take place A) in New York City only. B) in the principle financial city of each country, such as New York City for the United States and London for England. C) in a decentralized fashion around the world. D) in centralized physical locations known as stock exchanges and online through Internet brokers. Answer: D Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 54) According to the random walk theory, A) the probability that a stock's price will increase tomorrow is greater if it increased today. B) the probability that a stock's price will increase tomorrow is greater if it decreased today. C) the best forecast of tomorrow's price is today's price. D) the best forecast of tomorrow's price is found by determining the trend for the last five trading days. Answer: C Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

55) The theory that there are no predictable trends in securities prices is the A) opportunity cost of capital. B) random walk theory. C) capital reinvestment. D) present value. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 56) Which of the following is a TRUE statement about stock markets? A) Economists can make above-average profits in the stock market because of their specialized knowledge of economics. B) It is always better to buy growth stocks than the older and more stable blue-chip stocks. C) The stock market on average over time is random and totally unrelated to the performance of the economy. D) It is illegal for a friend of a corporate executive to make large profits in the stock market by using his inside information. Answer: D Diff: 3 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 57) Information that is NOT available to the general public about what is happening in a corporation is A) opportunity benefit. B) limited liability. C) economic rent. D) inside information. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

58) Inside information A) applies to proprietorships only. B) applies to proprietorships and partnerships only. C) applies to corporations only. D) applies to all forms of business. Answer: C Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 59) "Stocks and bonds" are collectively known as A) securities. B) equities. C) real property. D) shares. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 60) The theory that there is no way to "get rich quick" in securities due to a lack of predictable trends is A) no-win theory. B) market trend analysis. C) random walk theory. D) trading. Answer: C Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

61) Which of the following statements about stock market brokers and dealers is TRUE? A) Brokers earn commissions from trading stocks but dealers try to profit from trading stocks. B) Brokers try to profit from trading stocks but dealers earn commissions from trading stocks. C) Both brokers and dealers earn commissions from trading stocks. D) Both brokers and dealers try to profit from trading stocks. Answer: A Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 62) Efficient markets theory suggests that purchasing the published reports of financial analysts A) is likely to increase one's returns by an average of 5 percent. B) is likely to increase one's returns by an average of about 3 to 5 percent. C) is not likely to increase financial returns. D) will increase financial returns in the first year but not in following years. Answer: C Diff: 3 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 63) The theory that there are no predictable trends in securities prices that can be used to "get rich quick" is the A) dartboard theory. B) random walk theory. C) Wall Street theory. D) inefficient market hypothesis. Answer: B Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

64) "Inside information" is the use of information A) by those who read the companies' annual reports. B) by those who write the companies' annual reports. C) by stockbrokers at the largest brokerage firms. D) that is not available to the public. Answer: D Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 65) According to efficient market theory, which of the following can best predict the stock price of a particular company tomorrow? A) a finance professor who knows a lot of investment theory B) a stock trader who has traded stocks for more than 10 years C) that company's employee who has inside information about the company D) none of these: Everyone has an equal chance of predicting future stock prices. Answer: C Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 66) The price of the stock divided by the profits per share of stock is known as the A) price-earnings ratio. B) dividend. C) yield in percent per year. D) number of shares traded during the day. Answer: A Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

67) The stock market showed a PE for Alibaba equal to 32. What does PE mean? A) price-earnings ratio B) profit-earnings ratio C) perfect-earnings ratio D) price-equity ratio Answer: A Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 68) Describe and explain the three principle methods of financing used by corporations. Answer: Corporations raise funds by selling stocks, selling bonds, and reinvesting profits. A share of stock is a form of ownership in the firm and entitles the owner to a share of future profits. A person who buys a bond from a firm is lending the firm money. Finally, if the firm earns profits, it can use some of them for investment rather than pay them all out to stockholders as dividends. Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 69) What would happen if a corporation goes out of business? Answer: The assets of the corporation would be sold and the bondholders would receive the funds due them. Any funds left over would be divided among the shareholders. Firms must pay their obligations to bondholders before stockholders get money. Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 70) Which method of corporate finance is used the most? Why? Answer: Reinvestment accounts for about 75 percent of new financial capital for corporations. Smaller corporations may find it difficult to find people willing to buy shares of stock, and the existing owners may not want other owners involved in electing directors. Smaller firms may also have a difficult time getting people to lend to them. So, they have to rely on reinvesting profits. Diff: 3 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

71) Suppose that you decide to purchase either stocks or bonds of a particular corporation and you also prefer to receive some returns from the securities every year. Which should you buy — stocks or bonds? Why? Answer: You should buy bonds because you would receive coupons payments each year from holding the bonds whether the corporation makes profits or not while there is no guarantee for any payment for holding stocks. Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 72) What is the random walk theory? Answer: The random walk theory is the theory that prices of stocks move independently in securities markets and, hence, that there are no predictable trends that can be used to make riskless profits. The theory assumes that information about companies and stocks quickly are processed by the market and reflected in changed prices. This process happens so fast that no one can generate riskless profits. Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 73) If the random walk theory is correct, then is there any way to "beat the market"? Answer: If the random walk theory is correct, then no one can use publicly available information to predict the magnitude or direction of a stock price change. However, if you have inside information that is not available to the public, then you can still "beat the market." Inside information is about what is happening in a corporation that is not available to the public. Diff: 2 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking 74) How can one "beat the market"? Answer: Most economists feel the only way one can beat the market is to have inside information, which is information about what is happening in a corporation that is not available to the general public. Diff: 1 Topic: 21.4 Corporate Financing Methods Learning Outcome: Micro-18: Describe the fundamentals of capital markets and factors influencing the investment decision AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 22 The Firm: Cost and Output Determination 22.1 Short Run Versus Long Run 1) Economists generally define the short run as being A) that period of time in which at least one of the firm's inputs, usually plant size, is fixed. B) that period of time in which all inputs are variable. C) any period of time less than one year. D) any period of time less than six months. Answer: A Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 2) Which of the following is TRUE about the long run? A) All resources are variable. B) All resources are fixed. C) At least one resource is fixed. D) none of these Answer: A Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 3) Which of the following is a short-run decision for a firm? A) downsizing the firm's manufacturing plant B) expanding the firm's distribution network of long-haul freight trucks and smaller delivery trucks C) firing workers D) investing in a new addition to the firm's manufacturing plant Answer: C Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

4) The focus of firm decisions in the short run is primarily on A) variable inputs. B) capital investment. C) plant size. D) economies of scale. Answer: A Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 5) Subway is a fast-food restaurant chain. Which of the following would be a long-run decision for Subway? A) open a new restaurant in a city B) hire one more worker in a restaurant location C) supply more subs in one restaurant D) replace the manager of a restaurant Answer: A Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 6) Which of the following would NOT be a short-run decision for the firm? A) Recall workers who were previously laid-off. B) Have labor work two hours overtime each day in order to expand output. C) Build another wing on the plant in order to add a new assembly line. D) Place an order with a supplier for additional raw materials. Answer: C Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

7) A basic distinction between the long run and the short run is that A) if a firm produces no output in the long run, it still incurs a cost. B) the opportunity costs of production are lower in the short run than in the long run. C) in the long run, some inputs are fixed, while in the short run, all inputs are variable. D) in the short run, complete adjustment of all inputs is impossible, while in the long run all inputs can be adjusted. Answer: D Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 8) During the short run, a firm cannot A) increase its use of labor. B) change its plant size. C) purchase more raw materials. D) change its variable costs. Answer: B Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 9) For a hotdog vendor, the hotdog stand represents his A) fixed input. B) variable input. C) diseconomies of scale. D) none of these Answer: A Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

10) For a hotdog vendor, the hotdog buns represents his A) fixed input. B) variable input. C) sunk cost. D) none of these Answer: B Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 11) The time period during which a firm's capital is fixed but its labor is variable is called A) the planning horizon. B) the short run. C) the long run. D) the very long run. Answer: B Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 12) The long run is defined as the time period in which A) the firm can vary only one input. B) the firm can make positive economic profits. C) all factors of production can be altered. D) the firm can alter its rate of production. Answer: C Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 13) A fixed resource is one that A) is physically tied to a specific location. B) costs more than the average daily revenue of the firm. C) cannot be varied in the short run. D) can be disposed of only if the firm goes out of business. Answer: C Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 4 Copyright © 2021 Pearson Education, Inc.

14) Which of the following would be a fixed input to an automobile firm? A) tires B) a plant in Michigan C) car batteries D) engineers Answer: B Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 15) Which of the following would be a fixed input for an amusement park? A) ticket booth workers B) unpopped popcorn C) concession workers D) a roller coaster Answer: D Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 16) Mr.Hershey's company produces chocolate bars. Which is NOT a variable input for this firm? A) sugar B) assembly line workers C) the big chocolate-stirring machines D) packaging materials Answer: C Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

17) In economics, how long is the long run? A) more than 20 years B) 24 months or longer C) 1 year or longer D) whatever time it takes a firm to vary all inputs Answer: D Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 18) The short run is A) a year or less. B) up to three years. C) the period of time in which the firm can vary its rate of output. D) the period of time in which the firm cannot change its use of at least one input. Answer: D Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 19) The time period during at least one input cannot be changed is the A) production time. B) calendar year. C) long run. D) short run. Answer: D Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 20) The time period during which all factors of production can be varied is the A) production time. B) calendar year. C) long run. D) short run. Answer: C Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

21) Corporation A is planning on expanding the size of its factory given the amount they want to produce. Corporation A is now operating in the A) production time. B) corporation time. C) long run. D) short run. Answer: C Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 22) If the firm can vary all factors of production, it is operating A) at a profit. B) at a zero economic profit. C) in the short run. D) in the long run. Answer: D Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 23) The difference between the short run and the long run is A) economic profits are negative in the short run and positive in the long run. B) economic and accounting profits are not equal in the short run but are equal in the long run. C) that in the short run at least one factor of production cannot be varied while in the long run all factors of production can be varied. D) the short run is a period less than a year while the long run is a period greater than a year. Answer: C Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

24) Which of the following statements is NOT true about the short run and the long run? A) The short run for a firm is today while the long run is next week. B) These terms apply to the planning decisions of firms. C) The firm is always operating in the short run. D) In the short run, the firm can change the amount of variable inputs. Answer: A Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 25) For a wheat farmer in the middle of harvesting system, a fixed input would be A) workers hired. B) combines rented. C) the land that had been planted. D) trucks rented to haul the wheat. Answer: C Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 26) The best way to think of the short run and the long run is as A) specific periods of time, although the time periods may differ across industries. B) planning terms that apply to managers. C) concepts that apply to all people who work for a firm. D) a concept that only accountants are concerned with. Answer: A Diff: 3 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 27) For a firm, we define the short run as a period of time during which A) at least one input cannot be changed. B) all inputs can be changed. C) only the plant size can be changed. D) all inputs cannot be changed. Answer: A Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 8 Copyright © 2021 Pearson Education, Inc.

28) The short run is A) a period of time during which at least one input cannot be changed. B) a period of time during which no inputs can be changed. C) a period of time during which all inputs can be changed. D) a period of time shorter than one year. Answer: A Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 29) In economics, the short run means a time period A) during which new firms are prohibited from entering the industry. B) during which firms are not allowed to change the amount of imported resources they use. C) that is between one and five years. D) during which the firm is unable to change its plant size. Answer: D Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 30) When El Torito Restaurant is deciding how many waiters to hire for a holiday weekend, it is making a ________ decision. A) plant-size B) long-run C) short-run D) fixed-input Answer: C Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

31) When El Torito Restaurant is deciding to open a new restaurant location in another town, it is making a ________ decision. A) labor B) long-run C) short-run D) fixed-input Answer: B Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 32) In the long run, a firm can change A) nothing. B) only one input, such as plant size. C) all inputs. D) None of these are correct. Answer: C Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 33) The amount of calendar time associated with the long run A) is less than five years. B) is greater than one year. C) is between one and five years. D) varies by industry. Answer: D Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

34) If Dell, a computer company, is determining whether to build a new plant in Texas or in New Mexico, it is making a(n) ________ decision. A) immediate-run B) long-run C) short-run D) variable-input Answer: B Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 35) The time frame in which all factors of production can vary is A) the short run. B) the intermediate run. C) the long run. D) indeterminate. Answer: C Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 36) If a firm can vary all of its factors of production, it is operating in A) the long run. B) the immediate run. C) equilibrium. D) the short run. Answer: A Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

37) Which of the following is a long-run adjustment? A) A restaurant hires a new chef. B) A company relocate to a new headquarter in another city. C) A bank hires a new CEO. D) A company hires ten new management trainees. Answer: B Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 38) If a farmer buys one-hundred more acres for her flower farm, she is making a(n) A) long-run decision. B) short-run decision. C) immediate-run decision. D) variable-input decision. Answer: A Diff: 1 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 39) What is the difference between the short run and the long run? What is the appropriate time dimension of the long run? Answer: The short run is the time period when at least one input cannot be changed and the long run is the time period when all inputs can be varied. There is no appropriate time dimension for the long run. It depends on the production processes used by firms. Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 40) "In the short run, a firm cannot change any of its inputs." Do you agree or disagree? Explain. Answer: Disagree. The short run is a period that is so short that the firm cannot change at least one of its inputs. In other words, it can still change other inputs, known as variable inputs. Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

41) "In economics, the short run commonly refers to a period within one year and the long run is a period longer than one year." Do you agree or disagree? Explain your answer. Answer: Disagree. The time period of the short run versus the long run depends on each individual industry. In economics, the short run is the period during which at least one input cannot be changed, while the long run is the period long enough so that all inputs can change. Diff: 2 Topic: 22.1 Short Run Versus Long Run Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 22.2 A Firm's Production 1) Production functions indicate the relationship between A) factor costs and output prices. B) factor inputs and the quantity of output. C) the value of inputs and average costs. D) factor inputs and factor prices. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 2) Suppose that one worker can produce 15 cookies, two workers can produce 40 cookies together, and three workers can produce 75 cookies together. What is the marginal product of the 2nd worker? A) 20 cookies B) 25 cookies C) 35 cookies D) 40 cookies Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

3) Suppose that one worker can produce 15 cookies, two workers can produce 35 cookies together, and three workers can produce 50 cookies together. What is the marginal product of the 3rd worker? A) 20 cookies B) 15 cookies C) 50 cookies D) 35 cookies Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 4) Suppose that one worker can produce 15 cookies, two workers can produce 35 cookies together, and three workers can produce 60 cookies together. What is the average product of the first two workers? A) 15 cookies B) 20 cookies C) 17.5 cookies D) 35 cookies Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 5) Suppose that one worker can produce 15 cookies, two workers can produce 35 cookies together, and three workers can produce 60 cookies together. What is the average product of the first three workers? A) 25 cookies B) 30 cookies C) 17.5 cookies D) 20 cookies Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

6) When a firm uses technological improvements to increase output from the same amount of inputs, the result is A) a new production function. B) losses. C) guaranteed profits. D) diseconomies of scale. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 7) The concept of the production function implies that a firm using resources inefficiently will A) obtain less output than the theoretical production function shows. B) obtain more output than the theoretical production function shows. C) obtain exactly the amount that the theoretical production function shows. D) not be subject to diminishing marginal product. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 8) Changes in production functions are associated with changes in A) the level of output. B) demand. C) the levels of costs. D) technology. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

9) Which of the following statements is FALSE? A) Included in the firm's short-run production function are both fixed and variable inputs. B) An efficient firm can obtain more output than the production function shows. C) The production function shows the technical relationship between a firm's inputs and outputs. D) The production function presents the technically efficient methods of combining inputs to produce output. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 10) Will's Franks originally sold hotdogs and soft drinks from a cart located in front of City Hall. Then Will purchased another hotdog cart and hired someone to sell hotdogs and soft drinks near the high school. Both locations have been successful. When Will's Franks expanded to two locations, which of the following did NOT occur? A) Will's production function changed. B) Production increased. C) The company increased the inputs it employs. D) The firm employed additional capital. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 11) Which of the following changes a firm's production function? A) hiring additional workers B) acquiring additional physical capital C) adding a second production facility exactly like its first production site D) adopting new technology Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

12) A negative value for the marginal physical product would indicate that A) the company has not yet reached the point of saturation. B) total output increased by a significant amount. C) total output decreased when the extra unit of the variable input was added. D) total output increased, but the increase was very small. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 13) If the marginal product curve is increasing from workers 1-89 and then decreases steadily, crossing the horizontal axis at 190 workers, we know that A) the total output curve increases from workers 1-89, decreases from workers 90-189, and becomes 0 at the 190th worker. B) the total output curve is increasing at an increasing rate from workers 1-89, then increases at a decreasing rate until the 190th worker, after which it decreases. C) the total output curve is increasing throughout, although at an increasing rate for the first 190 workers and at a decreasing rate after the 190th worker. D) diminishing marginal product sets in with the 190th worker. Answer: B Diff: 3 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 14) If marginal product is negative, then A) total product is rising. B) total product is falling. C) marginal cost is falling. D) average profit is rising. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

15) Marginal physical product of the first worker is 100, 120 for the second, 80 for the third, 30 for the fourth, 5 for the fifth, 3 for the sixth, 2 for the seventh, 1 for the eighth, and 0 for the ninth. What is total product for the fifth worker and the ninth worker respectively? A) 335; 341 B) 335; 0 C) 5; 0 D) 0; 5 Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 16) When total product is rising, A) fixed cost must be rising. B) marginal product must be positive. C) variable cost must be declining. D) marginal product must be negative. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 17) If in the short run total product is decreasing as more workers are hired, then the marginal physical product is A) increasing. B) zero. C) negative. D) positive. Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

18) The production function A) shows the maximum level of output for a given set of inputs. B) is an economic relationship between revenue and cost. C) shows the relationship between input prices and amount of input used. D) always shows increasing marginal product of labor. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

19) In the above table, average product is 30 tablets when A) 4 workers are employed. B) 3 workers are employed. C) 2 workers are employed. D) 1 worker is employed. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 20) In the above table, when the firm employs 4 workers, the marginal product will be A) 140 tablets. B) 30 tablets. C) 35 tablets. D) 208 tablets. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

21) In the above table, when the firm employs 3 workers, the marginal product will be A) 42 tablets. B) 30 tablets. C) 36.67 tablets. D) 208 tablets. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 22) In the above table, how many workers are employed when marginal product reaches its maximum? A) 1 B) 2 C) 3 D) 4 Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 23) In the above table, diminishing marginal product occurs when employing the A) first worker. B) second worker. C) third worker. D) fourth worker. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

24) In the above table, marginal product becomes negative when employing the A) second worker. B) third worker. C) fourth worker. D) fifth worker. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 25) In the above table, the marginal product of the second worker is A) 68. B) 98. C) 38. D) It cannot be determined. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 26) In the above table, the average product of the fifth worker is A) 35. B) 135. C) -5. D) 27. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 27) In the above table, which two workers have the same marginal product? A) 1 and 2 B) 2 and 4 C) 1 and 3 D) 1 and 4 Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 21 Copyright © 2021 Pearson Education, Inc.

28) The marginal product of labor is calculated assuming other factor inputs A) increase more than proportionately. B) increase less than proportionately. C) remain constant. D) decrease. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 29) In the short run, the additional output that results from hiring an additional unit of a variable input is the A) marginal product. B) average product. C) average variable cost. D) marginal cost. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 30) Average product is calculated by dividing total product by the A) amount of variable and fixed inputs employed. B) quantity of the variable input. C) quantity of the fixed input. D) production function. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

A firm has the following production relationship between labor and output, for a fixed capital stock.

31) According to the above table, at what usage of labor does diminishing marginal product begin? A) 1 B) 2 C) 4 D) 5 Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 32) According to the above table, what is the marginal product of the 4th unit of labor? A) 3 B) 5 C) 6 D) 7 Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 33) According to the above table, what is the average product of labor when three laborers are employed? A) 3 B) 4 C) 5 D) 6 Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 23 Copyright © 2021 Pearson Education, Inc.

34) According to the above table, what is the marginal product of the 5th unit of labor? A) 3 B) 4 C) 5.2 D) 5 Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 35) According to the above table, what is the average product of labor when five laborers are employed? A) 3 B) 5.2 C) 5.75 D) 6 Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 36) Production A) is a process by which resources are produced. B) is a process by which resources are transferred into goods and services. C) only applies to manufacturing of goods. D) is carried on by corporations, but not by sole proprietorships. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

37) Any activity that results in the conversion of resources into products that can be used in consumption is A) planning. B) investment. C) production. D) discounting. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 38) The relationship Q = f(K, L) is an example of a A) cost function. B) production function. C) demand equation. D) profit equation. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 39) Which of the following activities is NOT included in the production process? A) determining the value of the goods B) making the goods C) packaging the goods D) transporting the goods Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

40) The production function A) gives the maximum amount of output for a given level of inputs. B) gives the implicit costs for all inputs. C) gives the amount of time necessary to reach the long run. D) allows us to compute the difference between accounting and economic profits. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 41) Which of the following statements is NOT true about the production function? A) It gives the maximum output that can be obtained for a given level of inputs. B) A new production function does not have to be developed when there is technical progress since technology is included in the function. C) The production function depends upon the level of technology available to the firm. D) It specifies the cost of inputs necessary to produce a certain level of outputs. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 42) The relationship between inputs and outputs is known as A) business. B) manufacturing. C) a production function. D) marginal product. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

43) A production function is a(n) A) cost relationship. B) economic relationship. C) accounting relationship. D) technological relationship. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 44) The production function does NOT provide information about A) the technology used in the production process. B) the types of inputs used in the production process. C) the relationship between changes in quantity of inputs and changes in the quantity of output. D) the profits of producing a good. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 45) Another term for the total quantity of output is A) average product. B) marginal product. C) total product. D) average variable product. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 46) Total product divided by the variable input is A) average total cost. B) marginal cost. C) average product. D) marginal product. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

47) Marginal product and average product are measured in A) dollars. B) profit terms. C) units of production. D) the same units as marginal cost and average total cost. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

48) Refer to the above table. When the quantity of labor equals 2, what does the average product equal? A) 46 B) 23 C) 26 D) 92 Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 49) Refer to the above table. When the quantity of labor equals 3, what does the average product equal? A) 21 B) 17 C) 63 D) 189 Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

50) Refer to the above table. When the quantity of labor equals 4, what does the average product equal? A) 9 B) 18 C) 72 D) 216 Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 51) Refer to the above table. What does the marginal product equal when the quantity of labor goes from 1 to 2? A) 46 B) 23 C) 26 D) 92 Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 52) Refer to the above table. What does the marginal product equal when the quantity of labor goes from 2 to 3? A) 21 B) 17 C) 63 D) 189 Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

53) Refer to the above table. What does the marginal product equal when the quantity of labor goes from 3 to 4? A) 9 B) 18 C) 72 D) 216 Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

54) Refer to the above figure. The curve represents a(n) A) marginal product curve. B) total product curve. C) total cost curve. D) average total cost curve. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

55) As the amount of a variable input increases, while all other inputs are held constant, total product will A) always increase. B) always decrease. C) initially decrease and then increase. D) initially increase and then decrease. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 56) If the average product of 20 workers is 100 bushels of wheat and the average product of 21 workers of wheat is 99 bushels of wheat, then the marginal product of the 21st worker was A) -1 bushel of wheat. B) 5 bushels of wheat. C) 79 bushels of wheat. D) 99 bushels of wheat. Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 57) Marginal product is A) the change in total output from using an additional unit of one variable input, holding other inputs constant. B) the change in total output from using an additional unit of all variable inputs. C) the total output divided by the number of units of the variable input. D) the change in total output divided by the number of units of the variable input, holding constant all other inputs. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

58) The change in total product occurring when a variable input is increased and all other inputs are held constant is A) average total cost. B) marginal cost. C) average product. D) marginal product. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 59) The physical output that is due to the addition of one more unit of a variable factor of production is A) average total cost. B) marginal cost. C) average product. D) marginal product. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 60) As the quantity of labor increases while the amount of other inputs are held constant, marginal product of labor will A) increase continuously. B) decrease continuously. C) initially decrease and then increase. D) initially increase and then decrease. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

61) Apple Computer developed Apple's new iTunes Music Store, which offers more than 200,000 songs from five major record labels, for use with Apple's iPod and iMac. More than a million songs were downloaded the first week alone! In economic terms, CEO Tim Cook helped convert capital and labor inputs into products consumers use. Any activity that results in the conversion of resources into products that can be used in consumption is A) not profitable. B) a start-up venture. C) demand. D) production. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

62) Using the above table, the total product and average product when 3 workers are employed are A) 36 and 12, respectively. B) 39 and 13, respectively. C) 37 and 27, respectively. D) 40 and 10, respectively. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

63) Using the above table, the total product and average product when 5 workers are employed are A) 61 and 21, respectively. B) 62 and 13, respectively. C) 62 and 15, respectively. D) 61 and 12.2, respectively. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 64) Using the above table, the average product and marginal product when 4 workers are employed are A) 13 and 13, respectively. B) 13 and 14, respectively. C) 13 and 9, respectively. D) 14 and 13, respectively. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 65) Using the above table, the marginal product of the 2nd worker is A) 12. B) 14. C) 15. D) 13. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

66) Using the above table, the marginal product of the 4th worker is A) 12. B) 13. C) 14. D) 15. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge Use the information from the below table to answer following question(s).

67) In the above table, the average product for 5 units of labor is A) 20.0. B) 22.5. C) 25.0. D) 15.0. Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 68) In the above table, the average product for 3 units of labor is A) 30.0. B) 26.7. C) 26.3. D) 25.0. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 35 Copyright © 2021 Pearson Education, Inc.

69) In the above table, the marginal product of the fourth worker is A) 30. B) 25. C) 20. D) 15. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 70) In the above table, the marginal product of the sixth worker is A) 10. B) 25. C) 20. D) 15. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 71) When total product is increasing at an increasing rate, marginal product is A) positive and increasing. B) positive and decreasing. C) constant. D) negative. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 72) When total product is increasing at a decreasing rate, marginal product is A) positive and increasing. B) positive and decreasing. C) constant. D) negative. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

73) If four workers were hired and we discovered that we could produce 88 units of production, what is the average physical product of labor? A) 44 B) 352 C) 11 D) 22 Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 74) At Phil's Pretzel Stand, we found the following: 4 laborers produced 66 pretzels 5 laborers produced 76 pretzels 6 laborers produced 85 pretzels 7 laborers produced 88 pretzels What was the marginal product of the sixth laborer? A) 10 pretzels B) 9 pretzels C) 6 pretzels D) 3 pretzels Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

75) At Phil's Pretzel Stand, we found the following: 4 laborers produced 66 pretzels 5 laborers produced 76 pretzels 6 laborers produced 85 pretzels 7 laborers produced 88 pretzels What was the marginal physical product of the seventh laborer? A) 10 pretzels B) 9 pretzels C) 3 pretzels D) none of these due to insufficient information Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 76) The change in output caused by a one-unit change in labor is referred to as the A) compounded physical product of labor. B) average product of labor. C) marginal product of labor. D) total product of labor. Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 77) Which of the following statement is correct? A) When Marginal Product is greater than Average Product, Average Product is increasing. B) When Marginal Product is greater than Average Product, Average Product is decreasing. C) When Marginal Product is greater than Average Product, Average Product is equal to Total Product. D) When Marginal Product is greater than Average Product, Total Product is increasing at a decreasing rate. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

78) The average product of labor is equal to A) total product divided by quantity of labor. B) change in total product divided by quantity of labor. C) total product divided by change in quantity of labor. D) change in total product divided by change in quantity of labor. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

79) In the above table, the average product of the 3rd worker is A) 5. B) 4. C) 3. D) 12. Answer: B Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 80) In the above table, the marginal product of the 3rd worker is A) 5. B) 4. C) 3. D) 12. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

81) In the above table, the average product of the 6th worker is A) 5. B) 4. C) 3. D) 0. Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 82) In the above table, the marginal physical product of the 6th worker is A) 5. B) 4. C) 3. D) 0. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 83) In the above table, the average physical product of 2 workers and the marginal product of the 2nd worker is A) 2; 2. B) 4; 1. C) 3.5; 3.5. D) 3.5; 4. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

84) In the above table, the average product for 5 workers and the marginal product of the 5th worker is A) 3.6; 2. B) 0.72; 1. C) 2; 0.6. D) 16; 2. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 85) The production function illustrates the amount of total product that can be produced with a given set of A) inputs. B) outputs. C) marginal product. D) marginal input. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

86) Refer to the above table. What does total product equal when 2 units of labor are used? A) 320 B) 335 C) 350 D) 670 Answer: D Diff: 3 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

87) Refer to the above table. What does total product equal when 3 units of labor are used? A) 336 B) 1008 C) 338 D) 3 Answer: B Diff: 3 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 88) Refer to the above table. What does total product equal when 4 units of labor are used? A) 1328 B) 332 C) 320 D) 960 Answer: A Diff: 3 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

89) Refer to the above figure. The curve reflects A) the law of diminishing marginal product in labor. B) the law of increasing marginal product in labor. C) the law of diminishing marginal product in capital. D) the law of increasing marginal product in capital. Answer: A Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 90) Phil found that as he continued to crowd laborers into his hot dog stand, the extra output he was receiving from each additional laborer was beginning to fall off. This is an example of the A) law of increasing opportunities. B) law of demand. C) law of diminishing marginal utility. D) law of diminishing product. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

91) The marginal productivity of labor will eventually decrease as more workers are employed because A) average product is increasing. B) total product is decreasing. C) the amount of capital will also be increasing. D) on the average each worker will have fewer inputs to work with. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 92) If we add successive laborers to work a given amount of land on a wheat farm, eventually A) average total cost will fall to zero. B) the increases in wheat harvested will rise at a constant rate. C) the increases in wheat harvested will get smaller and smaller. D) the increases in wheat harvested will get larger and larger. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 93) After some point successive equal increases in a variable factor of production, when added to a fixed amount of inputs, will result in smaller increases in output. This is known as A) the long run. B) the law of diminishing marginal product. C) marginal physical product. D) short run average cost. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

94) The marginal product of labor may increase rapidly initially A) as more workers are able to specialize. B) as total product is decreasing. C) as the amount of other inputs is held constant. D) as more workers will get crowded in a fixed factory. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 95) As successive equal increases in a variable factor of production are added to fixed factors of production, there will be a point beyond which the extra product that can be attributed to each additional unit of the variable factor of production will decline. This is known as the law of A) diminishing total product. B) diminishing average product. C) diminishing marginal product. D) decreasing product. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 96) The law of diminishing marginal product indicates that A) average product will eventually decrease. B) marginal product will eventually decrease. C) total product will eventually decrease. D) resources are inefficient. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

97) The observation that beyond some point, successive increases in a variable factor of production added to a fixed factor of production lead to smaller and smaller increases in output is A) the law of marginal utility. B) the law of averages. C) the law of diminishing marginal product. D) the law of opportunity costs. Answer: C Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 98) The law of diminishing marginal product states that A) output will continue to increase indefinitely if more variable factors of production are added to an existing stock of fixed factors. B) successive equal-sized increases in labor, when added to fixed factors of production, will result in smaller increases of output. C) a doubling all inputs will double output. D) variable costs tend to decrease with output. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 99) The law of diminishing marginal product is a statement A) that concerns changes in variable input and changes in output. B) that concerns the long run. C) that concerns changes in profits. D) that relates to plant size. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

100) The point of saturation occurs when a firm A) has total returns equal to zero. B) first encounters negative marginal product. C) first experiences positive marginal product. D) maximizes its total returns. Answer: B Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 101) What happens at a firm's point of saturation? A) For the first time, hiring an additional worker decreases total product. B) Workers cannot take on any additional tasks without working overtime hours. C) The market for a firm's output has been saturated and sales fall to zero. D) The firm's total costs exceed its revenues. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

102) Refer to the above table. At what quantity of labor does the law of diminishing marginal product set in? A) at 1 unit B) at 2 units C) at 3 units D) at 6 units Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

103) Refer to the above table. At what quantity of labor is the average product of labor maximized? A) 1 unit B) 2 units C) 3 units D) 6 units Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 104) Refer to the above table. At what quantity of labor does it become obvious that the law of diminishing marginal product has set in? A) worker number 3 B) worker number 4 C) worker number 21 D) worker number 5 Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 105) As long as marginal product of labor exceeds the average product of labor, then average product of labor A) must fall. B) must rise. C) will stay unchanged. D) will be at its maximum value. Answer: B Diff: 3 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

106) If marginal product is zero, we know that A) total product is also zero. B) average product is also zero. C) total output is maximized. D) average product is constant. Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 107) Total product will start to decrease A) at the quantity where the law of diminishing returns starts. B) when average physical product decreases. C) when marginal physical product increases. D) when marginal physical product becomes negative. Answer: D Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 108) Suppose the total output curve increases at an increasing rate for workers 1-50, increases at a decreasing rate from workers 51-101, and decreases beyond 101 workers. We would know that A) marginal product is increasing from workers 1-50 and then becomes negative after worker 51. B) marginal product is increasing from workers 1-50, decreasing after 51 workers, and becomes negative after the 101st worker. C) marginal product is decreasing from workers 1-101, becoming negative at the 102nd worker. D) marginal product is increasing from workers 1-50, constant from workers 51 to 101, and is decreasing after that. Answer: B Diff: 3 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

109) In the above table, the law of diminishing marginal product sets in with the hiring of the ________ worker. A) first B) sixth C) third D) fourth Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 110) The observation that after some point, successive equal size increases in a variable factor of production, such as labor, added to fixed factors of production, will result in smaller increases in output is the A) law of diminishing marginal product. B) streamlining production function. C) consumer equilibrium. D) theory of increasing marginal utility. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 111) When total product is decreasing, marginal product is A) positive and increasing. B) positive and decreasing. C) constant. D) negative. Answer: D Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 50 Copyright © 2021 Pearson Education, Inc.

112) The law of diminishing marginal product shows the relationship A) between accounting and economic profits. B) between short-run and long-run outputs of a firm. C) between inputs and outputs for a firm in the short run. D) between inputs and outputs for a firm in the long run. Answer: C Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 113) Suppose the manager of a restaurant notices that when she has too many waiters on the floor for a shift that the waiters get in each other's way and fewer dinners are served. This is an example of A) diminishing marginal product. B) diminishing marginal utility. C) diminishing marginal workforce. D) diminishing marginal inputs. Answer: A Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 114) Describe the concept of the production function. What happens to the production function when a firm becomes less efficient, so that it now requires more labor to produce the same amount of output as before? Answer: The production function is the maximum possible output that can be produced with a given amount of inputs. If a firm now requires more labor to produce the same amount of output as before, then its production function either rotates downward or its curvature changes. Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

115) Explain how you can calculate average physical product and marginal physical product from information on total physical product and variable input. Answer: Given the information on total physical product and variable input, average physical product can be calculated by dividing total product by the variable input. Marginal physical product is the change in total physical output given a one-unit increase in the variable input, holding all other inputs constant. Hence, it can be computed by dividing a change in total physical output by the corresponding one-unit increase in the variable output. Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 116) What is a production function? Answer: Production is a process that transforms resources into goods or services. A production function is a relationship between inputs and output. It is a technological relationship and not an economic relationship. Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 117) Graphically, what happens to the production function if a firm uses automation to raise the amount of output per worker? Explain. Answer: The production function is the relationship between inputs and maximum physical output. If automation raises the productivity of workers, then the production function will rotate upward so that higher output corresponds to a given level of labor input. Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 118) What is the law of diminishing marginal product? Answer: The law of diminishing marginal product states that, after some point, successive equal increases in a variable input added to fixed inputs will generate smaller and smaller increases in output. That is, after some point, the marginal physical product from adding a variable input to one or more fixed inputs will decrease. Diff: 1 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

119) Graphically, what does the marginal product curve for a labor input look like? Explain in words. Answer: Typically, the marginal product of labor increases at low levels of labor inputs due to specialization and other factors. As labor inputs continue to increase, some workers may have fewer machines to work with and thus their marginal product decreases. In other words, the marginal product curve increases first and then decreases with successively increases in labor inputs. Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 120) What is the law of diminishing marginal product? Is it a realistic concept for describing the real world? Explain. Answer: The law of diminishing marginal product is the observation that after some point, successive equal-sized increases in a variable input added to fixed inputs will result in smaller increases in output. This is a realistic concept because without diminishing marginal product, firms will continue to, say, hire additional workers without adding more machines or office space. This is not what we commonly see in the world. Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 121) "Diminishing marginal product is a basic law because new workers are always less qualified than the existing workers." Do you agree or disagree? Explain. Answer: Disagree. Diminishing marginal product occurs not because workers are less qualified but because, given fixed some factors of production, each worker will have, on average, fewer of the fixed factors of production to utilize. Output per worker can be raised by increasing those fixed factors of production. Diff: 2 Topic: 22.2 A Firm's Production Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

22.3 Short-Run Costs to the Firm 1) The firm's short-run costs contain A) only variable costs. B) only fixed costs. C) both variable and fixed costs. D) only opportunity costs. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 2) Which of the following is correct? A) TC = TFC + TVC B) TC = TFC - TVC C) TC = TFC * TVC D) TC = TFC / TVC Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 3) Suppose that a firm is currently producing 500 units of output. At this level of output, AVC is $1 per unit, and TFC is $500. What is the firm's TC? A) $1,500 B) $1,000 C) $500 D) $501 Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

4) Suppose that a firm is currently producing 500 units of output. At this level of output, TVC = $10,000 and TFC = $25,000. What is the firms ATC? A) $20 B) $50 C) $70 D) $100 Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 5) Suppose that when the level of output for the firm increases from 50 to 60 units, its variable costs increase from $500 to $700. What is the firm's marginal cost? A) $5 B) $10 C) $20 D) $115 Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 6) Which one of the following statements is FALSE? A) TC = TFC + TVC B) ATC = AFC + AVC C) AFC = TFC divided by Q D) MC = TC divided by Q Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

7) Assume it takes 5 units of labor to produce 10 units of output. When the price of labor is $5 per unit and fixed costs equal $100, what is the total cost of those 10 units of output? A) $150 B) $600 C) $125 D) $500 Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 8) Short-run total cost is defined as A) the sum of marginal cost and total variable cost. B) price of labor per unit multiplied by the number of labor units. C) total fixed cost plus total variable cost. D) total capital cost only. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 9) In economics, a fixed cost is a cost that A) is present only in the short run. B) goes up as the level of output goes up. C) goes down as the level of output goes up. D) does not vary with the level of output. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

10) Which of the following would NOT be considered a fixed cost of production? A) wages paid to labor B) the opportunity cost of capital C) interest payments on a loan D) insurance payments on plant and equipment Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 11) All of the following are most likely to be fixed costs EXCEPT the cost relating to A) insurance. B) taxes. C) rent. D) packaging. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 12) With a given plant size, an increase in output will NOT result in an increase in A) total cost. B) average fixed cost. C) total fixed cost. D) average variable cost. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

13) When output is 100 units, the firm's total fixed cost is $100. What will this firm's total fixed cost be if output doubles to 200 units? A) $1,000 B) $100 C) $200 D) Can't tell from the information provided. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 14) Which of the following statements about a firm's short-run variable costs is correct? A) They increase as the level of output decreases. B) They typically include the cost of workers' wages. C) They include the costs of plant and equipment. D) They are always a greater expense than are fixed costs. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 15) As a firm increases the level of output that it produces, short-run average fixed cost A) rises and then falls. B) remains constant since fixed costs are constant. C) decreases. D) decreases up to a particular level of output and then increases. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

16) Average fixed costs will A) rise as output rises. B) fall then rise as output rises. C) rise then fall as output rises. D) fall as output rises. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 17) When a company produces 5,000 units, total costs equal $150,000 and total variable costs equal $75,000. At this level of output, what is that company average fixed cost? A) $75,000 B) $30 C) $225,000 D) $15 Answer: D Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 18) In the short run, average total cost is A) higher than average variable cost. B) equal to average variable cost. C) less than average variable cost. D) sometimes higher and sometimes lower than average variable cost. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

19) Refer to the above table. At an output of 4 units, average variable costs are A) $16. B) $22. C) $38.50. D) $44. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 20) Refer to the above table. At an output of 3 units, average variable costs are A) $42. B) $30. C) $44. D) $14. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 21) Refer to the above table. At an output of 2 units, average total costs are A) $61. B) $122. C) $16. D) $45. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

22) Refer to the above table. At an output of 5 units, average total costs are A) $18. B) $19. C) $37. D) $185. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 23) Refer to the above table. When output rises from 2 units to 3 units, marginal costs are A) $7. B) $10. C) $22. D) $41. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 24) Refer to the above table. When output rises from 3 units to 4 units, marginal costs are A) $16. B) $10. C) $22. D) $31. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 25) Refer to the above table. When output rises from 4 units to 5 units, marginal costs are A) $19. B) $10. C) $22. D) $31. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 61 Copyright © 2021 Pearson Education, Inc.

26) Refer to the above table. When output rises from 2 units to 5 units, marginal costs are A) $26.50. B) $31. C) $21. D) $63. Answer: C Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 27) Refer to the above table. What is AVC at an output of 2 units? A) $7 B) $16 C) $45 D) $61 Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 28) Refer to the above table. What is MC when output rises from 0 unit to 1 unit? A) $0 B) $25 C) $90 D) $115 Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

29) Refer to the above table. MC is the lowest A) between 0 and 1 units of output. B) between 1 and 2 units of output. C) between 3 and 4 units of output. D) at 0 units of output. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

30) In the above figure, if this firm produces output level Q2, it has average variable costs of A) OF. B) OE. C) OC. D) OD. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

31) In the above figure, if this firm produces output level Q2, it has average total costs of A) OF. B) OE. C) OC. D) OD. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 32) In the above figure, at an output level of Q1, total variable cost is A) OF times Q1. B) OD times Q2. C) OF. D) OF minus DF. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 33) Which of the following statements is correct? A) TC = TFC + TVC B) TC = average product + marginal product C) TC = TFC - TVC D) TC = average physical product - marginal physical product Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 34) Costs that do NOT vary with output are A) total costs. B) variable costs. C) fixed costs. D) marginal costs. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

35) Fixed costs are A) costs that never change. B) costs that a firm incurs even when output is zero. C) not actually costs since they do not affect the decisions of a firm. D) costs that increase at a constant rate when output increases. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 36) Fixed costs include all but A) a normal rate of return on investment. B) temporary labor. C) property tax on the existing buildings. D) machines that have been producing output. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 37) The total cost of the firm A) includes explicit costs but excludes implicit costs. B) includes implicit costs but excludes explicit costs. C) includes implicit and explicit costs. D) includes implicit and explicit costs but excludes a normal rate of return on investment. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

38) Average variable costs equal A) total variable costs divided by marginal costs. B) total variable costs divided by output. C) the change in marginal costs from producing another unit of output. D) output divided by the change in total costs. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 39) Average total cost equals A) TC/Q. B) TVC/Q. C) TFC/Q. D) change in total cost/change in output. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 40) Average variable cost equals A) TC/Q. B) TVC/Q. C) TFC/Q. D) change in total cost/change in output. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 41) Marginal cost equals A) TC/Q. B) TVC/Q. C) TFC/Q. D) change in total cost/change in output. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

42) Marginal cost is equal to A) change in total cost divided by change in output. B) change in total variable cost divided by change in output. C) total variable cost divided by quantity of output. D) Both A and B are correct. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 43) The change in total variable cost which accompanies one extra unit of output is A) the average total cost. B) the average variable cost. C) the average fixed cost. D) marginal cost. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 44) The change in total costs due to a one-unit change in the production rate is A) total fixed cost. B) total variable cost. C) marginal cost. D) average total cost. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

45) Refer to the above table. What are total fixed costs at an output of 2 units? A) $50 B) $100 C) $150 D) $200 Answer: C Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 46) Refer to the above table. What are total variable costs at an output of 2 units? A) $50 B) $100 C) $150 D) $200 Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 47) Refer to the above table. What are total costs at an output of 2 units? A) $50 B) $100 C) $150 D) $200 Answer: D Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

48) Refer to the above table. What are total fixed costs at an output of 3 units? A) $90 B) $120 C) $150 D) $270 Answer: C Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 49) Refer to the above table. What are total variable costs at an output of 3 units? A) $90 B) $120 C) $150 D) $270 Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 50) Refer to the above table. What are total costs at an output of 3 units? A) $90 B) $120 C) $150 D) $270 Answer: D Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

51) If total costs are $50,000 when 1000 units are produced, and total costs are $50,100 when 1001 units are produced, we can conclude that A) average variable costs are $100. B) average total costs are $100. C) average fixed costs are $100. D) marginal costs are $100. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 52) If average variable costs are increasing while average total costs are decreasing, then A) marginal cost must lie between average variable and average total costs. B) marginal cost must equal average variable cost. C) marginal cost must equal average total cost. D) fixed costs must be zero. Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 53) In a graph showing the short-run cost curves, the one curve which declines continuously as we expand output is called A) the average fixed cost curve. B) the average variable cost curve. C) the average total cost curve. D) the marginal cost curve. Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

54) In a map showing short-run cost functions, one curve begins at the origin and rises as output expands. It is called the A) the marginal cost curve. B) the total fixed cost curve. C) the total cost curve. D) the total variable cost curve. Answer: D Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 55) If, in the short run, the level of output is zero, which of the following statement is TRUE? A) Total variable cost is zero but total cost equals total fixed cost, and both of the latter exceed zero. B) Total cost and total fixed cost graphs will begin at the origin. C) Total fixed cost will also be zero at first but will rise once output rises. D) none of these Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

56) Refer to the above figure. Average total costs are represented by curve A) 1. B) 2. C) 3. D) 4. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 57) Refer to the above figure. Marginal costs are represented by curve A) 1. B) 2. C) 3. D) 4. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

58) Refer to the above figure. Average variable costs are represented by curve A) 1. B) 2. C) 3. D) 4. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 59) Refer to the above figure. Curve (4) is the A) total fixed cost curve. B) marginal product curve. C) average fixed cost curve. D) average variable cost curve. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 60) Suppose there are fixed costs and marginal costs that are constant. Then we know that A) average total costs are also constant. B) average variable costs decrease continuously as output increases, and lie above the marginal cost curve. C) average total costs decrease continuously as output increases, and lie above the average variable cost curve, which also is decreasing continuously. D) average total costs decrease continuously as output increases, and lie above the average variable cost curve, which is constant. Answer: D Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

61) The marginal cost curve intersects A) the average fixed cost curve at its minimum. B) the average total cost curve at its maximum. C) the minimum of the average fixed cost, average variable cost and the average total cost curves. D) the minimum of the average variable cost and average total cost curves. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 62) Which of the following would be an example of a fixed cost to a firm? A) rent for the building it occupies B) wages for the laborers C) the cost of raw materials D) electricity and other fuel costs Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 63) Which equation is used by a manager when considering total cost? A) total costs (TC) = consumption (C) + investment (I) + government (G) B) total costs (TC) = average fixed costs (AFC) + number of workers C) total costs (TC) = average total costs (ATC) D) total costs (TC) = total fixed costs (TFC) + total variable costs (TVC) Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

64) Use the above figure. The TFC at output level 10 is A) $10. B) $3. C) $2. D) $1. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 65) Use the above figure. The AFC at output level 20 is A) $10.00. B) $0.50. C) $3.00. D) $1.00. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 66) Use the above figure. The ATC at output 10 is A) $30.00. B) $2.67. C) $2.00. D) $3.00. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

67) Use the above figure. The AVC at output 10 is A) $20.00. B) $1.00. C) $2.00. D) $3.00. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 68) Use the above figure. The ATC at output 5 is A) $25.00. B) $2.00. C) $3.00. D) $5.00. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 69) Use the above figure. The AVC at output 5 is A) $35.00. B) $2.00. C) $3.00. D) $5.00. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

70) Notice the costs of production for a firm in the table below. What are the total costs for outputs of 7 units and 8 units respectively?

A) $20.12; $19.33 B) $17.25; $18.32 C) $19.33; $20.12 D) $9.33; $10.12 Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 71) Notice the costs as given in the table below. What is the marginal cost when total cost is $23?

A) $5 B) $3 C) $2 D) $1 Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

72) Notice the costs as given in the table below. What is the total fixed cost in the table below?

A) $5 B) $0 C) $10 D) $9 Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 73) Marginal costs are defined as A) the change in total costs due to a one-unit change in production. B) costs that are viewed as marginal; of little or small importance. C) costs that represent a change, but one that cannot be measured correctly. D) the change in the decisions that are made by households and firms. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 74) In the short run, total costs equal A) the sum of total fixed costs and total variable costs. B) the sum of total fixed costs and total explicit costs. C) the sum of total variable costs and total implicit costs. D) the sum of total fixed costs and total implicit costs. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

75) Summing all of the costs that do NOT change as output varies yields A) variable costs. B) fixed costs. C) implicit costs. D) explicit costs. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 76) As long as output increases A) average total costs decrease. B) average variable costs decrease. C) average fixed costs decrease. D) marginal costs decrease. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 77) Which of the following is correct? A) AFC = TC/Q - TVC/Q B) AVC = TVC - AFC C) TC = AVC∗Q D) MC = TC - TVC Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

78) Using the above table, we see that when output is 4 units, average total cost equals A) $24.00. B) $14.00. C) $3.50. D) $6.00. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 79) Using the above table, we see that when output is 4 units, average variable cost equals A) $24.00. B) $14.00. C) $3.50. D) $6.00. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 80) In the above table, total fixed costs are A) $10.00. B) $5.00. C) $8.00. D) $18.00. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 80 Copyright © 2021 Pearson Education, Inc.

81) In the above table, when output is 8 units, average variable costs are A) $4.75. B) $3.50. C) $1.25. D) $4.50. Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 82) In the above table, when output is 8 units, average total costs are A) $4.75. B) $3.50. C) $38. D) $28. Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 83) In the above table, the marginal cost of the ninth unit is A) $4.00. B) $5.00. C) $6.00. D) $7.00. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

84) In the above table, the marginal cost of the fourth unit is A) $1.00. B) $2.00. C) $6.00. D) $24.00. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 85) In the above table, the marginal cost of the seventh unit is A) $4.00. B) $5.00. C) $3.00. D) $33.00. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 86) Marginal cost is equal to average variable cost A) when average variable cost is at its minimum value. B) when marginal cost is at its minimum value. C) when average variable cost is getting smaller. D) when average cost is getting smaller. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 87) The ratio of total costs to the quantity produced is referred to as A) average fixed costs. B) average variable costs. C) marginal costs. D) average total costs. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 82 Copyright © 2021 Pearson Education, Inc.

88) As a firm continues to produce additional output, which of the following will continue to decline as output expands? A) average total costs B) marginal costs C) average fixed costs D) opportunity costs Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 89) The addition to total costs associated with the production of one more unit of output is referred to as A) average cost. B) marginal cost. C) opportunity cost. D) overhead cost. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 90) The marginal cost curve always intersects the average total cost curve at the point at which the average total cost curve A) is zero. B) is at its minimum. C) is at its maximum. D) has a vertical slope. Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

91) Which of the following is NOT correct? A) MC = change in TC/change in Q B) ATC = TC/Q C) AVC = TVC/Q D) ATC + AVC = AFC Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 92) Total fixed cost is A) the cost of buying and installing new machinery. B) the cost that does not change as output changes. C) the expenditure on imported raw materials. D) the wages paid to consultants. Answer: B Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 93) Which of the following would be an example of a fixed cost? A) the electric and gas bills B) wages paid to temporary workers C) property insurance premiums D) expenditures on imported raw materials Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 94) The average fixed cost curve A) is parallel to the x-axis. B) is the distance between the TC and TVC curves. C) slopes downward as output increases. D) increases as the cost of inputs rise. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 84 Copyright © 2021 Pearson Education, Inc.

95) Using the above table, the AFC, the AVC, and the ATC when output is 1 unit are A) $10, $10, and $20, respectively. B) $5, $10, and $15, respectively. C) $0, $10, and $10, respectively. D) $5, $10, and $5, respectively. Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 96) Using the above table, the TC, the AFC, and the TVC when output is 2 units are A) $20, $2.50, and $15, respectively. B) $35, $2.50, and $30, respectively. C) $30, $2.50, and $40, respectively. D) $35, $2.50, and $20, respectively. Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 97) Using the above table, the TVC, the TC, and MC when output is 3 units are A) $45, $50, and $15, respectively. B) $15, $20, and $15, respectively. C) $45, $18, and $15, respectively. D) $15, $45, and $15, respectively. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

98) Using the above table, the TVC, the TC, and the MC when output is 4 units are A) $67, $72, and $22, respectively. B) $16.75, $21.75, and $22, respectively. C) $16.75, $21.75, and $30, respectively. D) $67, $62, and $22, respectively. Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 99) The distance between the TC and the TVC curve A) is constant. B) decreases as output increases. C) increases as output increases. D) is the MC curve. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 100) MC = AVC and MC = ATC at points at which A) the AVC and ATC curves are at their respective maximums. B) the AVC and ATC curves are at their respective minimums. C) the distance between the ATC and AVC curves is at its minimum. D) the distance between the ATC and AVC curves is at its maximum. Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 101) At an output at which MC is greater than ATC, A) the ATC curve is downward sloping. B) the ATC curve is upward sloping. C) the AFC curve is upward sloping. D) the AVC curve is downward sloping. Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 86 Copyright © 2021 Pearson Education, Inc.

102) At an output at which ATC is greater than MC, A) the ATC curve is downward sloping. B) the ATC curve is upward sloping. C) the AFC curve is upward sloping. D) the AVC curve is upward sloping. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 103) A firm has average fixed costs of $0.20 and average variable costs of $2.50 at an output of 500 units. The firm's total costs are therefore A) $1,250. B) $1,350. C) $1,150. D) $1,500. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

104) In the above table, what are the total fixed costs for an output of 4? A) $0 B) $120 C) $100 D) $220 Answer: C Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 87 Copyright © 2021 Pearson Education, Inc.

105) In the above table, what is the marginal cost to produce the 5th unit of output? A) $80 B) $60 C) $55 D) $20 Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 106) In the above table, what is the marginal cost to produce the 4th unit of output? A) $30 B) $60 C) $55 D) $20 Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 107) In the above table, what is the marginal cost to produce the 2nd unit of output? A) $30 B) $60 C) $55 D) $20 Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 108) In the above table, what is the average variable cost to produce 4 units of output? A) $30 B) $60 C) $55 D) $20 Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 88 Copyright © 2021 Pearson Education, Inc.

109) In the above table, what is the average variable cost to produce 3 units of output? A) $30 B) $60 C) $10 D) $20 Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 110) In the above table, what is the average variable cost to produce 2 units of output? A) $25 B) $60 C) $55 D) $20 Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 111) In the above table, what is the average total cost to produce 4 units of output? A) $30 B) $60 C) $55 D) $20 Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

112) In the above table, what is the average total cost to produce 5 units of output? A) $80 B) $55 C) $40 D) $60 Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 113) In the above table, what is the average total cost to produce 3 units of output? A) $33.33 B) $53.33 C) $55 D) $20 Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 114) Which of the following statements regarding the relationship between average and marginal costs is INCORRECT? A) There is always a definite relationship between average and marginal cost. B) When marginal costs are less than average costs, the latter must fall. C) When marginal costs are greater than average costs, the latter must rise. D) There is no way for average variable costs to fall when marginal costs are falling. Answer: D Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

115) Assume that in the short run a firm is producing 100 units of output, has average total costs of $100, and average variable costs of $50. The firm's total fixed costs are A) $50. B) $5,000. C) $150. D) $15,000. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge 116) Assume that in the short run a firm is producing 100 units of output, has average total costs of $100, and average fixed costs of $20. The firm's total variable cost at this output level is A) $120. B) $80. C) $8,000. D) $12,000. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Application of knowledge

117) Use the above figure. At an output equal to "Q" the total cost for the firm will be the area A) OQDC. B) OQFA. C) OQBC. D) OQEB. Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 118) Use the above figure. At an output equal to "Q" the average fixed cost for the firm will be the line segment A) DE. B) AB. C) BE. D) CD. Answer: A Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

119) Use the above figure. At an output equal to "Q" the total variable cost for the firm will be the area A) OQAB. B) OQEB. C) OQFA. D) OQDC. Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 120) In the table below, what are the marginal costs of the fourth unit of output?

A) $10,000 B) $20,000 C) $30,000 D) $40,000 Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 121) Which of the following is TRUE? A) The MC curve intersects AFC at its minimum point. B) If MC is below AVC, AVC must be increasing. C) If MC is above ATC, ATC must be increasing. D) none of these Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

122) If average total cost is decreasing as more and more units are produced, then marginal cost must be A) rising. B) constant. C) below average total cost. D) negative. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 123) Marginal cost begins to rise when A) diminishing marginal product begins. B) diminishing marginal product ends. C) average total cost falls. D) fixed cost falls. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 124) At the output rate at which diminishing marginal product begins, a firm will experience A) constant average total costs. B) increasing average fixed costs. C) increasing marginal costs. D) decreasing average variable costs. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

125) Which of the following statements is correct? A) Average variable costs always exceed average total costs. B) Average fixed costs are constant. C) Average variable cost reaches its minimum when average product equals its maximum. D) Average fixed costs are always less than average variable costs. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 126) If the marginal product of an input is falling, then A) average fixed cost is constant. B) marginal cost is falling. C) average total cost is constant. D) marginal cost is rising. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 127) When marginal product is rising, A) total product is falling. B) marginal cost is falling. C) marginal cost is rising. D) average fixed cost is rising. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 128) The shape of the short-run average total cost curve is a result of A) economies of scale. B) diseconomies of scale. C) the law of diminishing marginal product. D) falling profits. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 95 Copyright © 2021 Pearson Education, Inc.

129) As a firm's production increases in the short run, the average total cost curve eventually slopes upward because A) marginal physical product eventually declines as output increases. B) marginal cost eventually declines as output increases. C) average fixed cost declines with increases in output. D) average physical product rises with increases in output. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 130) The law of diminishing marginal product is NOT responsible for the shape of A) the total cost curve. B) the average variable cost curve. C) total fixed cost curve. D) marginal cost curve. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 131) When the marginal physical product is rising, A) total cost is falling. B) average total cost is increasing. C) marginal cost is falling. D) marginal cost is rising. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

132) When the marginal physical product is falling, A) marginal cost is rising. B) average fixed costs are rising. C) total costs are falling. D) average variable costs are falling. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 133) When the average physical product is rising, A) total cost is falling. B) average total cost is increasing. C) average variable cost is falling. D) marginal cost is always rising. Answer: C Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 134) When the average physical product is falling, A) average variable costs are rising. B) average fixed costs are rising. C) total costs are falling. D) average variable costs are falling. Answer: A Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 135) Marginal costs will begin to rise at the point where A) fixed costs increase. B) variable costs increase. C) average variable costs increase. D) diminishing marginal product begins. Answer: D Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 97 Copyright © 2021 Pearson Education, Inc.

136) Refer to the above table. At what quantity of labor does the marginal cost curve start to increase? A) after 1 unit B) after 2 units C) after 3 units D) after 6 units Answer: B Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 137) Refer to the above table. At what quantity of labor does the average variable cost curve start to increase? A) after 1 unit B) after 2 units C) after 3 units D) after 6 units Answer: C Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 138) Marginal physical product of labor equals A) the wage. B) the wage divided by marginal cost. C) marginal cost divided by the wage. D) marginal cost times the wage. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 98 Copyright © 2021 Pearson Education, Inc.

139) Short-run cost relationships for a firm are A) determined by the law of diminishing marginal product. B) determined by the specific long-run relationships that exist. C) due to the level of wages relative to other input prices. D) due to the normal contractual relations in a market. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 140) If the marginal product curve is intersecting the average product curve, we know that A) the average variable cost curve is intersecting the average total cost curve. B) the marginal cost curve is intersecting the average fixed cost curve. C) the average total cost curve lies above the marginal cost curve. D) the marginal cost curve is intersecting the average variable cost curve. Answer: D Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 141) When marginal costs are rising, A) marginal physical product is also rising. B) marginal physical product is falling. C) average physical product is rising. D) average physical product is falling. Answer: B Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 142) When average variable costs are rising, A) marginal physical product is also rising. B) marginal costs is falling. C) average physical product is rising. D) average physical product is falling. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 99 Copyright © 2021 Pearson Education, Inc.

143) What happens to the marginal cost curve when the marginal physical product of labor is rising? A) It becomes upward sloping. B) It becomes vertical. C) It becomes downward sloping. D) It becomes horizontal. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 144) The typical cost curves are U-shaped due to the A) law of diminishing marginal utility. B) law of supply. C) law of demand. D) law of diminishing marginal product. Answer: D Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 145) If the price of labor is constant and a firm experiences diminishing marginal product, then its A) marginal costs increase. B) marginal costs decrease. C) fixed costs increase. D) total costs decrease. Answer: A Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

146) If the price of labor is constant and a firm experiences diminishing marginal product, then its A) marginal costs decrease. B) fixed costs increase. C) average variable cost increases. D) total costs decrease. Answer: C Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 147) What is the difference between average variable costs and average total costs? Answer: Average total costs equal average variable costs plus average fixed costs. Total fixed costs are constant and do not vary with output, so average fixed costs fall as output increases. For this reason, as output increases average variable and average total costs get closer together. Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 148) What are the relationships between the marginal cost curve and the average cost curves? Explain in words. Answer: When the marginal cost curve is below each of the average variable cost and average total cost curves, the latter fall. The marginal cost curve intersects the two average cost curves at the minimum points of those average cost curves. When the marginal cost curve is above the average cost curves, the latter rise. Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 149) "All average costs have a U-shaped curve." Do you agree or disagree? Explain why? Answer: Disagree. It is true that the average variable cost curve and average total cost curve are U-shaped, but the average fixed cost curve is continuously downward sloping. Because fixed costs do not vary, an increase in output only reduces average fixed costs. Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

150) What is the relationship between the marginal cost curve and marginal product? Explain. Answer: The short-run cost curve is a reflection of the law of diminishing marginal product. Graphically, the marginal cost curve looks like the inverse of marginal physical product of a variable input. As long as marginal product rises, marginal costs decline. At the point at which marginal product begins to decline, marginal costs begin to rise. Diff: 1 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 151) What is the most important determinant of the firm's short-run cost curves? Answer: The short-run cost curves owe their shapes to the law of diminishing marginal product. Given a constant price of a variable input, marginal costs will rise as marginal product diminishes. Similarly, given the relationship that exists between marginal cost and average total and average variable costs, we can also say the law of diminishing marginal product determines their shapes. Diff: 3 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 152) What is the relationship between marginal cost and marginal physical product? Answer: Assuming labor is the only variable input and the wage rate is fixed, marginal cost then equals the wage rate divided by marginal physical product. Thus, marginal cost increases as marginal physical product decreases, and vice versa. Diff: 2 Topic: 22.3 Short-Run Costs to the Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 22.4 Long-Run Cost Curves 1) In economics, the planning horizon is defined as A) the immediate future, such as the next day that any action can be taken. B) the shortest time period over which the firm can make decisions. C) the period of time for which technology is fixed. D) the long run, during which all inputs are variable. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 102 Copyright © 2021 Pearson Education, Inc.

2) The minimum possible short-run average costs are equal to long-run average costs when A) the plant is producing at its short-run minimum point. B) short-run and long-run costs are declining. C) the long-run curve is at a minimum point. D) production is at any point on the LAC curve. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 3) The long-run average cost curve A) is always a downward-sloping straight line. B) is a curve which is tangent to each member of a set of short-run average cost curves. C) is identical to the marginal cost curve. D) should always be horizontal. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 4) A firm's long-run average cost curve is A) the locus of points representing the minimum unit cost of producing any given rate of output when all inputs may be adjusted. B) the locus of points made up of the minimum point on each short-run average total cost curve when only one input may be adjusted. C) the envelope of the firm's variable cost curves. D) identical to the lowest short-run average cost curve the firm has. Answer: A Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

5) The long run is A) when the firm no longer exists. B) when a firm begins to make a profit. C) when all factors of production are fixed. D) the time period in which all factors of production can be varied. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 6) Which of the following is TRUE for a firm in the long run? A) Variable costs will initially increase and then decrease. B) The law of diminishing marginal product holds. C) All costs are variable costs. D) Variable costs will equal marginal cost at all output levels. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 7) The planning horizon is the A) long run. B) short run. C) point where production begins. D) point where diminishing marginal product starts. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 8) Which of the following statements is TRUE about the planning horizon? A) All inputs are fixed. B) All inputs are variable. C) There are fixed and variable inputs. D) Costs do not exist. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 104 Copyright © 2021 Pearson Education, Inc.

9) Every point on the long-run average cost curve is A) also a minimum point on a short-run average cost curve. B) on a short-run average total cost curve. C) on a short-run average variable cost curve. D) on a short-run marginal cost curve. Answer: B Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 10) The locus of points representing the minimum unit cost of producing any given rate of output is the A) short-run average total cost curve. B) long-run marginal cost curve. C) short-run total cost curve. D) long-run average cost curve. Answer: D Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 11) The long run for a business is a period of time A) longer than a year. B) when most inputs are variable. C) when all inputs can change. D) when labor is the only input used by the business. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

12) The long run is defined as a time period during which full adjustment can be made to any change in the economic environment. Thus in the long run, all factors of production are variable. Long-run curves are sometimes called planning curves, and the long run is sometimes called the A) foreseeable future. B) minimum efficient time period. C) non-adjustment period. D) planning horizon. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

13) Which of the following statements with respect to the figure below is INCORRECT?

A) All the possible short-run average cost curves that correspond to the different plant sizes are shown as SAC1 - SAC8. B) If the anticipated permanent rate of output per unit time period is Q1 in panel (a), the optimal plant would correspond to SAC1. C) If the permanent rate of output increases to Q2 in panel (a), it will be more profitable to have a plant size corresponding to SAC3. D) The long-run average cost curve LAC in panel (b) is sometimes called the planning curve representing the locus (path) of points. Answer: C Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 14) The planning curve is the A) long-run average cost curve. B) production function. C) short-run marginal cost curve. D) short-run average cost curve. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 107 Copyright © 2021 Pearson Education, Inc.

15) Which of the following is NOT one of the reasons a firm might be expected to experience economies of scale? A) specialization B) the dimensional factor C) improved productive equipment D) depreciation Answer: D Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 16) Due to extremely large fixed costs, an electricity generating plant probably experiences which of the following returns to size? A) diseconomies of scale B) diminishing marginal product C) constant returns to scale D) economies of scale Answer: D Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 17) If a firm gets so large that management of employees and other resources becomes a costly problem, it will be experiencing A) diseconomies of scale. B) diminishing marginal product. C) constant returns to scale. D) economies of scale. Answer: A Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

18) Suppose a firm doubles its output in the long run. At the same time the unit cost of production remains unchanged. We can conclude that the firm is A) exploiting the economies of scale available to it. B) facing constant returns to scale. C) facing diseconomies of scale. D) not using the available technology efficiently. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

19) In the above figure, the long-run cost curve between points A and B illustrates A) diseconomies of scale. B) diminishing marginal product. C) constant returns to scale. D) economies of scale. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

20) In the above figure, the long-run cost curve between points C and D illustrates A) diseconomies of scale. B) diminishing marginal product. C) constant returns to scale. D) economies of scale. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 21) In the above figure, the long-run cost curve between points E and F illustrates A) diseconomies of scale. B) diminishing marginal product. C) constant returns to scale. D) economies of scale. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 22) Economies of scale occur when there are A) decreases in long-run average costs resulting from increases in output. B) no changes in long-run average costs when output increases. C) increases in long-run average costs when output increases. D) decreases in output resulting from decreases in input. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

23) In the above figure, for any output level less than Q2, this firm experiences A) economies of scale. B) diseconomies of scale. C) constant economies of scale. D) decreasing long run average costs. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 24) In the above figure, for any output level larger than Q3, this firm experiences A) economies of scale. B) diseconomies of scale. C) constant economies of scale. D) decreasing long run average costs. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

25) In the above figure, the firm experiences constant returns to scale between output levels of A) zero and Q1. B) Q2 and Q3. C) Q3 and Q4. D) any level greater than Q4. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 26) Economies of scale exist where the long-run average cost curve is A) horizontal. B) downward sloping. C) upward sloping. D) tangent to the marginal cost curve. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 27) The typical shape of the long-run average cost curve is like A) the letter "C." B) the letter "U." C) an inverse of the letter "V." D) a circle. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 28) Diseconomies of scale occur A) only in the short run. B) only in the long run. C) because of fixed costs. D) none of these Answer: B Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 112 Copyright © 2021 Pearson Education, Inc.

29) A horizontal long-run average cost curve indicates A) constant returns to scale. B) diseconomies of scale. C) constant marginal physical product. D) economies of scale. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 30) When increasing its output results in falling costs, a firm that can adjust all inputs is experiencing A) diseconomies of scale. B) economies of scale. C) loss. D) capital gains. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 31) Which of the following is NOT a reason a firm might experience economies of scale? A) specialization B) dimensional factors C) increasing long-run average costs D) more productive equipment Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

32) Which of the following physical relationships might generate economies of scale? A) Proportionally larger pipes can transport more than a proportional increase in oil. B) Larger equipment tends to weigh more and use more fuel on a per-unit-of-output basis. C) Each lift truck requires one lift truck driver. D) A doubling of all inputs leads to a doubling of output. Answer: A Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 33) If a firm is experiencing diseconomies of scale, then A) proportional increases in all inputs result in proportional increases in output. B) the long-run average cost curve is rising as output expands. C) the long-run average cost curve is decreasing as output expands. D) the firm should expand the size of its operation. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 34) The law of diminishing marginal product is responsible for A) economies of scale. B) constant returns to scale. C) diseconomies of scale. D) none of the long-run relationships. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

35) The law of diminishing marginal product A) holds in the short run and the long run because as you increase the amount of variable inputs eventually the increases in output will decrease. B) does not hold in the short run because of fixed costs. C) does not hold in the long run because there are no fixed inputs in the long run. D) holds in the short and long run because of economies to scale. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 36) A decrease in long-run average costs resulting from increases in output is A) attributed to economies of scale. B) attributed to diseconomies to scale. C) attributed to constant returns to scale. D) attributed to the law of diminishing marginal product. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 37) An increase in long-run average costs resulting from decreases in output is A) attributed to the law of diminishing marginal product. B) attributed to constant returns to scale. C) attributed to economies of scale. D) attributed to diseconomies to scale. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

38) An increase in long-run average costs resulting from increases in output is A) attributed to economies of scale. B) attributed to diseconomies to scale. C) attributed to constant returns to scale. D) attributed to the law of diminishing marginal product. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 39) A decrease in long-run average costs resulting from decreases in output is A) attributed to constant returns to scale. B) attributed to economies of scale. C) attributed to the law of diminishing marginal product. D) attributed to diseconomies to scale. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 40) An increase in output would result in no change in long-run average costs when there are A) economies of scale. B) diseconomies to scale. C) constant returns to scale. D) diminishing marginal product. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 41) An increase in output would result in a rise in long-run average costs when there are A) economies of scale. B) diseconomies to scale. C) constant returns to scale. D) the law of diminishing marginal product. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 116 Copyright © 2021 Pearson Education, Inc.

42) Constant returns to scale are illustrated by A) a downward-sloping long-run average cost curve. B) a horizontal long-run average cost curve. C) an upward-sloping long-run average cost curve. D) a long-run average cost curve that is shaped like an upside down U. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 43) Graphically, economies to scale are illustrated by A) a downward-sloping long-run average cost curve. B) a horizontal long-run average cost curve. C) an upward-sloping long-run average cost curve. D) a long-run average cost curve that is shaped like an upside down U. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 44) Graphically, diseconomies to scale are illustrated by A) a downward-sloping long-run average cost curve. B) a horizontal long-run average cost curve. C) an upward-sloping long-run average cost curve. D) a long-run average cost curve that is shaped like an upside down U. Answer: C Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

45) Increases in long-run average cost that result from output increases is A) the law of diminishing marginal product. B) economies of scale. C) constant returns to scale. D) diseconomies of scale. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 46) Which of the following is NOT a reason why a firm may experience economies of scale? A) productive specialization B) dimensional factors C) improved productive equipment D) increased layers of management Answer: D Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 47) The main source of diseconomies of scale is A) dimensional factors associated with many physical relationships. B) specialization of labor. C) limits to the efficient functioning of management. D) improvements in production technology. Answer: C Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

48) Refer to the above figure. Economies of scale exist A) over the entire range of output. B) from output Q2 to Q5. C) up to output Q2. D) after output Q5. Answer: C Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 49) Refer to the above figure. The firm that produces an output between Q1 to Q2 is experiencing A) constant returns to scale. B) diseconomies of scale. C) diminishing marginal product. D) economies of scale. Answer: D Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

50) Refer to the above figure. Diseconomies of scale exist A) over the entire range of output. B) from output Q2 to Q5. C) up to output Q2. D) after output Q5. Answer: D Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 51) Refer to the above figure. Constant returns to scale exist A) up to output Q2. B) from Q2 to Q5. C) after Q5. D) over the entire long-run average cost curve. Answer: B Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 52) A decrease in the long-run average costs resulting from increasing output is referred to as A) diseconomies of scale. B) constant return to scale. C) a scale invariant process. D) economies of scale. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

53) When long-run average costs decline as output increases, the firm is experiencing A) negative returns to scale. B) diseconomies of scale. C) constant returns to scale. D) economies of scale. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 54) When long-run average costs rise as output increases, the firm is experiencing A) diseconomies of scale. B) diminishing returns. C) constant returns to scale. D) economies of scale. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 55) All of the following are reasons for economies of scale EXCEPT A) diminishing marginal product. B) specialization. C) dimensional factors. D) more efficient production equipment. Answer: A Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

56) Which of the following statements is TRUE? A) If a firm is experiencing economies of scale, diminishing marginal product has not set in yet. B) No firm would ever operate at a level of output for which it experiences diseconomies of scale. C) A firm can experience diminishing marginal product and economies of scale at the same time. D) Diseconomies of scale is a short-run concept, while economies of scale is a long-run concept. Answer: C Diff: 3 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

57) In the above figure, point B is called A) the maximum efficient scale. B) the minimum efficient scale. C) the planning horizon. D) the point of diminishing marginal product. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

58) A single-plant firm trying to select the rate of output consistent with an overall plant size that yields the minimum efficient scale will choose a rate of output for which A) the short-run marginal cost curve crosses the short-run average total cost curve at that rate of output. B) the long-run marginal cost curve crosses the long-run average fixed cost curve at that rate of output. C) long-run average total cost is lowest at that rate of output. D) total fixed costs are minimized at that rate of output. Answer: C Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 59) When a firm is at its minimum efficient scale of operation, it produces the A) maximum rate of output at which long-run average cost is minimized. B) minimum rate of output at which long-run average cost is minimized. C) maximum rate of output consistent with lowest long-run marginal cost. D) minimum rate of output consistent with lowest long-run marginal cost. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 60) Minimum efficient scale is defined as A) the lowest output level at which long-run average costs are at their minimum. B) the amount of labor that maximizes the marginal product of labor. C) the point at which marginal cost, average variable cost, and average fixed cost are all equal. D) the point at which economies of scale are at their maximum. Answer: A Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

61) If the long-run average cost curve continuously slopes upward as output rises, minimum efficient scale would be A) when output is zero. B) at the midpoint of the long-run average cost curve. C) at the rate of output associated with the smallest sized plant the firm can build. D) nonexistent. Answer: D Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

62) Refer to the above figure. Minimum efficient scale is at output rate A) Q1. B) Q2. C) Q3. D) Q5. Answer: B Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

63) Minimum efficient scale A) is the point at which economies of scale begin for a particular firm. B) is the lowest rate of output per unit of time at which long-run average costs reach a minimum for a particular firm. C) applies only to firms with U-shaped long-run average cost curves. D) is the point at which diseconomies of scale begin for a particular firm. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 64) The lowest rate of output per unit of time at which long-run average costs for a particular firm are at a minimum is A) economies of scale. B) diseconomies of scale. C) constant returns of scale. D) minimum efficient scale. Answer: D Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 65) When the minimum efficient scale occurs at a high level of industry output A) the firms in the industry will be producing in the diseconomies of scale portion of the curve. B) there will only be a few firms in the industry. C) the government will have to take over the production of the good since it will be unprofitable for firms. D) there will be a lot of firms in this industry. Answer: B Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

66) The lowest rate of output per unit of time at which long-run average costs for a firm are at a minimum defines A) maximum efficient scale. B) minimum efficient scale. C) allowable efficient scale. D) short-run efficient scale. Answer: B Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 67) The minimum efficient scale in the figure below shows that

A) point A is the minimum efficient scale (MES) for the firm. B) point B is the minimum efficient scale (MES) for the firm. C) the long-run average cost curve (LAC) reaches a minimum point at B. D) the minimum efficient scale (MES) illustrates maximum average costs. Answer: A Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 68) Explain how the long-run average cost curve is constructed graphically. Answer: The long-run average cost curve is constructed as the envelope to (a curve tangent to) all the possible short-run average cost curves that correspond to different plant sizes. Diff: 1 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 126 Copyright © 2021 Pearson Education, Inc.

69) How is the long-run average cost curve found? What is its importance to the firm? Answer: The long-run average cost curve is the locus of points representing the minimum unit cost of producing any given rate of output, given the current technology and resource prices. It is the envelope of the various short-run average cost curves. It is significant in that it is the planning curve for the firm in deciding whether to expand its production facilities or not. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 70) "The long-run average cost curve is derived from adding all short-run average cost curves together." Do you agree or disagree? Explain. Answer: Disagree. The long-run average cost curve is derived as the curve that is tangent to the short-run average cost curves rather than adding them together. The reason for the tangent points is that the firm will try to change any of its inputs whenever they lead to a lower average cost. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 71) What factors generate economies of scale? Answer: Economies of scale can be generated by specialization. As a firm's scale of operations increases, there are more opportunities for specialization of labor, and this usually is very productive. Further, there are certain physical relationships that generate economies of scale, such as that between the volume of a cylinder and the diameter of the cylinder. Finally, largescale enterprise can take advantage of larger volume types of machinery which lower per-unit costs. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 72) "The short-run average total cost curve and the long-run average cost curve are both Ushaped for the same reasons." Do you agree or disagree? Why? Answer: Disagree. The U-shaped short-run average cost curves are due to the law of diminishing marginal product, but in the long run there are no fixed inputs so the law of diminishing marginal product does not apply. The long-run average cost curve is U-shaped if economies of scale apply at smaller rates of output and diseconomies of scale apply at larger rates of output. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 127 Copyright © 2021 Pearson Education, Inc.

73) "A firm cannot experience both economies of scale and diminishing marginal product." Do you agree or disagree? Why? Answer: Disagree. Diminishing marginal product is a short-run concept while economies of scale is a long-run concept. The former occurs when one input is fixed and the other when all inputs are variable. So, there is no reason why a firm cannot experience both. Diff: 3 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 74) Why might firms experience diseconomies of scale? Answer: The main reason for firms to experience diseconomies of scale is that there are limits to the efficient functioning of management. As a firm gets bigger, the layers of supervision grow, the costs of information and communication also grow more than proportionally so that the average costs increase. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 75) What is minimum efficient scale? Why is it important? Answer: Minimum efficient scale (MES) is the lowest rate of output per unit of time at which long-run average costs for a particular firm are at a minimum. If the MES is small relative to industry output, firms will be relatively small and numerous. If the MES is large relative to industry output, firms will be large and few. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 76) For an industry in which average costs continue to decline as output rises, what would you expect the minimum efficient scale to be? Explain your answer. Answer: When average costs continue to decline as output rises, the industry experiences economies of scale over all output levels. Thus, the long-run average cost curve only falls with increasing output. This means that the minimum efficient scale does not exist. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

77) "If an industry's minimum efficient scale is between 2,000 and 4,000 units of output, then a firm producing 2,000 units of output in that industry has a cost-saving advantage over another firm producing 4,000 units of output in the same industry." Do you agree or disagree? Explain. Answer: Disagree. If the minimum efficient scale is between 2,000 and 4,000 units of output, then the average costs are the same for any firm producing within that output range. This means that the firm producing 2,000 units of output has no cost-saving advantage over the firm producing 4,000 units of output. Diff: 2 Topic: 22.4 Long-Run Cost Curves Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 23 Perfect Competition 23.1 Characteristics of a Perfectly Competitive Market Structure 1) Which of the following is NOT a characteristic of a perfectly competitive market? A) The products sold by the firms in the market are homogeneous. B) There are many buyers and sellers in the market. C) It is difficult for a firm to enter or leave the market. D) Each firm is a price taker. Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 2) Which of the following is a characteristic of perfect competition? A) easy entry and exit B) few firms C) differentiated products D) none of these Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 3) All of the following are characteristics of perfect competition EXCEPT A) homogeneous products. B) each firm is a price taker. C) product differentiation. D) a lack of barriers. Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

4) Perfect competition is characterized by A) many buyers and sellers. B) a small number of firms. C) differentiated products of firms in the industry. D) high barriers to entry. Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 5) The perfectly competitive firm cannot influence the market price because A) it has market power. B) its production is too small to affect the market. C) a few buyers have control over the market price. D) its costs are too high. Answer: B Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 6) Which of the following is NOT a characteristic of a perfectly competitive industry? A) There is easy entry and exit in the long run. B) The industry demand curve is downward sloping. C) Each firm produces the same homogeneous product. D) Economic profits must be positive in the short run. Answer: D Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 7) Being a price taker essentially means A) a firm can influence the market price. B) a firm cannot influence the market price. C) the firm cannot legally set its price above the market price. D) the firm cannot legally set its price below the market price. Answer: B Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) In a perfectly competitive industry, A) each firm is a price maker. B) no buyer or seller can influence the market price. C) there is apt to be a shortage of sellers of output. D) firms can never make an economic profit. Answer: B Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 9) Each firm in a perfectly competitive industry is A) producing a unique product. B) relatively large. C) a price taker. D) a price maker. Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 10) All firms in a perfect competition industry A) are price makers. B) produce differentiated products. C) produce identical products. D) lose money. Answer: C Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

11) Which of the following is NOT a characteristic of a perfectly competitive industry? A) There are large numbers of buyers and sellers. B) The firms in the industry produce a homogeneous product. C) Sellers have better information about the product than consumers. D) Any firm can enter or leave the industry without serious impediments. Answer: C Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 12) A market structure in which the decisions of individual buyers and sellers have no effect on market price is A) perfect competition. B) a short-run industry. C) a long-run industry. D) a market supply industry. Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 13) A market structure in which the decisions of individual buyers and sellers have no effect on market price is A) monopoly. B) monopolistic competition. C) perfect competition. D) oligopoly. Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

14) A firm in a perfectly competitive industry is a A) price taker. B) quantity taker. C) profit maker. D) price maker. Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 15) Under perfect competition, a firm that sets its price slightly above the market price would A) make lower profits than the other firms, but the amount would depend on the elasticity of demand. B) make a normal rate of return, but on reduced revenues. C) lose all of its customers. D) earn higher profits as long as the other firms continued to charge the market price. Answer: C Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 16) A firm is a price taker if it A) seeks to maximize revenue rather than profit. B) cannot influence the market price. C) searches for the best price and then takes the highest profits possible. D) buys inputs for firms. Answer: B Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

17) Which of the following is NOT a characteristic of perfect competition? A) There are large numbers of buyers and sellers. B) The firms in an industry produce goods that are different from each other. C) Any firm can easily enter or leave the industry. D) Both buyers and sellers have equally good information. Answer: B Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 18) When considering perfect competition the absence of entry barriers implies that A) no firm can enter the industry. B) firms can enter but cannot get out of the industry easily. C) all firms will earn economic profit. D) firms can enter and leave the industry without serious impediments. Answer: D Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 19) In a perfectly competitive market, which of the following is the main factor that affects consumers' decisions on which firm to purchase a good from? A) quality B) customer service C) reputation D) price Answer: D Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

20) All of the following are characteristics of a perfectly competitive industry EXCEPT A) the product sold is homogeneous. B) firms in the industry are price takers. C) buyers and sellers have equal access to information. D) there are a large number of buyers and sellers with only a few being able to influence the market price. Answer: D Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 21) When there are large numbers of buyers and sellers, then A) the products sold must look identical. B) firms will move labor and capital in pursuit of profit-making opportunities to whatever business venture gives them the highest return on their investment. C) no one buyer or seller has any influence on price. D) consumers are able to find out about lower prices charged by other firms. Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 22) What does it mean when the products sold by the firms in an industry are homogeneous? A) The product sold by one firm is a perfect substitute of the product sold by another firm in the same industry. B) Firms in the industry can produce the same product with different inputs. C) All firms in the industry are identical in size. D) The product sold by one firm is a perfect complement of the product sold by another firm in the same industry. Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

23) In a perfectly competitive market structure both buyers and sellers have equal access to information. This implies A) the products sold will be alike. B) firms will move labor and capital in pursuit of profit-making opportunities to whatever business venture gives them the highest return on their investment. C) no one buyer or seller has any influence on price. D) consumers are able to find out about lower prices charged by other firms. Answer: D Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 24) In a perfectly competitive market structure any firm can enter or leave the industry without serious impediments. This implies A) the products sold will be alike. B) firms will move labor and capital in pursuit of profit-making opportunities to whatever business venture gives them the highest return on their investment. C) no one buyer or seller has any influence on price. D) consumers are able to find out about lower prices charged by other firms. Answer: B Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 25) Malfeasance at Enron, a Houston-based energy firm, led to overstatement of revenues by almost $92 billion. As Enron closed its operations, U.S. energy prices remained stable. This may have been evidence that A) Enron could charge whatever price it wanted to for energy. B) there was lack of any competition, so Enron was the winner. C) there is a competitive market in energy distribution in the United States. D) the accounting profession needs to review its policies quickly. Answer: C Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

26) Clothing retailers have faced greater competition in recent years as more firms have entered the clothing market. Some of the competition has come from foreign competitors, but much of it is domestic competition. As a result there is much competition in markets for many types of clothing and A) individual buyers and sellers cannot affect the market price because it is determined by the market forces of demand and supply. B) there are no other implications. C) firms have a great degree of flexibility in pricing their products because these products can be sold at a high profit level. D) there are relatively few buyers and sellers in the market, and one individual firm can determine the market price. Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 27) A farmer has many competitors and exists in a market structure known as perfect competition. This means that price is determined outside of the individual farmer's ability to charge a price higher than the going market for a bushel of wheat, hence the farmer is A) a price maker and can therefore charge different customers different prices. B) always able to price produce above the competition and earn a larger profit. C) never able to sell anything for any prices he charges. D) a price taker and cannot affect the market price of wheat. Answer: D Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 28) Perfect competition is a market structure A) in which any firm would have serious impediments to entry or exit. B) in which individual buyers and sellers have no effect on the market price. C) resulting from individual firms selling highly differentiated products. D) where there is significant regulation and markets are always efficient. Answer: B Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

29) The firm in a perfectly competitive industry is a A) price taker. B) price maker. C) price seeker. D) price dealer. Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 30) Which of the following statements about the perfect competitor is INCORRECT? A) The perfectly competitive firm is always a price taker. B) The perfect competitor sells a homogeneous commodity. C) If an individual firm raises price, it will lose business. D) The products made by a perfectly competitive firm have no close substitutes. Answer: D Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 31) Which of the following is NOT a characteristic of perfect competition? A) There are many buyers and sellers. B) Each firm determines the market price of its product. C) Products are homogeneous. D) Buyers and sellers have equal access to information. Answer: B Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 32) Which of the following is NOT a characteristic of perfect competition? A) differentiated products B) large number of buyers and sellers C) price taking by each firm D) easy entry and exit into the market Answer: A Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

33) Which of the following is NOT a characteristic of perfect competition? A) Firms are "price takers." B) All firms sell identical products. C) There are substantial barriers to entry into the industry. D) There are many buyers and sellers. Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 34) All of the following are characteristics of a perfectly competitive market EXCEPT A) homogeneous products. B) large number of buyers and sellers. C) buyers and seller have equal access to information. D) high barriers to entry and exit. Answer: D Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 35) Which of the following is closest to a perfectly competitive market? A) the computer software market B) the market for handmade guitars C) the market for broccoli D) the market for athletic shoes Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

36) Which of the following is closest to a perfectly competitive market? A) the pizza market B) the market for breakfast cereal C) the market for corn D) the market for automobiles Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 37) Which of the following is closest to a perfectly competitive market? A) the soda pop market B) the market for bread C) the market for sugar D) the market for fast food Answer: C Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 38) A perfectly competitive market has A) high barriers to entry or exit. B) homogeneous products. C) to do a lot of advertising to attract buyers. D) few firms. Answer: B Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

39) What is a price taker? Discuss the assumptions used to obtain the perfectly competitive model. Answer: A price taker, or perfectly competitive firm, is a firm that must take the market price of its product as given because it cannot influence the market price. The model of perfect competition has four assumptions. There are a large number of buyers and sellers, and no one has any influence on the market price. The product is homogeneous, so the output of one firm is a perfect substitute for the output of another firm. Buyers and sellers have all the information they require to determine the lowest price and best production technique. Finally, all firms can easily enter or leave the industry. Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 40) What are the main characteristics of a perfectly competitive market? Answer: In a perfectly competitive market, there are large numbers of buyers and sellers; the products sold by the firms in the industry are homogeneous; both buyers and sellers have equal access to information; and any firm can enter or leave industry without serious impediments. As a result of these characteristics, all firms in the industry are price takers. Diff: 2 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 41) "A market is said to be perfectly competitive when consumers can tell that some products are of better quality than others." Do you agree or disagree? Why? Answer: Disagree. A market is perfectly competitive when firms produce homogeneous products and consumers cannot differentiate the quality of the products produced by different firms. Diff: 1 Topic: 23.1 Characteristics of a Perfectly Competitive Market Structure Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

23.2 Profit-Maximizing Choices of a Perfectly Competitive Firm 1) Under the perfectly competitive market structure, the demand curve of an individual firm is A) perfectly inelastic. B) downward sloping. C) relatively inelastic. D) perfectly elastic. Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 2) If a firm is a perfect competitor, then A) the demand curve for its product is perfectly elastic. B) it can independently set the price of the product it sells without regard to what other firms in the market are doing. C) it is impossible for the firm to earn short-run economic profits. D) its marginal cost will exceed marginal revenue at the optimal level of output. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 3) For a firm in a perfectly competitive industry, the demand curve for its own product is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

4) For a firm in a perfectly competitive industry, the demand curve for its own product is A) downward sloping. B) vertical. C) always above the marginal revenue curve. D) the same as the marginal revenue curve. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 5) In a perfectly competitive industry, the industry demand curve A) must be horizontal. B) must be vertical. C) is upward sloping. D) is downward sloping. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 6) The perfectly competitive firm faces A) a downward-sloping demand curve. B) a horizontal supply function. C) perfectly elastic demand. D) constant marginal costs. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 7) A perfectly elastic demand function A) shows that a consumer is willing to pay any amount for the product. B) is characteristic of an individual firm operating in a perfectly competitive market. C) shows that the individual firm can increase sales by lowering the price of output. D) has a marginal revenue that is always decreasing. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 15 Copyright © 2021 Pearson Education, Inc.

8) The demand curve for a perfectly competitive firm is horizontal because A) consumers are willing to pay any price to obtain its product. B) its production decisions cannot influence the market price. C) the firm profits from setting its price higher than the market price. D) its product is easy for consumers to differentiate from those of other firms. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 9) The demand curve for a perfectly competitive industry is A) downward sloping. B) horizontal. C) vertical. D) upward sloping. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 10) The demand curve for a perfectly competitive firm is A) elastic at relatively high prices and inelastic at relatively low prices. B) perfectly elastic. C) perfectly inelastic. D) unitary elastic. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

11) In the model of perfect competition, the market demand curve is found by A) a marketing analysis. B) taking the demand curve of a "representative consumer" and expanding it by the number of consumers of the good. C) horizontally summing the demand curves of individual consumers. D) horizontally summing the supply curves of individual firms. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 12) The demand curve for the product of a perfectly competitive firm's demand curve indicates that if the firm A) lowers its price, it can sell more. B) accepts the market-set price, the number of units the firm can sell is limited. C) raises its price, sales will fall to zero. D) changes its price, the quantity demanded will change in the opposite direction. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 13) Which of the following statements is NOT true for a perfectly competitive firm? A) A firm's demand curve is horizontal. B) The firm can influence its demand curve by advertising its product. C) The firm's demand curve is perfectly elastic. D) The market demand and supply curves determine the market price. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

14) A perfectly competitive producer faces a demand curve for its own product that is A) downward sloping. B) upward sloping. C) horizontal. D) vertical. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 15) Which of the following statements is correct about the demand curve of the perfectly competitive industry? A) The demand curve of the perfectly competitive industry is horizontal as are the demand curves facing the individual firms. B) The market demand curve of perfect competition is vertical because the individual consumers are buying a homogeneous product. C) The market demand curve of the perfectly competitive industry is downward sloping while the demand curve facing an individual firm is horizontal. D) The market demand curve of the perfectly competitive industry is downward sloping, so the demand curves of the individual firms are also downward sloping. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 16) Which of the following statements is correct? A) The demand curve of the perfectly competitive industry is elastic as are the demand curves facing the individual firms. B) The market demand curve of perfect competition is inelastic because the individual consumers are buying a homogeneous product. C) The market demand curve of the perfectly competitive industry is downward sloping while the demand curve of an individual firm is horizontal with a height equal to the product price. D) The market demand curve of the perfectly competitive industry is downward sloping, so the demand curves of the individual firms are also downward sloping. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

17) The demand curve for the product of a perfectly competitive firm is A) perfectly elastic. B) perfectly inelastic. C) elastic at high prices and inelastic at low prices. D) identical to the elasticity of demand on the market demand curve. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

18) Refer to the above figure. The market supply and demand curves in a perfectly competitive market intersect at $4. Which of the graphs represent the situation for an individual firm? A) Panel A B) Panel B C) Panel C D) Panel D Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

19) Refer to the above figure. Which of the graphs represent the demand curve for a perfectly competitive industry? A) Panel A B) Panel B C) Panel C D) Panel D Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

20) Refer to the above figure. The figure represents the market demand and supply curves for widgets in a perfectly competitive market. What statement can be made about the demand curve for an individual firm in this market? A) An individual firm's demand curve will be a smaller version of the market demand curve. B) An individual firm's demand curve will be horizontal at $5. C) An individual firm's demand curve will be horizontal at a price below $5. D) An individual firm's demand curve cannot be determined from the graph above. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

21) Referring to the diagram, which of the following statements is INCORRECT?

A) The equilibrium market price is $5, at which the industry demand and supply curves intersect. B) If the individual firm raises its price, it will capture all sales in the market. C) The individual firm takes as given the market price along the perfectly elastic demand curve "d." D) The individual firm faces the going market price as determined by the industry. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 22) The demand curve faced by a perfectly competitive industry A) slopes upward. B) slopes downward. C) has no slope. D) is horizontal. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

23) The demand curve for a perfectly competitive industry is A) perfectly inelastic. B) downward sloping. C) perfectly elastic. D) unit elastic. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 24) The demand curve for the product of a perfectly competitive firm is A) downward sloping. B) upward sloping. C) perfectly inelastic. D) perfectly elastic. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 25) If a firm in a perfectly competitive market raises its price, A) it will sell more products. B) it will sell fewer products. C) its sales will remain unchanged. D) it will sell nothing. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 26) A perfectly competitive firm faces a horizontal demand curve because it is A) a price taker. B) a price maker. C) a large firm in a small industry. D) one of few firms in the market. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 22 Copyright © 2021 Pearson Education, Inc.

27) The perfectly competitive firm's demand curve has A) a negative slope. B) a positive slope. C) a slope of infinity. D) a slope of 0. Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 28) For a firm in a perfectly competitive market, average revenue equals A) average cost. B) the change in total revenue. C) the market price. D) price divided by quantity. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 29) The total revenue of a perfectly competitive firm is calculated by A) multiplying average revenue by price. B) dividing price by quantity. C) multiplying price by quantity. D) multiplying quantity by average total cost. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

30) Economists generally assume that firms attempt to maximize A) total revenue. B) sales. C) marginal revenue. D) total economic profits. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

31) In the above figure, the market price charged by this profit-maximizing, perfectly competitive firm is A) $5 per unit of output. B) $10 per unit of output. C) $8 per unit of output. D) $14 per unit of output. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge

32) In the above figure, the profit-maximizing rate of production for the perfectly competitive firm is A) 5. B) 10. C) 13. D) none of these. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 33) In the above figure, at the profit-maximizing rate of production for the perfectly competitive firm, total revenue is A) $100. B) $70. C) $30. D) $130. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 34) In the above figure, at the profit-maximizing rate of production for the perfectly competitive firm, total cost is A) $100. B) $70. C) $30. D) $130. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge

35) In the above figure, at the profit-maximizing rate of production for the perfectly competitive firm, average total cost is A) $10. B) $3. C) $7. D) $70. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 36) In the above figure, at the profit-maximizing rate of production for the perfectly competitive firm, profit is A) $100. B) $70. C) $30. D) $130. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 37) In the above figure, at output levels between 5 units and 13 units, A) the firm's accounting profits are negative. B) total revenue equals total costs. C) the firm's economic profits are positive. D) the firm is breaking even. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

38) In the above figure, at which output level is this firm earning negative economic profits? A) 2 B) 5 C) 10 D) 12 Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 39) A firm in a perfectly competitive market maximizes profits when it finds A) the price at which total revenue minus total cost is the greatest. B) the quantity at which total revenue minus total cost is the greatest. C) the quantity at which total revenue equals total cost. D) the quantity at which total revenue is maximized. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 40) When a firm is operating at an output rate at which total revenue equal total costs, this is called A) its shutdown point. B) its break-even point. C) a short-run profit. D) a loss. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

41) Refer to the above table. This firm operates in a perfectly competitive market in which the market price is $10 per unit. What is its profit-maximizing rate of production? A) 104 units B) 106 units C) 108 units D) 110 units Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 42) Refer to the above table. This firm operates in a perfectly competitive market in which the market price is $10/unit. What is TRUE when the firm produces 103 units? A) Total revenue equals $5,060. B) Total costs exceed total revenue by $403. C) Marginal revenue is less than marginal cost. D) Its total profit is $524. Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 43) Refer to the above table. This firm operates in a perfectly competitive market in which the market price is $5/unit. What is TRUE when the firm produces 110 units? A) Total revenue equals $3,075. B) Total costs exceed total revenue by $65. C) Marginal revenue is more than marginal cost. D) Its total profit is $65. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 28 Copyright © 2021 Pearson Education, Inc.

44) Refer to the above figure. If an individual firm wants to maximize economic profits, it should A) charge $5 for its product. B) charge more than $5 for its product since increasing the price will increase revenues. C) charge less than $5 for its product since a lower price will attract more customers. D) withdraw its product from the market forcing the market price up. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 45) The total amount received from the sale of output is A) average revenue. B) marginal revenue. C) total revenue. D) price revenue. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

46) The price per unit times the total quantity sold is A) average revenue. B) marginal revenue. C) total revenue. D) price revenue. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 47) Total revenue divided by quantity is A) average revenue. B) marginal revenue. C) quantity revenue. D) price revenue. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

48) Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $10. What does total revenue equal when quantity equals 4? A) $4 B) $6 C) $36 D) $40 Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 30 Copyright © 2021 Pearson Education, Inc.

49) Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $8. What will be the value of total revenue when quantity sold equals 3? A) $24 B) $27 C) $3 D) $9 Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 50) Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $7. What will be the value of total revenue when quantity sold equals 2? A) $7 B) $14 C) $21 D) $16 Answer: B Diff: 3 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 51) Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $10. What does profit equal when quantity equals 4? A) $4 B) $10 C) $8 D) $40 Answer: B Diff: 3 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

52) Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $9. What does profit equal when quantity equals 3? A) $13 B) $10 C) $6 D) $2 Answer: C Diff: 3 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 53) Refer to the above table. The table represents information on the costs for Ajax Corporation. Ajax operates in a perfectly competitive market and the price of the product is $7. What does profit equal when quantity equals 2? A) $14 B) -$2 C) $16 D) $2 Answer: B Diff: 3 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 54) We assume that firms, when they are deciding the best rate of output at which to produce, A) try to get the highest price possible. B) want to maximize sales. C) want to minimize costs. D) want to maximize profits. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

55) The equation TR/Q is used to compute A) total cost. B) average revenue. C) demand. D) marginal revenue. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 56) For a perfect competitor, price equals A) marginal revenue only. B) average revenue only. C) both average revenue and marginal revenue. D) neither marginal revenue nor average revenue. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 57) In a perfectly competitive market, the average revenue curve of a firm is A) the same as its total revenue curve. B) the same as its demand curve. C) the same its economic profits. D) the difference between its total revenue curve and its marginal revenue curve. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 58) Under perfect competition, the firm must decide A) the best price to charge for its product. B) the best rate of output it should produce. C) the optimal level of advertising to engage in. D) the optimal level of quality and the packaging that will maximize profits. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 33 Copyright © 2021 Pearson Education, Inc.

59) Refer to the above figure. Profits for this firm are positive A) only for all points less than B. B) only at points B and C. C) for points between B and C. D) for all points less than B and greater than C. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 60) Refer to the above figure. Profits for this firm will be maximized at A) point B. B) point C. C) a quantity greater than point C. D) a quantity between points B and C. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

61) Refer to the above figure. Profits for this firm are equal to zero A) only for all points less than B. B) only at points B and C. C) for points between B and C. D) for all points less than B and greater than C. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 62) Refer to the above figure. Profits for this firm are negative A) only for all points less than B. B) only at points B and C. C) for points between B and C. D) for all points less than B and greater than C. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 63) Which of the following equals the ratio of the change in total revenues over the change in output? A) total cost B) average revenue C) demand D) marginal revenue Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

64) For the perfectly competitive firm, price A) equals average revenue and marginal revenue. B) equals average total cost. C) changes as output changes. D) depends on the fixed cost for the firm. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 65) Total revenues A) are defined as the quantity sold divided by price. B) are not the same as total receipts from the sale of output. C) equal gross revenues minus all expenses of the firm. D) equal the price per unit times the total quantity sold. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 66) The perfectly competitive firm's total revenue curve A) is linear and upward sloping. B) has a constant slope. C) has a positive slope. D) all of these Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 67) The goal of the perfectly competitive firm is to A) maximize total revenue. B) maximize total profits. C) minimize AFC. D) minimize ATC. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 36 Copyright © 2021 Pearson Education, Inc.

68) The vertical distance between the horizontal axis and any point on a perfect competitor's demand curve measures A) total cost. B) total revenues. C) product price, marginal revenue, and average revenue. D) supply curve for the product. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 69) The rate of production that maximizes the positive difference between total revenues and total costs is the A) profit-maximizing rate of production. B) rate of production at which marginal revenue equals marginal product. C) rate of production at which marginal revenue equals average revenue. D) rate of production at which average revenue equals average total cost. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 70) Which is always TRUE at a firm's profit-maximizing rate of production? A) Total Revenue = Total Costs B) The total revenue curve lies below the total cost curve. C) Marginal Revenue > Marginal Cost D) Marginal Revenue = Marginal Cost Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

71) The perfectly competitive, profit-maximizing rate of production A) occurs at the point at which marginal revenue is equal to marginal cost. B) occurs at the point at which the difference between marginal revenue and marginal cost is maximized. C) is not measurable for a perfectly competitive firm. D) ignores the relation of total revenues and total costs. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 72) Which of the following is TRUE for the perfectly competitive firm? A) Price and MR are always equal. B) AR is less than price. C) AR is more than price. D) Price elasticity of demand is equal to 1. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 73) The profit-maximizing output for the perfectly competitive firm occurs at the point at which A) TR - MR is at a maximum. B) TR - TC is at a minimum. C) MR = MC. D) TR - ATC is at a maximum. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

74) When MR < MC for a firm, the firm should A) reduce its level of output. B) stay at the same level of output. C) stop producing. D) increase output, unless P < AVC. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 75) A firm seeking to maximize economic profits should produce at the output at which A) total revenue equals total cost. B) marginal revenue equals marginal cost. C) average revenue equals average cost. D) marginal revenue equals average revenue. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 76) A perfectly competitive firm will maximize profits when A) average cost is greater than marginal revenue. B) marginal cost is greater than marginal revenue. C) marginal cost is equal to marginal revenue. D) average cost is equal to average revenue. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 77) For a perfectly competitive firm, profit maximization occurs when A) marginal revenue equals average total cost. B) marginal revenue equals marginal cost. C) marginal cost is equal to average total cost. D) average total cost is at its minimum. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 39 Copyright © 2021 Pearson Education, Inc.

78) When price and marginal cost are equal for a perfectly competitive firm, the firm is A) minimizing average total cost. B) maximizing total revenue. C) maximizing economic profit. D) earning negative economic profit. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 79) When price is greater than both marginal cost and average variable cost, the perfectly competitive firm A) is maximizing economic profit. B) should increase its level of output. C) should reduce its level of output. D) should stop production. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 80) If a firm is producing an output rate at which marginal cost is greater than price, the firm A) is sustaining economic loss. B) should increase its output level. C) should reduce its output level. D) will not be covering its fixed cost. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

81) If a firm is producing an output rate at which marginal cost is equal price, the firm A) is maximizing profits. B) should increase its output level. C) should reduce its output level. D) will not be covering its fixed cost. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 82) For a firm in a perfectly competitive industry, which of the following is TRUE? A) MR = P B) MR < P C) AVC = ATC D) MR > P Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 83) When demand is perfectly elastic, marginal revenue is A) zero. B) equal to price. C) declining. D) increasing. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

84) Which of the following conditions is TRUE for a profit-maximizing firm in a perfectly competitive industry? A) MR = TC B) ATC = AFC C) MR = MC D) MC = AVC Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 85) Suppose that at the current level of output, price = $12, MC = $4, AVC = $7, and ATC = $11. Which of the following is TRUE? A) The firm should decrease output. B) The firm should shut down. C) The firm should increase output. D) The firm should maintain the current level of output. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 86) Suppose that at the current level of output, price = $12, MC = $14, AVC = $7, and ATC = $9. Which of the following is TRUE? A) The firm should decrease output. B) The firm should shut down. C) The firm should increase output. D) The firm should maintain the current level of output. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

87) Suppose that at the current level of output, price = $100, MC = $100, AVC = $80, and ATC = $90. Which of the following is TRUE? A) The firm should decrease output. B) The firm should shut down. C) The firm should increase output. D) The firm should maintain the current level of output. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 88) For a firm in a perfectly competitive industry, A) the demand curve is unitary elastic throughout. B) marginal revenue and product price are equal at every level of output. C) the price elasticity of demand is zero. D) more output can be sold only if the firm unilaterally lowers its product price. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 89) The marginal revenue curve of a perfectly competitive firm A) has a vertical intercept equal to exactly one-half of the vertical intercept for the demand curve. B) lies below the demand curve and above the average revenue curve. C) intersects the average revenue curve from above at the maximum point of the average revenue curve. D) is also the demand curve faced by the firm. Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

90) In a perfectly competitive industry, the firm's marginal revenue curve is A) downward sloping. B) upward sloping. C) vertical. D) horizontal. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

91) In the above figure, what happens to the firm's optimal level of output if the price it receives for its product increases from P2 to P3? A) Output stays the same. B) Output decreases. C) Output increases. D) There is not enough information provided to know what happens to output. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

92) In the above figure, what happens to the firm's optimal level of output if the price it receives for its product decreases from P4 to P3? A) Output stays the same. B) Output decreases. C) Output increases. D) There is not enough information provided to know what happens to output. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 93) Marginal revenue equals A) total revenue divided by output. B) price times quantity, divided by average revenue. C) total revenue divided by average revenue. D) the change in total revenue from selling one more unit. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 94) The change in total revenues resulting from a change in output of one unit is A) average revenue. B) marginal revenue. C) economic revenue. D) diminishing revenue. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

95) For a perfect competitor, marginal revenue equals A) the slope of the demand curve. B) average revenue divided by price. C) price divided by average revenue. D) the market price. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 96) Which of the following is NOT true for a perfectly competitive firm? A) P = MR B) AR = MR C) MR = TR D) P = AR Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 97) For a perfect competitor, the marginal revenue curve will be A) horizontal. B) vertical. C) positively sloped. D) negatively sloped. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

98) Refer to the above figure. Line C in Panel B does NOT represent A) the equilibrium price. B) average revenue. C) total revenue. D) marginal revenue. Answer: C Diff: 3 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 99) The perfectly competitive firm maximizes profits when A) it produces and sells the quantity at which the difference between marginal revenue and marginal cost is the greatest. B) it produces and sells the quantity at which marginal revenue and marginal cost are equal. C) it produces and sells the quantity at which the difference between average revenue and average cost is the greatest. D) it produces and sells the quantity at which the difference between price and average cost is the greatest. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

100) The rate of production at which marginal revenue equals marginal cost is A) a point of negative profits for the firm. B) what determines the equilibrium price in the market. C) the firm's shutdown point. D) the point where profits are maximized. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 101) If marginal revenue is less than marginal cost, the firm should A) raise price. B) raise marginal revenue. C) increase its rate of output. D) decrease its rate of output. Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 102) If marginal revenue is greater than marginal cost, the firm should A) raise price. B) raise marginal revenue. C) increase its rate of output. D) decrease its rate of output. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 103) Which of the following is always TRUE for a perfectly competitive firm? A) P = d = MR B) P = d = AVC C) MC = MR = AVC D) AVC = ATC = P Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 48 Copyright © 2021 Pearson Education, Inc.

104) Which of the following is always TRUE in the short run for a perfectly competitive firm that is maximizing economic profits? A) P = d = MR = MC = AVC B) P = d = MR = MC C) P = d = MR = Q D) MR = MC = Q Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 105) Marginal revenue is A) change in total revenue/change in output. B) total revenue/output. C) change in total revenue/output. D) total revenue/change in output. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 106) For a perfectly competitive firm, A) price is greater than marginal revenue. B) price equals marginal revenue. C) price is less than marginal revenue. D) there is no relationship between price and marginal revenue. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

107) The profit-maximizing level of output for a firm occurs at the point at which A) P = ATC. B) P = AVC. C) MR = MC. D) MR = ATC. Answer: C Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 108) Marginal revenue A) cannot be used to determine the profit-maximizing rate of production. B) is the change in total revenues resulting from a change in output. C) is a change in revenue that is immeasurable and non-quantifiable. D) cannot be effectively utilized when analyzing the perfect competitor. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 109) Under what condition are profits maximized? A) at the rate of output at which marginal revenue equals marginal cost B) at the output rate where marginal cost is greater than marginal revenue C) at the point at which the difference between total revenues and total costs is negative D) at the point at which the difference between price and quantity demanded is greatest Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 110) The loss-minimizing output for the perfectly competitive firm occurs at the point at which A) TR - MR = minimum. B) TR - TC = maximum. C) MR = MC. D) TC - ATC = maximum. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 50 Copyright © 2021 Pearson Education, Inc.

111) A perfectly competitive firm is selling 300 units of output at $4 each. At this output level, total fixed cost is $100 and total variable cost is $500. The firm A) is maximizing its profit. B) is earning a profit, but not necessarily the maximum profit. C) is experiencing an economic loss. D) should shut down. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 112) Economic profits are maximized at the point at which A) marginal revenues equal marginal costs. B) accounting profit exceeds economic profit. C) total revenues are greater than total costs. D) accounting profits are equal to zero. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 113) For a perfectly competitive firm, when MC is less than MR, A) the producer has an incentive to expand output. B) the producer has an incentive to decrease output. C) the producer has no incentive to change production. D) economic profits must be positive. Answer: A Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

114) If a perfectly competitive firm is producing at an output at which marginal cost exceeds marginal revenue, A) price will be at the profit maximizing level. B) sales will be at the profit maximizing level. C) the firm should expand production. D) the firm should reduce production. Answer: D Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 115) A firm in a competitive industry faces the following short-run cost and revenue conditions: ATC = $16; AVC = $8; and MR = MC = $12. This firm should A) expand production and keep price constant. B) decrease production and raise its price. C) shut down. D) continue to operate at the same price and output level in the short run. Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 116) Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC = $12; AVC = $10; MC = $15; MR = $16. The firm should A) increase output. B) decrease output. C) increase price. D) change nothing. Answer: A Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

117) Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC = $700; AVC = $500; MC = $600; MR = $600. The firm should A) increase output. B) decrease output. C) continue to produce its current output. D) shut down. Answer: C Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 118) Suppose a perfectly competitive firm faces the following cost and revenue conditions: ATC = $25.50; AVC = $20.50; MC = $25.50; MR = $28.50. The firm should A) decrease output. B) increase output. C) shut down. D) continue to produce its current output. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 119) Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC = $8.00; AVC = $5.00; MC = $8.00; MR = $7.00. The firm should A) increase output. B) decrease output. C) increase price. D) continue to produce its current output. Answer: B Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

120) A firm should continue producing until A) the cost of producing the output equals the revenues obtainable from selling the output. B) the cost of increasing output by one more unit equals the revenues obtainable from selling the extra unit. C) average costs are at a minimum. D) the average cost when another unit is produced equals the average revenue obtainable from selling the extra unit. Answer: B Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 121) For a perfectly competitive firm, which of the following is NOT true? A) The average revenue curve, the demand and the marginal revenue curves are identical. B) The total revenue curve begins at the origin and slopes upward as output increases. C) The slope of the total revenue curve is equal to the product price. D) The total revenue curve is horizontal. Answer: D Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 122) "Demand curves slope down, so the demand curve faced by a perfectly competitive firm must also be downward sloping." Do you agree or disagree? Why? Answer: Disagree. Market demand curves slope down. However, the demand curve faced by a perfectly competitive firm is horizontal at the market price. The firm's output is such a small portion of industry output so that it cannot influence the market price. If it sets the price of its good above the market price, which is identical to other firms' products, it will be unable to sell any of its output. If it sets its price below the market price, it will not maximize economic profits. Consequently, the firm takes the market price as given, and it receives this per-unit price for any given quantity it produces and sells. Diff: 3 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

123) Describe and explain how a perfectly competitive firm's demand curve is found. Answer: The interaction of supply and demand in the industry determines the price. The firm is a price taker, so it takes the price as a given. It can sell as many units as it wants at this price. Hence, the demand curve for the product of a perfectly competitive firm is perfectly elastic, or horizontal, at the market price. Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 124) Why is the demand curve horizontal for a perfectly competitive firm? Answer: The demand curve for a perfectly competitive firm is horizontal to reflect the fact that if it raises its price, its sales will drop to zero. The firm has no control over the market price. Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 125) "A perfect competitor should maximize total revenues." Do you agree or disagree? Explain. Answer: Disagree. A perfect competitor should maximize total profits instead of total revenues. Because the firm's average revenue is constant for all output levels, its total revenues increase proportionally to its output. However, its total costs do not increase proportionally to output. As such, there is a level of output at which total profits—the difference between total revenues and total costs—are maximized. Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 126) What does a perfectly competitive firm do to maximize profits? Answer: The perfect competitor cannot influence market price, so it must find the rate of production that maximizes its profits. The profit-maximizing output is the output at which marginal revenue equals marginal cost. If marginal revenue is greater than marginal cost, an additional unit increases revenues more than costs, so profits increase. If marginal revenue is less than marginal cost, a reduction in output of one unit reduces costs more than revenues, so profits increase. Economic profits are maximized when marginal revenue equals marginal cost. Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

127) Why should a perfect competitor produce at which price equals marginal cost? Answer: For a perfect competitor, its market price equals marginal revenue. Because profits are maximized when marginal revenue equals marginal cost, a perfect competitor will therefore maximize profits by producing at price equals marginal cost. A lower or higher level of output than that profit-maximizing output level will only result in lower profits. Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 128) Why should a firm not produce more than the rate of output at which marginal revenue equals marginal cost? Answer: A firm maximizes its total profits when producing the rate of output at which marginal revenue equals marginal cost. If the firm produces more than this rate of production, then marginal cost will exceed marginal revenue, meaning that total profits decrease as a result of a higher production rate. Therefore, the profit-maximizing firm should not produce more than the rate of production at which marginal revenue equals marginal cost. Diff: 2 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 129) How do we determine whether a firm has maximized profits? Answer: A firm maximizes profits only when it produces where marginal revenue equals marginal cost. Whenever marginal revenue exceeds marginal cost, the firm can always make more profit by increasing production; whenever marginal revenue is less than marginal cost, the firm can always make more profit by reducing production. Diff: 1 Topic: 23.2 Perfect-Maximizing Choices of a Perfectly Competitive Firm Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

23.3 Short-Run Supply under Perfect Competition

1) Refer to the above table. If the price is $5, the perfectly competitive firm should produce A) 104 units. B) 105 units. C) 106 units. D) 107 units. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 2) Refer to the above table. If the price is $5, the maximum economic profits this firm could earn is A) $520. B) $420. C) $414. D) $106. Answer: D Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

3) Refer to the above table. If the price is $6, the perfectly competitive firm should produce A) 104 units. B) 105 units. C) 106 units. D) 107 units. Answer: B Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 4) Refer to the above table. If the price is $6, the maximum profit this firm could earn is A) $210. B) $414. C) $420. D) $630. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 5) Refer to the above table. If the price is $3, the perfectly competitive firm should produce A) 102 units. B) 105 units. C) 103 units. D) 104 units. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 6) Refer to the above table. If the price is $3, the maximum profit this firm could earn is A) $99. B) $306. C) -$100. D) -$99. Answer: D Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 58 Copyright © 2021 Pearson Education, Inc.

7) A firm in a perfectly competitive industry faces the following cost and revenue conditions: ATC = $6; AVC = $3; MR = MC = $5. The firm is A) earning economic profits. B) experiencing economic losses. C) experiencing zero profits. D) in a position in which it should shut down. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

8) In the above figure, if the firm is facing demand curve d2, then to maximize profits it will produce at output level A) A. B) B. C) C. D) D. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

9) In the above figure, if d3 is the relevant demand curve for this firm, then which level of output will maximize this firm's profits or minimize its losses? A) A B) B C) C D) D Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 10) In the above figure, if d4 is the relevant demand curve for this firm, then which level of output will maximize this firm's profits or minimize its losses? A) A B) B C) C D) D Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 11) In the above figure, if d1 is the relevant demand curve for this firm, then which level of output will maximize this firm's profits or minimize its losses? A) A B) B C) C D) D Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

12) If the firm in the above figure produces output level D, it incurs an average fixed cost of production equal to the distance A) DK. B) RN. C) JL. D) KR. Answer: D Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 13) What is always TRUE about the short-run equilibrium position for a firm in perfect competition? A) MR = MC = P = ATC = AR B) TR = TC C) MR = MC = P = AR D) MC = ATC Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 14) Profit per unit is the difference between A) average revenue and average total cost. B) marginal revenue and marginal cost. C) total revenue and total cost. D) average revenue and marginal cost. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

15) A perfectly competitive firm is maximizing profits in the short run. This implies that the firm is earning the most economic profits possible, which A) must be positive. B) must be either zero or positive. C) can be positive, negative, or zero. D) exist at the point at which price equals total cost. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

16) Refer to the above figure. Profits will equal zero A) when the price equals $1. B) when the price equals $2. C) when the price equals $4. D) at prices between $1 and $2. Answer: B Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

17) Refer to the above figure. Profits will be positive A) when the price equals $1. B) when the price equals $2. C) at prices between $1 and $2. D) when the price is above $2. Answer: D Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 18) Refer to the above figure. The firm will just be covering all of its variable cost but none of its fixed cost A) when the price equals $1. B) when the price equals $2. C) when the price equals $4. D) at prices between $1 and $2. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 19) Refer to the above figure. Profits will be negative A) when the price equals $2. B) when the price is above $2. C) when the price is below $2. D) only when the price equals $1. Answer: C Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

20) Refer to the above figure. The firm's short-run shutdown price is A) at $1. B) at $2. C) at $4. D) above $4. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 21) The difference between price and average total cost is A) total costs. B) marginal costs. C) average profit. D) an irrelevant quantity. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

22) Refer to the above figure. When the price in the market is $4, economic profits will equal A) $100. B) $200. C) $300. D) $400. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

23) Refer to the above figure. If the market price is equal to A, which statement can be made about economic profits? A) Economic profits are positive and equal to ABCG. B) Economic profits are positive and equal to ABEF. C) Economic profits are negative and equal to GCEF. D) Economic profits are negative and equal to ABQ 0. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

24) Refer to the above figure. If the market price is equal to A, which statement can be made about profits? A) Profits are positive and equal to BCEA. B) Profits are positive and equal to BCFG. C) Profits are negative and equal to BCEA. D) Profits are negative and equal to GFQ 0. Answer: C Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 25) Refer to the above figure. In order to stay open in the short run, this firm must A) earn a positive profit. B) receive a price equal to or greater than the minimum of its average variable cost. C) receive a price exactly equal to its average total cost. D) recover its fixed cost. Answer: B Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

26) In the above figure, what is the profit-maximizing output and price? A) 8, $7 B) 10, $8 C) 12, $10 D) 10, $10 Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 27) In the above figure, what is the profit at the profit-maximizing output level? A) $70 B) $2 C) $20 D) $10 Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge

28) In the above figure, what is the price the firm receives if the output is 8? A) $10 B) $2 C) $7 D) $8 Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Application of knowledge 29) Suppose a perfectly competitive cotton farmer can produce 10 containers of cotton at an output at which marginal cost equals marginal revenue. The price per container of cotton is $100 and the average total cost is $75. What is the profit or loss that this cotton farmer is earning? A) $750 B) $150 C) $250 D) -$25 Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 30) Suppose a perfectly competitive ukulele factory can produce 35 ukuleles at an output at which marginal cost equals marginal revenue. The price per ukulele is $1300 and the average total cost is $1500. What is the profit or loss that this furniture factory is earning? A) $700.00 B) -$7,000.00 C) -$1,050.00 D) -$450.00 Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

31) The short-run break-even price A) is the price at which the firm's current liabilities are paid off. B) is the price at which a firm's total revenues equal total costs. C) occurs at the output at which the firm yields a below normal rate of return. D) occurs at the output at which the firm yields a positive economic profit. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

32) In the above figure, the firm will shut down if price falls below A) F. B) I. C) H. D) E. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

33) In the above figure, the firm will shut down if quantity falls below A) A. B) B. C) C. D) D. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 34) The firm in the above figure breaks even when market price is A) H. B) E. C) I. D) G. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 35) The firm in the above figure breaks even when quantity is A) A. B) B. C) C. D) D. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 36) In the short run, the perfectly competitive firm will always earn an economic profit when A) P = ATC. B) P > AVC. C) P = MC. D) P > ATC. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

37) A company finds that at the output level at which marginal cost equals marginal revenue, TC = $500, TVC = $400, and TR = $450. Your advice to the firm is A) shut down, as TC > TR. B) reduce output to reduce the cost of production. C) increase output to reduce the per unit cost of production. D) continue to produce because loss is less than TFC. Answer: D Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 38) A company finds that at its present level of production, MC = AVC at $15, MC = ATC at $20, and MC = MR at $17. Your advice to the firm regarding its short-run operations is A) to continue production, as it is earning an economic profit of $2 per unit. B) to continue production, as it is earning an economic profit of $3 per unit. C) to shut down. D) to continue production at a loss. Answer: D Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 39) A company finds that at its present level of production, MR = MC at $14, MC = AVC at $15, and MC = ATC at $20. Your advice to the firm regarding its short-run operations is A) to continue production, as it is earning an economic profit of $1 per unit. B) to continue production, as it is earning an economic profit of $6 per unit. C) to shut down. D) to continue production at a loss. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

40) Suppose that in a perfectly competitive market, the market price is $10. A firm in that market has marginal cost of $10, average total cost of $12, and it is producing 100 units. The firm is A) earning $1,000 in total economic profits and is maximizing economic profits. B) earning $200 in total economic profits and is maximizing economic profits. C) earning zero total economic profits and is not maximizing economic profits. D) incurring $200 in total economic losses and is minimizing economic losses. Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

41) In the above figure, if price is equal to P4, the firm will A) earn positive economic profits. B) incur an economic loss. C) earn zero economic profits. D) shut down. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

42) If price is $5, marginal cost is $5, average total cost is $3, and the quantity produced is 150 units, then the perfectly competitive firm is A) not maximizing economic profit. B) earning $2 in economic profits and is maximizing economic profits. C) earning $150 in economic profits and is not maximizing economic profits. D) earning $300 in economic profits and is maximizing economic profits. Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 43) Suppose the market price is $5, marginal cost is $4, and average total cost is $2. The perfectly competitive firm in that market is A) earning $3 in economic profits per unit of output and is not maximizing profits. B) earning $2 in economic profits per unit of output and is maximizing profits. C) earning $1 in economic profits per unit of output and is not maximizing profits. D) none of these: Insufficient information is given. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

44) In the above figure, assume d1 is the demand curve faced by this firm. Which is TRUE? A) This firm is earning an economic profit. B) This firm is experiencing an economic loss. C) This firm is breaking even. D) This firm's total costs equal EJA0. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 45) In the above figure, assume d3 is the demand curve faced by this firm. Which is TRUE? A) This firm is earning an economic profit. B) This firm is experiencing an economic loss. C) This firm is breaking even. D) This firm's total revenues equal HRD0. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

46) In the above figure, when price is below E, this firm should A) lower prices. B) continue to operate as-is. C) attempt to lower ATC and to raise AVC. D) shut down. Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 47) For a perfectly competitive firm, the short-run break-even point occurs at the level of output where A) P > MR = MC. B) MR = P > MC. C) MR < P = MC. D) P = MC = ATC. Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 48) At the short-run break-even point, the perfectly competitive firm is A) earning positive economic profits. B) earning zero economic profits. C) earning negative economic profits. D) just covering its total variable costs. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

49) When a firm is earning zero economic profits A) accounting profit is zero. B) total revenue is greater than total cost. C) P = ATC. D) P is greater than ATC. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 50) At the short-run break-even point, the firm is A) earning zero accounting profit. B) losing money. C) earning zero economic profit. D) ready to shut down. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 51) A perfectly competitive firm's short-run break-even output occurs A) at the minimum point of its average variable cost curve. B) at the minimum point of its average total cost curve. C) at the minimum point of its marginal cost curve. D) at the intersection of its total cost curve and its marginal revenue curve. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

52) According to the above figure, if the firm is earning zero economic profits, what quantity is the firm selling and at what price? A) Q = 200; P = $4 B) Q = 1,000; P = $5 C) Q = 800; P = $4 D) Q = 1,200; P = $7 Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 53) The short-run break-even price is the point at which A) price is less than marginal cost. B) marginal cost, average total cost and marginal revenue are all equal. C) average variable cost is at a minimum. D) marginal cost, price and average variable cost are all equal. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

54) Economic profits at the short-run break-even point are A) positive. B) negative. C) equal to zero. D) indeterminate since they also depend on the size of the fixed costs. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 55) Accounting profits at a firm's break-even point are A) positive. B) negative. C) zero. D) indeterminate since we need to know what demand is. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 56) At a perfectly competitive firm's short-run break-even price, A) P = ATC. B) TR is more than TC. C) the average cost is below the total revenue line. D) P > AVC, but P < AFC. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

57) Suppose a perfectly competitive firm faces the following short-run cost and revenue conditions: ATC = $6.00; AVC = $4.00; MC = $3.50; MR = $3.50. The firm should A) increase output. B) increase price. C) remain at the same position. D) shut down. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 58) For a perfectly competitive firm, any price below its minimum AVC is a A) market price. B) shutdown price. C) profit maximizing price. D) negative price. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 59) The firm will shut down in the short run if A) the price falls below its minimum AVC. B) the market price rises unexpectedly. C) P = MC. D) P = ATC at its minimum. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

60) The short-run shutdown price occurs where price equals A) MC. B) AVC at any point. C) AVC at the minimum point. D) AFC at the minimum point. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 61) When a firm has an accounting profit that is negative, it A) will never produce output, even in the short run. B) may still have economic profit. C) has total revenue that is less than total cost. D) cannot be producing where price equals marginal cost. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 62) In the short run, a firm should shut down when A) P < AVC. B) P > MC. C) MR > MC. D) MR = ATC. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 63) If AVC is $10 when P = MC, a firm A) will have positive economic profits if price is greater than $10. B) is producing too little output. C) should shut down if price is less than $10. D) is experiencing economies of scale. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 81 Copyright © 2021 Pearson Education, Inc.

64) A firm should never produce any output if A) P < AVC. B) P < ATC. C) AR < ATC. D) MR < MC. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 65) A firm earning economic losses should operate in the short run as long as A) the price per unit sold is greater than the average fixed cost per unit produced. B) the price per unit sold is greater than the average variable cost per unit produced. C) marginal revenue is at least the price per unit sold. D) the price per unit sold is equal to or greater than the marginal cost of production. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 66) A firm that shuts down in the short run experiences losses equal to its A) total fixed costs. B) average variable costs. C) total variable costs. D) total variable costs minus its total fixed costs. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

67) The short-run shutdown price for a perfectly competitive firm is where price equals A) minimum ATC. B) AR. C) MR. D) minimum AVC. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 68) The shutdown rule for a firm in a perfectly competitive industry is that the firm should cease production if A) P < MC. B) P < ATC. C) P < AVC. D) P < AFC. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 69) As long as price exceeds AVC, the firm is better off A) continuing production. B) closing. C) raising its price. D) cutting price. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

70) A firm will shut down in the short run when A) price is below average total costs at all possible rates of output. B) price is below average variable costs at all possible rates of output. C) price is below marginal cost at all possible rates of output. D) it is making a loss. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 71) In the short run, which of the following is FALSE about the shutdown point? A) Total revenue is equal to total fixed cost. B) Total revenue is equal to total variable cost. C) Product price is equal to the minimum average variable cost. D) Price multiplied by quantity must be equal to minimum average variable cost multiplied by quantity. Answer: A Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 72) In the short run, the price at which a firm's total revenues equal its total costs is A) a point of positive profits. B) a no return price. C) the short-run shutdown point. D) the short-run break-even point. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

73) At the short-run break-even price, the firm A) is earning positive economic profits. B) is earning negative economic profits. C) is making a normal rate of return on its capital investment. D) may be earning a positive or negative economic profit depending upon costs. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 74) If price is above average total costs, the firm A) is earning positive profits. B) is earning negative profits. C) is making a normal rate of return on its capital investment. D) may be earning a positive or negative profit depending upon costs. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 75) Below the short-run shutdown price, the firm A) is earning positive economic profits. B) is earning negative economic profits. C) is making a normal rate of return on its capital investment. D) may be earning a positive or negative economic profits depending upon costs. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

76) A firm will continue to produce in the short run even though economic profits are negative as long as A) the amount of the loss is no greater than the amount of fixed cost. B) MC = MR. C) it earned positive economic profits last year. D) it has fixed obligations to pay. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 77) A firm that shuts down in the short run experiences losses equal to A) zero. B) total variable costs. C) total fixed costs. D) total marginal costs. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 78) If there is no output for which product price is sufficient to cover variable costs, A) the firm should stay open in the short run. B) the firm should shut down in the short run. C) the firm earns economic profits by staying open. D) the firm should increase production. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

79) A perfectly competitive firm faces a market clearing price of $150 per unit. Average variable costs are at the minimum value of $200 per unit at an output rate of 100 units. Marginal cost equals $150 per unit at an output rate of 75 units. It can be concluded that the short-run profitmaximizing output rate is A) 75 units, at which the firm earns zero economic profits per unit sold. B) 75 units, at which the firm earns $50 in economic profits per unit sold. C) 100 units, because marginal cost equals average variable costs. D) 0 units, because price is less than average variable costs. Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 80) A perfectly competitive firm faces a market clearing price of $150 per unit. Average total costs are at the minimum value of $200 per unit at an output rate of 100 units. Average variable costs are at the minimum value of $100 per unit at an output rate of 50 units. Marginal cost equals $150 per unit at an output rate of 75 units. It can be concluded that the short-run profitmaximizing output rate is A) 75 units, at which the firm earns zero economic profits per unit sold. B) 75 units, at which the firm earns negative economic profits per unit sold. C) 75 units, at which the firm earns positive economic profits per unit sold. D) 50 units, because price is less than average variable costs. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 81) A perfectly competitive firm faces a market clearing price of $150 per unit. Average total costs are at the minimum value of $120 per unit at an output rate of 70 units. Marginal cost equals $150 per unit at an output rate of 75 units. It can be concluded that the short-run profitmaximizing output rate is A) 75 units, at which the firm earns zero economic profits per unit sold. B) 75 units, at which the firm earns negative economic profits per unit sold. C) 75 units, at which the firm earns positive economic profits per unit sold. D) 70 units, because price is less than average total costs. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

82) A firm is currently producing at the point where MC = MR. The situation for the firm at this point is P = $5, Q = 100, ATC = $6, AVC = $4.50. What do you recommend this firm do? A) Increase production above the current output rate, because MC = MR at this rate of output. B) Continue to produce the current output rate, because P > AVC. C) Shut down, because AVC > P. D) Shut down, because ATC > P. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 83) A firm is currently producing at the point where MC = MR. The situation for the firm at this point is P = $5, Q = 100, ATC = $6, AVC = $5.50. What do you recommend this firm do? A) Increase production above the current output rate, because MC = MR at this rate of output. B) Continue to produce the current output rate, because P > AVC. C) Shut down, because AVC > P. D) Shut down, because ATC > P. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 84) A firm that has positive economic profits has accounting profits that are A) zero. B) positive. C) negative. D) indeterminate without more information. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking

85) A firm that has negative economic profits has accounting profits that are A) zero. B) positive. C) negative. D) indeterminate without more information. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 86) When a firm has economic profits equal to zero, A) the firm is earning a normal rate of return on investment. B) the firm is not earning a normal rate of return on investment. C) the firm should shut down. D) the firm's accounting profits are also zero. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-12: Apply methods for measuring and analyzing the effects of inputs and costs on the supply curve AACSB: Analytical thinking 87) When a firm is at its short-run break-even point, A) economic profits are positive. B) economic profits equal zero and the firm should shut down. C) economic profits equal zero and the firm is earning a nominal rate of return on investment. D) economic profits are negative but the firm should continue to produce because accounting profits are positive. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

88) The owner of a perfectly competitive firm that is earning economic losses in the short run A) should alter the rate of output in order to increase profitability. B) should cut his own salary in order to reach the break-even point. C) is actually losing more than he thinks because not all of the implicit costs have been considered. D) is earning less than he would if he worked for someone else. Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 89) The owner of a perfectly competitive firm is currently earning an economic profit of zero. This owner A) should shut down since profits of zero are not good. B) should raise the price of the product to increase profits. C) is covering all of his fixed costs. D) will continue producing in the short-run but will shut down in the long run if profits do not increase. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 90) In the short run, in a perfectly competitive market, a firm will shut down if A) P < AVC for all levels of output. B) P < ATC for all levels of output. C) ATC > P > AVC for all levels of output. D) P > AFC for all levels of output. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

91) For a perfectly competitive firm facing the short-run break-even price, A) it has a negative accounting profit. B) it has an economic profit of zero. C) it should shut down. D) it should expand production. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

92) In the above figure, if the market price is $10, the firm A) produces 10 units. B) produces 12 units. C) shuts down operations. D) produces 11 units. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

93) In the above figure, if the market price is less than $7, the firm A) produces 10 units. B) produces 8 units. C) produces 0 units. D) produces 11 units. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 94) In the above figure, if the market price is $8, the firm A) continues to produce but at an economic loss. B) continues to produce but at an economic profit. C) shuts down operations. D) produces 10 units. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 95) The short-run break-even price is A) the price at which a firm's total revenues exceed total costs. B) the point at which the firm's total costs are maximized. C) the price at which a firm's total revenues equal its total costs. D) the point at which the firm's implicit costs are maximized. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 96) If a firm shuts down in the short run, A) it will lose its operating costs. B) its losses will be equal to zero. C) it will incur its fixed costs. D) it will incur only its explicit costs. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 92 Copyright © 2021 Pearson Education, Inc.

97) Suppose the price of an item in a perfectly competitive market is $20. For a firm in this market, MC = MR at an output of 100 units. The average total cost at this output level is $4 per unit, and TVC is $800. We may conclude that A) the firm should shut down because TC > TR. B) the firm should continue to produce because P>AVC. C) the firm should shut down because its FC is $400 and its TC is $500. D) the firm should shut down because other firms will enter the industry as the market is perfectly competitive. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 98) Suppose a perfectly competitive firm can produce 20,000 bushels of corn a year at an output at which marginal cost equals marginal revenue. The market price of corn per bushel is $1.00. The firm's total costs per year are $50,000 and fixed costs per year are $25,000. In the short run, this firm should A) shut down. B) continue producing until the price of corn increases. C) produce 20,000 bushels of corn because, although they are losing money, they are losing less than if they shut down. D) produce 40,000 bushels to try to increase economic profit. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 99) Suppose a perfectly competitive firm can produce 20,000 bushels of corn a year at an output at which marginal cost equals marginal revenue. The market price of corn per bushel is $2.00. The firm's total costs per year are $50,000 and fixed costs per year are $25,000. In the short run, this firm should A) shut down. B) continue producing until the price of corn increases. C) produce 20,000 bushels of corn because, although they are losing money, they are losing less than if they shut down. D) produce 40,000 bushels to try to increase economic profit. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 93 Copyright © 2021 Pearson Education, Inc.

100) The break-even price for a perfectly competitive firm is the price that is equal to A) AVC. B) ATC. C) MC. D) MR Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

101) Using the above figure, the perfectly competitive firm in the diagram will earn an economic profit if the market price is A) P1. B) P2. C) P3. D) P4. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

102) Using the above figure, the perfectly competitive firm should shut down if the market price is below A) P1. B) P2. C) P3. D) P4. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 103) Using the above figure, the short-run break-even price for the perfectly competitive firm will be A) P1. B) P2. C) P3. D) P4. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 104) Which of the following could generate economic profits for perfectly competitive firms in the short run, if they initially earn zero economic profits? A) a fall in demand B) a unit tax on output C) an increase in total fixed costs D) a decrease in input prices Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

105) A firm is currently producing an output at which price equals the minimum point on the average variable cost curve. If wage rates increase, the firm will A) increase its rate of output to make up for the higher variable costs. B) shut down since it would no longer be covering its variable costs. C) decrease its rate of output to offset the higher variable costs. D) not make any changes since its current rate of output is still minimizing its losses. Answer: B Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 106) The perfectly competitive seller's short-run supply curve is A) its entire marginal cost curve. B) its marginal revenue curve. C) the part of its marginal cost curve above the average variable cost curve. D) the part of its marginal cost curve above the average total cost curve. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 107) The rising portion of a perfectly competitive firm's marginal cost curve, above the intersection with AVC, is its A) demand curve. B) economic profit. C) supply curve. D) accounting profit. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

108) In a perfectly competitive market, a firm's short-run supply curve is A) its total cost curve. B) its marginal cost curve equal to or above the point of intersection with its average variable cost curve. C) its average variable cost curve below the point of intersection with its total cost curve. D) its total cost curve between the shutdown point and the break-even point. Answer: B Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 109) If price is below average variable costs at all rates of output, the quantity supplied by a perfectly competitive firm will equal A) zero. B) the rate of output where price equals marginal cost. C) the rate of output associated with the break-even point. D) the rate of output where marginal revenue equals average fixed costs. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 110) Assuming fixed factor prices, the short-run industry supply curve for a perfectly competitive industry is equal to the sum of the A) AVC curves above minimum AVC. B) ATC curves above minimum ATC. C) MC curves above minimum AVC. D) MC curves above minimum ATC. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

111) In the above figure, assuming Firm 1 and Firm 2 are the sole producers in the industry, the industry quantity supplied at price P1 is equal to A) Q1 + Q2. B) Q1 + Q3. C) Q2 + Q4. D) Q4 - Q2. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 112) In the above figure, assuming Firm 1 and Firm 2 are the sole producers in the industry, the industry quantity supplied at price P2 is equal to A) Q1 + Q2. B) Q1 + Q3. C) Q2 + Q4. D) Q4 - Q2. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

113) A perfectly competitive industry's short-run supply curve is best described as A) the upward-sloping portion of the industry's marginal cost curve. B) horizontal. C) perfectly inelastic. D) the horizontal summation of the individual firms' supply curves. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 114) The short-run supply curve of a perfect competitor is A) its average variable cost curve. B) its marginal revenue curve. C) its entire marginal cost curve. D) its marginal cost curve equal to or above the minimum point on its average variable cost curve. Answer: D Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

115) Refer to the above figure. The competitive firm's short run supply curve A) starts at A and goes along the MC curve as quantity increases. B) starts at B and goes along the MC curve as quantity increases. C) starts at A and goes along the AVC curve as quantity increases. D) starts at B and goes along the ATC curve as quantity increases. Answer: A Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 99 Copyright © 2021 Pearson Education, Inc.

116) A perfectly competitive firm is producing zero units of output in the short run. We know that price is A) below the minimum point of its average fixed cost curve. B) below the minimum point of its average variable cost curve. C) below the minimum point of its average total cost curve. D) between the minimum points of its average total cost curve. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 117) The short-run industry supply curve is found by A) taking the inverse of the industry demand curve. B) horizontally summing the average total cost curve of all firms in the industry. C) adding up the quantities supplied at each price by each firm in the industry. D) adding up the quantities supplied at each price by each of the firms in the industry that are making a profit. Answer: C Diff: 1 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 118) The short-run industry supply curve slopes up because A) the firms eventually experience diseconomies of scale. B) the law of diminishing marginal product applies in the short run. C) wages increase as the industry increases output. D) the higher price is needed to get more firms to enter the industry. Answer: B Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

119) Factors that cause the short-run supply curve to change are factors that affect A) demand. B) fixed costs. C) variable costs. D) the market but not the individual firm. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 120) An increase in the productivity of labor causes A) quantity supplied by each firm in a competitive industry to decrease. B) supply in a competitive industry to increase. C) the market price to increase in a competitive industry. D) the firm's supply curve to shift but has no effect on the industry supply curve. Answer: B Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 121) If the wage rate increases and firms in a perfectly competitive industry are hiring labor, then A) the firms will quit using labor. B) profits will increase. C) market supply will decrease. D) market price will decrease. Answer: C Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 122) The short-run supply curve for a perfectly competitive firm is the portion of its A) ATC curve above the MC curve. B) MC curve above the ATC curve. C) ATC curve below the MC curve. D) MC curve above its AVC curve. Answer: D Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 101 Copyright © 2021 Pearson Education, Inc.

123) The short-run supply curve for the perfectly competitive firm is the portion of its A) MC curve above the AVC curve. B) MC curve above the AFC curve. C) MC curve above the ATC curve. D) MC curve above the MR curve. Answer: A Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 124) In principle, how do we determine a perfectly competitive firm's profit-maximizing output and maximum profits given information about the market clearing price, and about the marginal cost and average total cost curves of the firm? Explain in words. Answer: For a perfectly competitive firm, the market clearing price is the firm's marginal revenue and average revenue. The firm maximizes profits by producing the output at which marginal revenue equals marginal cost, which is at the point where the firm's marginal revenue curve crosses its marginal cost curve. Per-unit profit equals the market clearing price minus the average total cost of producing the profit-maximizing output. Total profits equal profit per unit (price minus average total cost) times the profit-maximizing output. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 125) Can a firm make losses by producing the rate of output at which marginal revenue equals marginal cost? Why? Answer: Even when a firm is producing the output rate at which marginal revenue equal to marginal cost, there is no guarantee that it makes profits. Market price is affected by market supply and market demand conditions. If price falls below average total costs, the firm makes a loss. However, the firm is doing its best and minimizing economic losses by producing the rate of output at which marginal revenue equals marginal cost. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

126) "By producing at an output rate at which marginal revenue equals marginal cost, a firm is definitely making positive economic profits." Do you agree or disagree? Why? Answer: Disagree. When it produces at an output rate at which marginal revenue equals marginal cost, the firm is doing its best (providing price exceeds its average variable cost). However, the firm does not necessarily make a profit. Depending on the market conditions that affect the market price and its average variable cost, it may actually incur a loss but the loss is still the minimum as long as marginal revenue equals marginal cost. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 127) What is the short-run break-even price? What are economic profits at this price? Why would a firm be willing to operate permanently at this price? Answer: The short-run break-even price is the price at which total revenue equals total costs, so that economic profits equal zero. The firm is willing to stay in business at zero economic profits because all opportunity costs are covered, including the opportunity costs of the entrepreneur's time and any other resources he or she brings into the firm. The zero economic profits are associated with a normal rate of return, and the entrepreneur cannot expect to do better anywhere else. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

128) What is the short-run shutdown price? Using a graph and a market price of P, show that losses are less when shutting down than when producing. Answer:

The short-run shutdown price is the price that equals the minimum point on the short-run average variable cost curve. At any price lower than this the firm should shut down and produce nothing. In the above figure, the price is below the shutdown price. Its fixed costs equal area CADE, so if it shuts down, this area equals its losses. If it produces where MR = MC, the firm's losses are CAFP, which are more than the losses with shutting down. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 129) "A firm should shut down immediately when it earns zero economic profits." Do you agree or disagree? Explain your answer. Answer: Disagree. When a firm earns economic profits or breaks even, the price per unit of output sold still exceeds the average variable cost so that it is better off continuing to produce. The revenues in excess of variable costs can be used toward covering fixed costs. Only if the price per unit of output falls below the average variable cost that the firm should shut down. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

130) When should a firm shut down? When should a firm go out of business? Answer: A firm should shut down when the price per unit of output sold drops below the average variable cost per unit produced. The firm can shut down or stop producing in the short run, but it can still stay in business. In the long run, if the market price remains below the firm's shutdown point, then its owners should sell the firm's assets and go out of business. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 131) Why does the industry short-run supply curve slope upward? Answer: The industry short-run supply curve slopes up because the individual firms' short-run supply curves slope upward. The perfect competitor's short-run supply curve slopes up because the marginal cost curve slopes up, and the marginal cost curve slopes up because of the law of diminishing marginal product. Hence, the industry short-run supply curve slopes up because of the law of diminishing marginal product. Diff: 3 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 132) What determines the perfect competitor's supply curve? How is the industry supply curve found? Answer: A supply curve shows the quantity supplied at various prices. The firm decides how much to supply at each price by equating price and marginal cost. Therefore, the marginal cost curve shows the quantity supplied at each price. However, at a price below the shutdown price, output is zero, so that portion of the marginal cost curve is not part of the supply curve. The industry supply curve is found by adding the quantities supplied of each firm for each price. It is the horizontal summation of the individual firms' supply curves. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 133) "An industry's short-run supply curve is constructed by adding horizontally all the average variable cost curves of firms in that industry." Do you agree or disagree? Why? Answer: Disagree. An industry's short-run supply curve is constructed by summing horizontally all of the individual firms' supply curves, which are their marginal cost curves (not average cost curves) above their respective minimum average variable cost points. Diff: 2 Topic: 23.3 Short-Run Supply under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 105 Copyright © 2021 Pearson Education, Inc.

23.4 Price Determination under Perfect Competition 1) A firm is currently producing at the rate of output at which total revenues just cover its total variable costs. If demand falls, the firm should A) lower both price and its rate of output. B) shut down. C) increase its rate of output to make up for the lower price. D) not change its rate of output because it is still covering its variable costs. Answer: B Diff: 2 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 2) A perfectly competitive industry's market or "going" price is established by A) the largest firm in the industry. B) the largest purchaser of this industry's output. C) each individual producing firm and reflects that firm's costs. D) the forces of supply and demand. Answer: D Diff: 1 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 3) A perfectly competitive industry's market price is found by A) finding the point on the market demand curve where the largest number of units will be purchased. B) locating the intersection of the market demand and market supply curves. C) the horizontal summation of all the industry firms' individual supply curves. D) identifying the price at which each firm realizes its largest economic profit. Answer: B Diff: 1 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

4) Under perfect competition, the demand curve facing the firm is determined by A) the intersection of the industry demand and supply curves. B) the tastes and preferences of consumers. C) utility maximizing behavior on the part of consumers. D) the willingness of the firm to supply the good. Answer: A Diff: 2 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 5) The market demand curve in perfect competition is found by A) horizontally summing the supply curves of the individual firms in the industry. B) horizontally summing the demand curves of the individual consumers. C) utility maximizing behavior of the "representative consumer." D) the interaction of supply and demand at the individual firm and consumer levels. Answer: B Diff: 2 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 6) In a perfectly competitive market in which all firms are maximizing their economic profits, the demand and supply curves intersect at a price of $10. From this we know that each A) firm's average total cost of producing the good is $10. B) firm's average variable cost of producing the good is $10. C) firm's marginal cost of producing the good is $10. D) firm is earning positive economic profits at a price of $8 or more. Answer: C Diff: 3 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

7) All of the following are true regarding perfectly competitive price determination EXCEPT A) the market price is determined by the interactions among all buyers (households) and firms. B) the individual firm takes the market price as given. C) the individual firm is known as a market price maker. D) the individual firm's marginal revenue curve is horizontal at the market price. Answer: C Diff: 1 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

8) Refer to the above figure for the individual firm in a perfectly competitive market. If the firm's average costs are given by AC1, then A) the industry supply curve will shift leftward. B) the industry supply curve will shift rightward. C) the industry demand curve will shift rightward. D) none of these Answer: D Diff: 1 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

9) Refer to the above figure for the individual firm in a perfectly competitive market. If the firm's average costs are given by AC2, then A) the industry supply curve will shift leftward. B) the industry supply curve will shift rightward. C) the industry demand curve will shift rightward. D) none of these Answer: B Diff: 1 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 10) Refer to the above figure for the individual firm in a perfectly competitive market. If the firm's average costs are given by AC3, then A) the industry supply curve will shift leftward. B) the industry supply curve will shift rightward. C) the industry demand curve will shift rightward. D) none of these Answer: A Diff: 1 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 11) How is the market clearing price established in a perfectly competitive industry? Answer: The market clearing price is established by the forces of market supply and demand. Market demand is determined collectively by the buyers. Market supply is determined collectively by the suppliers. Even though each individual supplier or buyer has no control on the price of the product in a perfectly competitive industry, the interaction of all the buyers and suppliers determines the price. Diff: 2 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

12) Using a graph, show a short-run equilibrium for the industry and the firm. Explain the graph. Answer:

In the above figure, the industry demand and supply curves intersect vertically at Q, where Q is quantity produced and sold at price P. The firm takes P as given, and chooses to produce q units since this is where MR = MC. Average revenue at q is aq and average total cost is bq, so average profit is ab and total profit is Pabc. Diff: 2 Topic: 23.4 Price Determination under Perfect Competition Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 23.5 The Long-Run Industry Situation: Exit and Entry 1) Market signals A) are ways of conveying information. B) are market noise that confuses buyers and sellers. C) are best ignored by investors. D) always lead to economic losses. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 2) What is the shape of the long-run supply curve in a decreasing-cost industry? A) horizontal B) increasing C) downward sloping D) upward sloping Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 110 Copyright © 2021 Pearson Education, Inc.

3) What is the shape of the long-run supply curve in an increasing-cost industry? A) horizontal B) inverted U-shape C) downward sloping D) upward sloping Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 4) What is the shape of the long-run supply curve in a constant-cost industry? A) horizontal B) vertical C) downward sloping D) upward sloping Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 5) In the long run, when a perfectly competitive firm experiences positive economic profits, A) firms exit the industry, the market supply curve shifts rightward, and the market price falls. B) firms enter the industry, the market supply curve shifts rightward, and the market price falls. C) firms exit the industry, the market supply curve shifts leftward, and the market price rises. D) firms enter the industry, the market supply curve shifts rightward, and the market price rises. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 6) In the long run, when a perfectly competitive firm experiences negative economic profits, A) firms exit the industry, the market supply curve shifts rightward, and the market price falls. B) firms enter the industry, the market supply curve shifts rightward, and the market price falls. C) firms exit the industry, the market supply curve shifts leftward, and the market price rises. D) firms enter the industry, the market supply curve shifts rightward, and the market price rises. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 111 Copyright © 2021 Pearson Education, Inc.

7) If an industry has constant marginal and average costs, any shift in demand will eventually A) result in a higher equilibrium price. B) be met by a smaller change in quantity supplied. C) be met by an equal change in quantity supplied, and equilibrium price will not change. D) make economic profits zero in the short run. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 8) In a perfectly competitive market, positive economic profits act to A) attract new entrants into the industry. B) drive potential competitors away from the industry. C) prevent reinvestment on the part of firms within the industry. D) signal resource owners elsewhere not to invest their capital in this industry. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 9) In a perfectly competitive market, if P > ATC in the short run, there is apt to be A) entry of new firms into the market. B) an accounting loss for existing firms. C) an inward shift in the industry supply curve. D) an upward pressure on price. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 10) If a perfect competitor faces P = ATC in the long run, the firm will A) earn economic profits. B) earn economic losses. C) leave the industry. D) remain in the industry. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 112 Copyright © 2021 Pearson Education, Inc.

11) The exiting of firms from a perfectly competitive industry occurs when A) opportunity costs cannot be covered. B) P = ATC. C) accounting profit is less than economic profit. D) MR equals MC. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 12) In a perfectly competitive industry, which of the following is a market signal to resource owners? A) economic profits B) quality of goods C) the level of exports in the country D) the level of subsidies the industry receives Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 13) Economic profits and losses are TRUE market signals because they A) convey information in an asymmetrical fashion. B) convey information about rewards people should anticipate experiencing by shifting resources from one activity to another. C) convey information to public officials about where to encourage people to invest and what skills people should develop. D) cause people to move into careers in both undesirable and desirable industries with equal ease. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

14) A law that restricts plant closings will A) make the economy more efficient by slowing down the movement of resources to a more optimal rate. B) make the economy more efficient by reducing poor decisions on the part of entrepreneurs. C) prevent resources from flowing to their highest-valued uses. D) provide useful market signals to all parties in the industry. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 15) In a decreasing-cost industry, an increase in output will lead to A) an upward shift in the ATC curve. B) an upward shift in the MC curve. C) a reduction in long-run per-unit costs. D) an increase in long-run per-unit costs. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 16) In an increasing-cost industry, an increase in output will lead to A) a downward shift in the ATC curve. B) a downward shift in the MC curve. C) a reduction in long-run per-unit costs. D) an increase in long-run per-unit costs. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

17) If an industry's long-run per-unit costs increase as its output increases then A) the firm's long-run economic profits must be greater than zero. B) the firm is most likely a decreasing-cost industry. C) the firm is most likely an increasing-cost industry. D) the firm is most likely a constant-cost industry. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 18) If an industry's long-run per-unit costs decrease as its output increases then A) the firm's long-run economic profits must be less than zero. B) the firm is most likely a decreasing-cost industry. C) the firm is most likely an increasing-cost industry. D) the firm is most likely a constant-cost industry. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 19) If an industry's long-run per-unit costs are constant as its output increases, then A) the firm's long-run economic profits must be greater than zero. B) the firm is most likely a decreasing-cost industry. C) the firm is most likely an increasing-cost industry. D) the firm is most likely a constant-cost industry. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

20) If a constant-cost, perfectly competitive industry experiences an increase in the demand for its product, we would expect A) only the market price of the good to increase. B) both the market price and quantity supplied to increase. C) decreases in the market price, but increases in quantity supplied. D) only the quantity supplied of the product to increase. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 21) A constant-cost industry is one in which A) output increases lead to productivity gains. B) the marginal product of labor is constant. C) there is no change in long-run per-unit costs, even as output varies. D) each firm has a horizontal long-run average cost curve. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 22) In an increasing-cost industry, an increase in industry output will A) lead to a higher market price. B) lead to a lower market price. C) shift each firm's average fixed cost curve down. D) shift each firm's short run supply curve down. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

23) In a decreasing-cost industry, an increase in industry output will A) lead to a higher market price. B) lead to a lower market price. C) shift each firm's average fixed cost curve up. D) shift each firm's short run supply curve up. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 24) A constant-cost industry A) is one in which an increase in demand is matched by a proportional increases in long-run supply. B) generates increasing profits whenever demand increases because the new long-run equilibrium price is above the old price even though average costs have not changed. C) has a horizontal long-run supply curve. D) has a downward sloping long-run supply curve. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 25) When economic profits in a perfectly competitive industry are positive, A) new firms will be attracted to the industry, and economic profits will decline to zero. B) the industry is in equilibrium. C) firms will increase output to earn even higher profits. D) firms will increase prices while they have the opportunity. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

26) In a perfectly competitive industry, any restrictions that prevent new firms from entering A) lead to negative profits. B) guarantee that all existing firms will earn exactly a zero profit. C) hinder economic efficiency. D) reduce the average cost of production. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 27) Signals are A) used by economic decision-makers to inform others about their plans. B) the method by which government planners inform economic decision-makers about the types of decisions they should make. C) the method by which firms determine their profit maximizing quantity. D) compact ways of conveying to economic decision makers information needed to identify industries where more resources are needed. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 28) A TRUE signal must A) convey information only. B) convey information and direct the resource owners to act appropriately. C) convey information about the long-run future. D) explain in detail why something should be done. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

29) Profits and losses are TRUE signals because they A) convey information about true long-run profits. B) cannot be misinterpreted by entrepreneurs. C) convey information about where to place resources and reward people who act on the information. D) reward people who make profits with even more profits and punish those who make losses with even more losses. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 30) Firms in a perfectly competitive industry are earning economic losses. This is A) a signal to entrepreneurs that some of the firms in the industry should exit and the resources of these firms should move into production of other goods. B) a signal to entrepreneurs that additional resources should be brought into this industry in order to make it profitable. C) a signal that the entrepreneurs are doing a poor job and should become workers for someone else. D) a signal to government officials that a subsidy is needed for the firms in the industry. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

31) Refer to the above figure. Which panel represents the long-run supply curve for a constant cost industry? A) Panel A B) Panel B C) Panel C D) Panel D Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 32) Refer to the above figure. Which panel represents the long-run supply curve for an increasing-cost industry? A) Panel A B) Panel B C) Panel C D) Panel D Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

33) Refer to the above figure. Which panel represents the long-run supply curve for a decreasingcost industry? A) Panel A B) Panel B C) Panel C D) Panel D Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 34) Which of the following would tell us that resources are NOT flowing to their highest valued uses? A) short-run economic profits B) short-run economic losses C) long-run economic profits D) Some firms are just breaking even. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 35) Along a perfectly competitive industry's long-run supply curve, A) economic profits are positive. B) economic profits are zero. C) the market price is higher than the marginal costs of firms D) the number of firms is constant. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

36) If the long-run supply curve is upward sloping, we know that A) entrepreneurs are earning higher profits as output expands. B) some input prices are increasing as the industry expands. C) firms are getting larger as the industry contracts. D) the law of diminishing marginal returns has set in. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 37) An industry whose total output can be increased without a change in long-run per-unit costs is a(n) A) increasing-cost industry. B) constant-cost industry. C) zero-cost industry. D) decreasing-cost industry. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 38) An industry in which an increase in industry output is accompanied by an increase in longrun per-unit costs is a(n) A) increasing-cost industry. B) constant-cost industry. C) break-even cost industry. D) decreasing-cost industry. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

39) An industry in which an increase in output leads to a reduction in long-run per-unit costs is a(n) A) increasing-cost industry. B) constant-cost industry. C) break-even cost industry. D) decreasing-cost industry. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 40) Suppose a perfectly competitive industry is in long-run equilibrium. If a decrease in demand leads to a lower long-run price, we know that A) this is a decreasing-cost industry. B) this is an increasing-cost industry. C) some firms will be losing money in the long run. D) after further adjustments, price will rise to its original level. Answer: B Diff: 3 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 41) Suppose a perfectly competitive industry is in long-run equilibrium. If a decrease in demand leads to a higher long-run price, we know that A) this is a decreasing-cost industry. B) this is an increasing-cost industry. C) some firms will be losing money in the long run. D) after further adjustments, price will fall to its original level. Answer: A Diff: 3 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

42) A perfectly elastic long-run supply curve indicates A) a decreasing-cost industry. B) a constant-cost industry. C) an increasing-cost industry. D) that some input prices change as firms enter and exit the industry. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 43) If the long-run supply curve is horizontal, we know that this is A) a decreasing-cost industry. B) a constant-cost industry. C) an increasing-cost industry. D) a situation in which some input prices change as firms enter and exit the industry. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 44) If the long-run supply curve slopes downward, we know that this is A) a decreasing-cost industry. B) a constant-cost industry. C) an increasing-cost industry. D) a situation in which no input prices change as firms enter and exit the industry. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 45) If the long-run supply curve slopes upward, we know that this is A) a decreasing-cost industry. B) a constant-cost industry. C) an increasing-cost industry. D) a situation in which no input prices change as firms enter and exit the industry. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 124 Copyright © 2021 Pearson Education, Inc.

46) Consider an industry that is in long-run equilibrium. An increase in demand leads to an increase in the price of the good. We know that this is A) a decreasing-cost industry. B) a constant cost industry. C) an increasing-cost industry. D) not a competitive industry. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 47) Consider an industry that is in long-run equilibrium. An increase in demand leads to a decrease in the price of the good. We know that this is A) a decreasing-cost industry. B) a constant cost industry. C) an increasing-cost industry. D) not a competitive industry. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 48) Consider an industry that is in long-run equilibrium. An increase in demand leads to no change in the price of the good. We know that this is A) a decreasing-cost industry. B) a constant cost industry. C) an increasing-cost industry. D) not a competitive industry. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

49) An increasing-cost industry will have A) a perfectly elastic long-run supply curve. B) a perfectly inelastic long-run supply curve. C) an upward-sloping supply curve in the long run. D) an upward-sloping demand curve in the long run. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 50) A decreasing-cost industry will have A) a perfectly elastic long-run supply curve. B) a perfectly inelastic long-run supply curve. C) an upward-sloping demand curve in the long run. D) a downward-sloping supply curve in the long run. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 51) If an industry's long-run supply curve slopes downward, then the industry is A) a fixed-cost industry. B) a constant-cost industry. C) an increasing-cost industry. D) a decreasing-cost industry. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 52) A constant-cost industry will have A) a perfectly elastic long-run supply curve. B) a perfectly inelastic long-run supply curve. C) an upward-sloping demand curve in the long run. D) an upward-sloping supply curve in the long run. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 126 Copyright © 2021 Pearson Education, Inc.

53) A perfectly competitive firm cannot earn an economic profit in the long run because A) it is a "price-maker." B) it faces a perfectly inelastic demand curve. C) there are no barriers to entry into the industry. D) all firms in the industry earn accounting profits. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 54) When a perfectly competitive firm experiences positive economic profits in the short run, A) the high barriers to entry prevent further competition. B) existing firms exit the industry. C) new firms enter the industry. D) firms have no incentive to exit or enter the industry. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 55) In the long run, when a perfectly competitive firm experiences negative economic profits, A) the high barriers to entry prevent further competition. B) that firm exits the industry. C) new firms enter the industry. D) firms have no incentive to exit or enter the industry. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

56) When a perfectly competitive firm experiences zero economic profits, A) the high barriers to entry prevent further competition. B) existing firms exit the industry. C) additional firms enter the industry. D) firms have no incentive to exit or enter the industry. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 57) The motive that drives firms to enter or exit an industry is A) opportunity costs. B) diseconomies of scale. C) economic profit. D) accounting costs. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

58) If a firm is earning short-run economic profits shown in the above figure, in the long run A) firms exit the industry, the market supply curve shifts rightward, and the market price falls. B) firms enter the industry, the market supply curve shifts rightward, and the market price falls. C) firms exit the industry, the market supply curve shifts leftward, and the market price falls. D) firms enter the industry, the market supply curve shifts rightward, and the market price rises. Answer: B Diff: 3 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 59) Which of the following is the best example of a decreasing-cost industry? A) the health care industry B) the personal computer industry C) the college-education industry D) the oil industry Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

60) If the costs of production do NOT change as output increases in the long run in a perfectly competitive industry, then this is a A) constant-return-to-scale industry. B) constant-competitive industry. C) constant-cost industry. D) constant-price industry. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 61) The long-run supply curve in a constant-cost, perfectly competitive industry is A) perfectly inelastic. B) upward sloping. C) downward sloping. D) perfectly elastic. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 62) The long-run industry supply curve in a decreasing-cost, perfectly competitive industry is A) negatively sloped. B) perfectly elastic. C) positively sloped. D) perfectly inelastic. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

63) If a perfectly competitive firm has economic profits greater than zero, then we know that A) the firm's industry is not in long-run equilibrium. B) the firm's industry is in long-run equilibrium. C) the firm is producing at the bottom of the average total cost curve. D) the firm will reduce output. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

64) In the above figure, the long-run equilibrium price and output are A) $10 and 10. B) $10 and 12. C) $7 and 8. D) $8 and 10. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

65) In the long run, a perfect competitor A) earns positive profits but will not make losses. B) earns positive economic profits. C) earns zero economic profits. D) produces at its shutdown point. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 66) In the long run, the price for a perfectly competitive firm A) will be determined by the firm's supply and demand curves. B) will allow for positive economic profits. C) will equal marginal cost where marginal cost is at a minimum. D) will equal the minimum average total cost. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 67) Which of the following is NOT correct for a perfectly competitive firm in long-run equilibrium? A) SAC = LAC B) MR = P = AR C) MC = MR > LAC D) LAC = P Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

68) Which of the following is TRUE in perfect competition at long-run equilibrium? A) P = ATC = MC = MR B) ATC is minimized. C) Economic profit is $0. D) all of these Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 69) In the long run, in a perfectly competitive industry, A) opportunity costs are negligible. B) economic profits will be zero. C) some firms will be experiencing economic losses. D) only entrepreneurs will earn more than their opportunity costs. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 70) Which of the following is NOT true for a perfectly competitive firm in the long run? A) MR = MC B) MC > LAC C) Price = MC D) SAC = LAC Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

71) Which of the following is NOT correct concerning perfectly competitive firms in the long run? A) Long-run economic profits are zero. B) Price equals minimum long-run average cost. C) Entrepreneurs earn the opportunity cost of their investment. D) The opportunity cost of capital is zero. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 72) In the long run, the perfectly competitive firm A) does not have a shutdown price. B) earns only a normal profit. C) may produce even if it suffers a loss. D) earns an economic profit. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 73) For a firm in a perfectly competitive industry, A) short-run economic profits must be zero. B) short-run and long-run economic profits must be zero. C) short-run economic profits may be positive, but long-run economic profits must be zero. D) both short-run and long-run economic profits may be negative. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

74) Firms in a perfectly competitive industry are producing goods efficiently in the long run if each is producing at the minimum point of the A) AVC curve. B) MC curve. C) LAC curve. D) AFC curve. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 75) In long-run equilibrium, the perfectly competitive firm will A) go out of business. B) produce to the point at which marginal cost is at its minimum. C) produce to the point at which marginal cost equals average total cost. D) produce on the upward-sloping portion of its ATC curve. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 76) Price equals the minimum of long-run average cost A) in a long-run equilibrium. B) in a short-run equilibrium as well as in a long-run equilibrium. C) whenever average revenue equals marginal cost. D) along a horizontal long-run supply curve, but not along an upward-sloping long-run supply curve. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

77) Which of the following is NOT a characteristic of a perfectly competitive long-run equilibrium? A) Firms are earning zero profits. B) Price equals marginal cost. C) Price equals long-run minimum average cost. D) Firms are producing on the downward-sloping portions of their short-run average cost curves. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 78) For a perfectly competitive firm at its long-run equilibrium, A) P = MR = MC = AC. B) P = MR > MC. C) accounting profit must be zero. D) there are no opportunity costs to be concerned with. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 79) If a perfectly competitive industry is in long-run equilibrium, then A) price equals average cost. B) price is greater than average cost and equal to marginal cost. C) all firms earn the same accounting profits. D) marginal cost is less than average cost. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

80) When a perfectly competitive firm is in long-run equilibrium, economic profits A) are positive. B) are zero. C) are negative. D) may be positive, zero or negative depending upon costs. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 81) In a perfectly competitive market, a firm in long-run equilibrium will be operating A) to the right of the minimum of the long-run average cost curve. B) to the left of the minimum of the long-run average cost curve. C) at the minimum of the long-run average cost curve. D) at the minimum of the marginal cost curve. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

82) Refer to the above figure. A perfectly competitive firm that is in long-run equilibrium will be operating A) with positive economic profits. B) at a quantity greater than point E. C) at a quantity less than point E. D) at point E. Answer: D Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

83) In reference to the long-run firm competitive equilibrium diagram, which of the following statements is INCORRECT?

A) In the long run, the firm has no incentive to alter its scale of operations. B) Because profits must be zero in the long run, the firm's short-run average costs (SAC) must equal P at Qe, which occurs at minimum SAC. C) In the long run, the firm operates where price, marginal revenue, marginal cost, short-run minimum average cost, and long-run minimum average cost all are equal. D) In the long run, this firm must be part of a constant-cost industry, because its marginal revenue curve is perfectly elastic. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 84) In a long-run equilibrium, a perfectly competitive firm's average total cost is A) minimized. B) higher than the market price. C) zero. D) equal to average fixed cost. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

85) In the long run, all firms in a perfectly competitive industry A) earn economic profits. B) break even. C) suffer economic losses. D) sell differentiated products to earn economic profits. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 86) For a perfectly competitive firm at its long-run competitive equilibrium point, A) P = AR = MR = LATC = ATC = MC. B) P = AR = MR = LATC > ATC = MC. C) P = AR = MR = MC = LATC = AVC. D) P > MR > AR > MC > LATC > ATC. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 87) In a long-run perfectly competitive equilibrium, A) P = MR = MC > ATC. B) P = MR > MC = ATC. C) P = MR = MC = ATC. D) P > MR > MC = ATC. Answer: C Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

88) Economic efficiency means A) the same as technical efficiency. B) that all firms within a single competitive industry are producing at the same level of output. C) that it is impossible to increase the output of any good without lowering the total value of the output of the economy. D) that high-tech methods of production are the most efficient. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 89) With marginal cost pricing, A) marginal benefits are usually less than marginal cost. B) all opportunity costs will be covered in the short run. C) the price charged is equal to the opportunity cost to society of producing one more unit of the good. D) there cannot be any short-run economic profit. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 90) When marginal cost pricing occurs, A) price equals the additional cost society incurs in producing the next unit of an item. B) the firm can only break even if it does not set price to marginal cost. C) price equals average variable cost but exceeds average total cost. D) the firm is at the shutdown point. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

91) Competitive pricing is efficient because A) the price that consumers pay reflects the opportunity cost to society of producing the good. B) firms make positive economic profits in long-run equilibrium. C) average revenue equals average cost. D) firms produce above the minimum efficient scale. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 92) A market failure is a situation in which A) resources are being efficiently allocated, but some companies are forced to shut down. B) the market equilibrium leads to either too many or too few resources going towards producing the good or service. C) the government must take actions to correct the failures of the market in a particular industry. D) there is no free entry or exit into an industry. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 93) The opportunity cost to society of producing one more unit of the good is A) average cost. B) marginal cost. C) efficiency costing. D) the optimal cost. Answer: B Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

94) When price equals marginal cost, A) firms make zero profits. B) firms make positive profits. C) the industry is in long-run equilibrium. D) the marginal benefits of consuming an extra unit of the good exactly equals the marginal cost to society of producing the good. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 95) The value of total output decreases when labor leaves one industry and goes to another and capital leaves the second industry and goes to the first. This indicates that A) the first situation was not efficient. B) the second situation is efficient. C) price is greater than marginal cost. D) it would be efficient to return to the first situation. Answer: D Diff: 3 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 96) If markets are perfectly competitive, then the production of goods A) will use the least costly combination of resources. B) will occur at an average total cost value that is above the minimum. C) will require government intervention. D) will always lead to business failures. Answer: A Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

97) Perfectly competitive markets are efficient because A) they always reach equilibrium. B) firms in the market are price takers. C) the cost to society for producing the goods is exactly equal to the value that society places on the good. D) the long run equilibrium assures that the prices of resources will not increase. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 98) Suppose the perfectly competitive equilibrium occurs such that too many units of the good are produced. This is an example of A) marginal cost pricing. B) market failure. C) firms have not yet exited the industry. D) greedy business people behaving in an inappropriate manner. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 99) Economic efficiency is indicated by A) P = AVC. B) MR = MC. C) P = MR. D) P = MC. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

100) A situation in which the price charged is equal to society's opportunity cost is known as A) market failure. B) marginal monopoly pricing. C) marginal profits. D) marginal cost pricing. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 101) A situation in which the price charged is greater than society's opportunity cost would lead to A) market failure. B) marginal monopoly pricing. C) marginal profits. D) marginal cost pricing. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 102) A situation in which the price charged is greater than society's opportunity cost would lead to A) too little being produced. B) too much being produced. C) an efficient amount being produced. D) marginal cost pricing. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

103) A situation in which the price charged is less than society's opportunity cost would lead to A) too little being produced. B) too much being produced. C) an efficient amount being produced. D) marginal cost pricing. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 104) Which of the following best describes a situation of economic efficiency? A) A firm produces to the point at which P = AVC, with MR < MC. B) A firm produces to the point at which P = ATC, with MC < MR. C) A firm produces to the point at which MR = AFC, with P = AVC. D) A firm produces to the point at which MR = MC, with P = MC. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 105) A firm's long-run position under perfect competition is often said to be efficient because A) P = AR > MC = AVC. B) P = AR > MR = MC. C) P = MR = AVC = AFC. D) P = MR = MC = ATC. Answer: D Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 106) In a perfectly competitive market, if P > MC, then A) too little output is being produced. B) too much output is being produced. C) production is efficient, as the firm is earning profits. D) the firm is paying a price for resources that is too high. Answer: A Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 146 Copyright © 2021 Pearson Education, Inc.

107) In a perfectly competitive market, if P < MC, then A) too little output is being produced. B) too much output is being produced. C) production is efficient, as the firm is earning profits. D) the firm is paying a price for resources that is too high. Answer: B Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

108) Using the above figure, the price facing the perfectly competitive firm in the long run will be A) P1. B) P2. C) P3. D) P4. Answer: C Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

109) "Because a firm's supply curve slopes upward, the long-run supply curve of an industry must also slope upward." Do you agree or disagree? Explain. Answer: Disagree. Even though a firm's supply curve slopes upward, the slope of the industry supply curve in the long run can be positive, negative or horizontal. An upward-sloping industry supply curve reflects that an increase in industry output is accompanied by an increase in longrun average costs, while a downward sloping industry supply curve reflects a corresponding decrease in long-run average costs, and a horizontal industry supply curve reflects no change in long-run average costs. Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 110) What are signals? How do profits function as signals? Answer: Signals are compact ways of conveying to economic decision makers information needed to make decisions. A signal not only conveys information, but also provides the incentive to react appropriately. Economic profits are such signals because they indicate to entrepreneurs where they should operate and provide the incentive in that the entrepreneurs' incomes are increased when they respond to the signals. Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 111) What determines whether the industry long-run supply curve is upward sloping or horizontal? Answer: When firms enter and exit the industry, new resources are either drawn into the industry or are temporarily left unemployed. If these movements in resources cause resource prices to rise, then the industry will be an increasing-cost industry and have an upward-sloping long-run supply curve. If these movements in resources do not affect resource prices, then the industry is a constant-cost industry and the long-run supply curve is horizontal. Diff: 3 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

112) Explain what happens to the long-run supply curve of an industry when firm entry raises the price of inputs used in the industry. Answer: When firm entry raises the price of inputs used in the industry, the average total cost curve and marginal cost curves shift upward. This in turn causes the firms' short-run supply curves to shift upward when there is an increase in market demand. As a result, the long-run industry supply curve slopes upward. Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 113) If firms in a perfectly competitive industry are earning positive economic profits, then what will happen in the long run? Answer: Economic profits provide incentives for entrepreneurs to start new firms and enter the industry. When entry of new firms takes place, the market supply curve shifts outward. The equilibrium quantity increases, and the market clearing price declines. This pushes economic profits back down toward zero. When economic profits return to zero, there is no longer an incentive for new firms to enter the industry, and a new long-run equilibrium will have been reached. Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 114) "In the long run, a perfectly competitive firm's average total cost is always below the market clearing price." Agree or disagree? Why? Answer: Disagree. In the long run, a perfectly competitive firm produces at an output rate at which the market clearing price equals short-run minimum average total cost and long-run minimum average total cost. If the firm's average total cost is below the market clearing price, its profits will lead to firm entry into the industry. As a result of firm entry, the market clearing price will decline. This process will continue until the market clearing price equals the firm's average total cost. Diff: 1 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

115) What is marginal cost pricing? Why is marginal cost pricing important? Answer: Marginal cost pricing is a situation in which price equals the opportunity cost to society of producing one more unit of the good, which is the marginal cost of the good. It is efficient in the sense that it is impossible to increase the output of any good without lowering the value of the total output produced by the society as a whole. Diff: 3 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 116) Why would it be economically inefficient for a firm to charge the price of a good greater than its marginal cost? Answer: When price equals marginal cost, the marginal benefit to consumers equals the opportunity cost to society of producing one more unit of the good. This condition is efficient because it is impossible to increase the output of that good without lowering the value of the total output produced in the economy. If a firm charges a price greater than its marginal cost, then the firm is producing too little as people value additional units more than the cost to society of producing them. Diff: 3 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 117) Why is the pricing outcome of a perfectly competitive firm efficient in economic sense? Answer: A perfectly competitive firm sells its product at a price that equals the opportunity cost, or the marginal cost, to society of producing one more unit of the product. Because the price that consumers are willing to pay for the last unit of the good is the marginal benefit to them, the pricing outcome of a competitive firm implies that the marginal benefit to consumers equals the marginal cost to society of producing the last unit. This outcome is efficient because it is impossible to increase the output of any good without lowering the value of the total output produced in the economy. Diff: 2 Topic: 23.5 The Long-Run Industry Situation: Exit and Entry Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 24 Monopoly 24.1 Defining and Explaining the Existence of Monopoly 1) Monopoly producers face A) many competitors producing the same product. B) only a few competitors producing the same product. C) at least one competitive producer of the same product. D) no competitive producers of the same product. Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 2) Which of the following is a characteristic of a monopoly market? A) many suppliers of similar products B) one single seller C) easy entry D) The firm is a price taker. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 3) Which of the following statements is FALSE? A) An unregulated, profit-maximizing monopolist will not operate in the inelastic portion of the demand curve. B) The marginal revenue earned by a monopolist will always be less than the product's price. C) Typically there are numerous very close substitutes for the product of a monopolist. D) For a profit-maximizing monopolist, marginal revenue equals marginal cost. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

4) A monopolist is defined as A) a firm with many business establishments located across the nations. B) a large firm, making substantial profits, that is able to make other firms do what it wants. C) a single producer of a good or service for which there is no close substitute. D) a producer of a good or service that is expensive to produce, requiring large amounts of capital equipment. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 5) A firm can be the sole supplier of a good and is still not a monopolist if A) the firm is not large. B) the good produced is not a popular item among consumers. C) the firm is not making excessive profits. D) there are close substitutes for the good. Answer: D Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 6) The market structure in which there is a single supplier of a good or service for which there is no close substitute is A) monopolistic competition. B) a monopoly. C) a price taker. D) perfect competition. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

7) The market structure in which there is a single seller of a good or service for which there is no close substitute is A) oligopoly. B) perfect competition. C) monopoly. D) monopolistic competition. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 8) A monopolist is A) a firm with the largest annual sales in a country. B) a single supplier of a good for which there is no close substitute. C) a large firm that makes all the other firms in the industry do what it wants. D) a supplier of a good that everyone needs with the result that it makes large profits. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 9) In a monopoly A) the firm is large in an absolute sense. B) the market is small in an absolute sense. C) the firm and the industry are the same thing. D) the monopolist determines how much each firm will produce. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

10) A firm can be the only firm in an industry and still not be a monopoly if A) the firm is not large. B) the firm is not making economic profits. C) the firm produces a good similar to a good in another industry. D) the firm produces a good that is not considered a necessity. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 11) In a monopoly market structure, the supplier in the market always A) is the whole industry. B) produces too much. C) sells faulty products. D) earns economic profit. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 12) Which of the following regarding a monopolist is INCORRECT? A) The monopolist is a single supplier of a good or service. B) The monopolist constitutes the entire industry. C) The monopolist produces only goods of highest quality. D) There are barriers to entry that allow monopoly. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

13) A single supplier of a good or service for which there is no close substitute is referred to as a(n) A) strategic competitor. B) monopoly. C) oligopoly. D) monopolistic competitor. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 14) A firm that is the only seller of a good with no close substitutes is a(n) A) perfect competitor. B) monopolistic competitor. C) oligopolist. D) monopolist. Answer: D Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 15) All of the following are true about a monopolist EXCEPT A) the demand curve for its product is perfectly elastic. B) it produces a product with no close substitutes. C) its demand curve is the same as the market demand for the industry. D) it is a single seller of a good or service. Answer: A Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

16) In order for a firm to receive monopoly profits, there must be A) homogeneous products. B) barriers to market entry. C) mutual interdependence among firms. D) free entry and exit to the market. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 17) Which of the following are barriers to entry? A) economies of scale B) patents and copyrights C) control of resources D) all of these Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 18) Which of the following is NOT a barrier to entry? A) patents B) licenses C) economies of scale D) U.S. antitrust legislation Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 19) To be able to engage in profit-maximizing price searching, a monopoly firm must be able to A) prevent the entry of other firms into the market for its product. B) induce the entry of other firms into the market for its product. C) avoid earning negative economic profits in the short run. D) always earn zero economic profits. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

20) Which of the following is NOT a barrier to entry that would allow a monopolist to keep potential competitors out of its market? A) Significant economies of scale exist. B) The market price of the product is too high. C) The firm has a patent on the good or control over some resource required for the production of the good. D) The firm has government authorization to be a monopoly. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 21) Which of the following would NOT be a barrier to entry for a particular market? A) ownership of a patent B) low cost of obtaining initial capital C) the presence of economies of scale D) government regulation Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 22) If government regulations significantly increase the cost of operating within a particular market, one result is that A) new firms are discouraged from entering the market. B) barriers to entry are nullified. C) a perfectly competitive market environment is encouraged. D) new firms are encouraged to enter the market. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

23) If there are no barriers to entry into an industry, A) short-run economic profits must be zero. B) long-run economic profits must be zero. C) both short-run and long-run economic profits must be zero. D) short-run and long-run profits must still be positive. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24) A firm typically achieves its position as a monopolist as a result of A) a small market and a constant average cost. B) a downward sloping demand for the product. C) barriers to entry. D) the absence of long-run profits in an industry. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 25) A monopolist can earn economic profits in the long run because A) a monopoly is by definition large, and this gives it the ability to make large profits. B) a monopoly makes the good or service better than anyone else. C) barriers to entry prevent new firms from entering the industry. D) monopolies can legally force people to buy their products and to pay more for them than they are worth. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

26) Which of the following can be a barrier to entry, closing a market to new firms? A) an elastic industry demand curve B) control of a vital resource by one producer C) diseconomies of scale D) ease of obtaining capital financing Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 27) Economies of scale can A) result in an increasing cost industry. B) cause firm exits out of the industry. C) prevent the entry of new firms into a market. D) reduce the rate of return which the firm may earn. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 28) A natural monopoly usually arises when A) there are diseconomies of scale in an industry. B) the government allows unrestricted access to a market. C) there are large economies of scale relative to the industry's demand. D) companies band together to form a larger company. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 29) According to the text, government licensing frequently enables monopoly in A) agriculture. B) electrical utility. C) mining. D) retail sales. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 9 Copyright © 2021 Pearson Education, Inc.

30) Smartphone companies protect their monopolies over new products they develop by utilizing A) patent protection. B) low cost production. C) diseconomies of scale. D) zero economic profits in the long run. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 31) A patent on a product gives a firm A) protection from having the invention copied or stolen for a period of 20 years. B) economies of scale in producing the product. C) excessive profits in the long run. D) the power to impose a tariff on a competing product. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 32) If a "certificate of convenience and public necessity" protects a monopolist's position, the barrier to entry this firm relies on is called A) a tariff. B) a government license. C) a patent. D) economies of scale. Answer: B Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

33) A patent provides legal protection for an invention for A) 7 years. B) 11 years. C) 20 years. D) as long as the invention is valuable. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 34) From the date a U.S. patent is granted to a firm, it ceases to be a potential source of monopoly profits after A) 20 years. B) 14 years. C) 1 year. D) 7 years. Answer: A Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 35) The use of a tariff provides monopoly protection since A) it allows more imports into the country. B) it reduces competition from imports by raising the import price. C) it reduces exporters' profits. D) it expands tax credits. Answer: B Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

36) If a government imposes high enough tariffs, one result will be that A) foreign producers will be able to sell more goods. B) domestic producers will face no foreign competition. C) consumers will benefit from lower prices. D) markets will become more globalized. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 37) A barrier to entry is A) a term used to explain why monopolies always make economic profits. B) a restriction on the profits that a monopoly can make. C) the situation when the government produces a good instead of relying on private firms to produce the good. D) a restriction on starting a business. Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 38) For a firm to become a monopoly in an industry A) barriers to entry must exist. B) the firm must charge higher prices than its competitors. C) the firm must produce a product with the best quality. D) the firm will engage in unfair practices to drive all competitors out of the market. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

39) All of the following are considered a barrier to entry into a market EXCEPT A) ownership of resources without close substitutes. B) when firms can only earn a normal rate of return in a market. C) economies of scale. D) governmental restrictions on a firm's ability enter a market. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 40) All of the following are considered a barrier to entry into a market EXCEPT A) government licenses. B) persistent declining long-run average costs as output increases. C) lowering tariffs. D) governmental regulations of business conduct relating to workplace conditions. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 41) Shortly after the turn of the century, U.S. Steel owned most of the iron ore reserves in the country. This is an example of A) monopoly due to government restrictions. B) a barrier to entry from owning an important resource. C) a barrier to entry from scale economies. D) monopoly due to governmental entry restrictions. Answer: B Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

42) Entry barriers are most significant in A) pure competition. B) monopolistic competition. C) oligopoly. D) pure monopoly. Answer: D Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 43) Considering the spectrum of market structures and moving from pure competition to pure monopoly, we can say that A) entry barriers get lower but exit gets more difficult. B) entry becomes harder but exit becomes easier. C) entry gets harder and the number of firms dwindles. D) none of these Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 44) When it takes one firm in an industry to produce the quantity necessary to realize low unit costs, the industry A) experiences economies of scale. B) has barriers to entry due to ownership of resources. C) has no barrier to entry. D) has a license granted by the government. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

45) Which of the following is NOT true when there are large economies of scale such that one firm can produce at a lower average cost than can be achieved by multiple firms? A) This situation produces a natural monopoly. B) Proportional increases in output yield proportionally small increases in total cost. C) The long-run average cost curve of the firm will increase at a low level of output. D) There will only be one firm in this industry. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 46) If it is NOT profitable for more than one firm to be in an industry, we have an example of A) monopoly due to ownership of key resources. B) monopoly due to governmental entry restrictions. C) monopoly due to economies of scale. D) pure competition. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 47) If it is NOT possible for a pharmaceutical drug maker to sell its generic cholesterol reducing drug along with some name brand cholesterol reducing drugs, we have an example of monopoly due to A) ownership of key resources. B) governmental entry restrictions. C) economies of scale. D) pure competition. Answer: B Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

48) A natural monopoly exists when A) the firm holds a patent. B) there are governmental entry restrictions. C) the firm owns all of the raw materials needed to produce the product. D) economies of scale occur. Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 49) Economies of scale will lead to only one firm in the industry because A) by increasing output a firm is able to lower the cost per unit and charge lower prices driving smaller firms out of business. B) one firm has an average cost curve, which has shifted below the average cost curves of its competitors. C) there are governmental entry restrictions. D) of government licensing. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

50) Refer to the above figure. The long-run average cost curve and the long-run marginal cost curves represent A) the cost curves for a competitive firm. B) the cost curves for a natural monopoly. C) a situation where a firm has control over the raw materials. D) a situation where a firm has a patent. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 51) Which of the following is NOT a restriction the government imposes to keep potential entrants out of a market? A) patents B) tariffs C) assistance with opening new firms D) copyrights Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

52) Which of the following is NOT a restriction the government imposes to keep potential entrants out of a market? A) subsidizing imported goods B) licensing of exclusive ownership of such a vital resources C) certificate of convenience D) compliance with government safety regulations Answer: A Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 53) Some electrical utilities are monopolies because of A) government restrictions that prevent new firms from entering the market. B) ownership of resources without close substitutes. C) diseconomies of scale. D) their inability to earn profits. Answer: A Diff: 3 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 54) Which of the following is NOT true about a certificate of convenience and public necessity? A) It is a barrier to entry. B) It is a patent. C) It is issued by a government agency. D) It limits competition. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

55) A patent provides legal protection for an invention for A) 20 years. B) 9 years. C) 5 years. D) 100 years. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 56) Which of the following is issued to an investor to provide protection from having the invention copied or stolen for 20 years? A) a license B) a natural monopoly C) a patent D) a certificate of convenience Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 57) Barriers to entry enable many monopolists to A) charge as high a price as they want. B) make people buy more of a good than they really want. C) earn economic profits in the long run. D) manipulate the government into providing special favors for themselves. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

58) A tax that is imposed on an imported good is called a A) tariff. B) quota. C) government license. D) patent. Answer: A Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 59) Which of the following is NOT true about a tariff? A) It is a barrier to entry in a market. B) It leads to a natural monopoly. C) It is a tax. D) It affects the amount of supply of imported goods. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 60) The effect of a tariff A) is negligible since it applies to firms outside the nation. B) can lead to economies of scale for firms inside the nation. C) can lead to a monopoly when domestic firms become the sole suppliers inside the nation. D) will be more beneficial to large firms than to small firms. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 61) A monopolist would probably earn fewer profits if A) the importance of specialized capital equipment in its production techniques increased. B) the time length of patents increased. C) environmental regulations increased that required the purchase of special capital equipment. D) tariffs on competing products were lowered. Answer: D Diff: 3 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 20 Copyright © 2021 Pearson Education, Inc.

62) Which of the following is a characteristic of a monopoly firm? A) horizontal individual demand curve B) barriers to entry C) easy entry and exit D) many buyers and sellers Answer: B Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 63) A monopoly which arises from significant economies of scale is referred to as a A) monopolistic competitor. B) strategic resource monopoly. C) natural monopoly. D) patent monopoly. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 64) A patent protects an inventor's creation from being copied or stolen for a period of A) 100 years. B) 20 years. C) 30 years. D) 14 years. Answer: B Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

65) When a firm experiences declining long-run average total costs as it produces more output, there are A) increasing marginal returns to variable inputs. B) economies of scale. C) diseconomies of scale. D) constant returns to scale. Answer: B Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 66) When a firm experiences declining long-run average total costs as it produces more output, it is known as a(n) A) oligopoly. B) rent seeker. C) natural monopoly. D) monopolistic competitor. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 67) A natural monopoly A) requires government licensing initially. B) is derived from deposits of natural resources. C) usually arises when there are large economies of scale. D) involves multiple firms selling differentiated products. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

68) Governments and legislatures can erect barriers to entry. Which of the following would NOT be one of them? A) licenses B) tariffs C) patents D) laws that ensure property rights Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 69) Which of the following would most likely be classified as a natural monopoly? A) a city water district B) Microsoft C) Disneyland D) Exxon-Mobil Answer: A Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 70) All of the following are barriers to entry in an industry EXCEPT A) a patent. B) governmental restrictions. C) low marginal tax rates. D) economies of scale. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

71) Suppose that a drug for treating cancer is cleared by the Food and Drug Administration and that the company is successful in obtaining a patent for its product. Which of the following is then TRUE? A) The patent holder now faces barriers to entry. B) The method of producing the product would not be considered intellectual property. C) The patent holder has a monopoly. D) The drug would have many close substitutes. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 72) A barrier to entry A) makes it illegal for firms to enter the industry. B) can be thought of as unrelated to monopoly. C) slows or even prevents entry into a market. D) usually takes the form of a cartel. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 73) Barriers to entry might include all of the following EXCEPT A) patents and copyrights. B) ownership of essential resources. C) government franchise. D) positive economic profits. Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

74) Economies of scale may be a barrier to entry in a situation in which A) only small-scale production can lower the per-unit cost of production. B) only small-scale production can meet the constantly changing market demand. C) only large-scale production can lower the per-unit cost of production. D) large-scale production is inefficient. Answer: C Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 75) Which of the following is most likely to be a monopoly? A) Ford, an auto manufacturer B) Verizon, a wireless service provider C) The Washington Post newspaper D) a public water utility Answer: D Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 76) Legal or governmental restrictions that give monopolistic advantages to a firm include all of the following EXCEPT A) economies of scale. B) tariffs. C) licenses. D) franchises. Answer: A Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

77) Legal or governmental restrictions that give monopolistic advantages to a firm include all of the following EXCEPT A) franchises. B) environmental protection. C) exclusive ownership of an unimportant resource. D) patents. Answer: C Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 78) What is a monopolist, and what is required for a monopolist to earn profits in the long run? Answer: A monopolist is a single supplier of a good or service for which there is no close substitute. For the firm to receive economic profits in the long run, there must be some type of barrier to entry that keeps entrants in search of profits out of the industry. Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 79) "A monopolist refers to any firm that is large in size." Do you agree or disagree? Why? Answer: Disagree. A monopolist does not have to be large in size. Regardless of its size, a monopolist in a market is the single supplier of a good or service for which there is no close substitute. Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 80) In what ways is government involved with the creation of barriers to entry? Answer: The government often erects barriers to entry by requiring licenses and franchises before firms can legally operate in a market, by granting patents, by assessing tariffs, or by implementing specific regulations that limit entry. It is illegal to enter many industries without a government license, and often the number of such licenses is limited. Patents create a legal monopoly for a period of 20 years, and tariffs help to keep out competition from foreign firms. Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

81) Which of the barriers to entry can last indefinitely and which are more likely to eventually erode such that a new entry can take place? Answer: Barriers such as economies of scale and government restrictions can last indefinitely since the first depends on technology and the latter on government action. It is unlikely that a firm can maintain control of a key input indefinitely, and patents expire after 20 years. Government regulations and tariffs can last indefinitely, although a change of government could knock these down as well. Diff: 3 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 82) In principle, can a monopolist hold its monopoly power in the long run? Explain. Answer: Yes. Monopoly power exists in the long run when the market is closed to entry in some way. Barriers to entry include ownership to resources without close substitutes, economies of scale, government restrictions, licenses and patents, and regulations. Diff: 1 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 83) Why would economies of scale be a barrier to entry? Answer: If significant economies of scale exist in an industry, then the long-run average costs can decline over a wide range of output rates so that it may not be profitable for more than one firm to exist in that industry. This is the case of a natural monopoly, which is able to underprice potential competitors and keep them out of the market. Diff: 2 Topic: 24.1 Defining and Explaining the Existence of Monopoly Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24.2 The Demand Curve a Monopolist Faces 1) If a monopolist wishes to increase its output and quantity sold A) it must reduce its price, so its marginal revenue is greater than its price. B) it must reduce its price, so its marginal revenue is less than its price. C) it must raise its price, so its marginal revenue is greater than its price. D) it must raise its price, so its marginal revenue is less than its price. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

2) The demand curve faced by the monopolist A) is perfectly elastic. B) is perfectly inelastic. C) slopes downward. D) slopes upward. Answer: C Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 3) Compared to perfectly competitive firms, the demand curve for a monopolist will be A) as elastic. B) more elastic. C) less elastic. D) perfectly elastic. Answer: C Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 4) Compared to a monopolist, the demand curve for a perfectly competitive firm will be A) as elastic. B) more elastic. C) less elastic. D) unitary elastic. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

5) The demand curve a monopoly faces is A) horizontal. B) vertical. C) upward sloping. D) downward sloping. Answer: D Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 6) Which of the following conditions is TRUE for a monopolist? A) MR < P B) MR = P C) MR = AFC D) MR < AVC Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 7) A monopolist's demand curve is A) perfectly elastic. B) perfectly inelastic. C) of unit elasticity along the entire curve. D) the industry demand curve. Answer: D Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 8) To sell one more unit of a good, a monopolist must A) lower the price on the last unit only. B) lower the price on all units. C) raise the price only on the last unit sold. D) raise the prices on all goods. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

9) The demand curve faced by a pure monopolist A) is the same as its marginal revenue curve. B) is perfectly inelastic. C) lies below the marginal revenue curve. D) is the market demand curve. Answer: D Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 10) A major difference between a monopolist and a perfectly competitive firm is that A) the monopolist is certain to earn economic profits. B) the monopolist's marginal revenue curve lies below its demand curve. C) the monopolist engages in marginal cost pricing. D) the monopolist charges the highest possible price that he can. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 11) A monopolist faces a demand curve that A) is perfectly horizontal at the market price. B) is below the marginal revenue curve. C) is downward sloping. D) coincides with the industry supply. Answer: C Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

12) The demand curve a monopolist faces is A) horizontal. B) the industry demand curve. C) vertical. D) inelastic at all points. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 13) An important difference between a perfectly competitive firm and a monopolist is A) the size of the firms. B) the shape of the demand curve each faces. C) the goals of the owners of the firms. D) a monopolist normally produces a service, while a perfect competitor normally produces a good. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 14) An important difference between a perfectly competitive firm and a monopolist is A) the size of the industry. B) the primary objective of the firms. C) a monopolist only produces in the long run, while a perfect competitor only produces in the short run. D) the price it charges to sell additional units of a good. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

15) To sell more units, a monopolist must A) merely produce more units. B) advertise more. C) raise product quality. D) lower price. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 16) To sell more units, a monopolist A) simply moves across its horizontal demand curve to a larger quantity. B) moves down its demand curve to a lower price that will increase quantity demand. C) can continue to receive the same price it always has as long as it has its customers' goodwill. D) must be willing to lower the barriers to entry that have protected it. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 17) A monopolist's marginal revenue curve is A) the same as a perfectly competitive firm's marginal revenue curve. B) higher than the monopolist's demand curve. C) below the firm's demand curve. D) a horizontal line at the market price. Answer: C Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

18) For a monopolist, the marginal revenue gained when one more unit of output is sold is A) the price at which the extra unit is sold minus the loss in revenue that results from cutting the price on units sold previously. B) equal to the price of the product. C) negative if price is above the midpoint of the demand curve. D) the average revenue created by the increased sales. Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 19) If a firm sells 10 units of output at $100 per unit and 11 units of output when price is reduced to $98, its marginal revenue for the last unit sold is A) $2. B) $10. C) $89. D) $78. Answer: D Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 20) If a firm sells 50 units of output at $9 per unit and 60 units of output when price is reduced to $8, its marginal revenue from selling the sixth unit is A) $10. B) $480. C) $450. D) $30. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

21) If a firm sells 100 units of output at $15 per unit and 110 units of output when price is reduced to $12, its marginal revenue from selling the last unit is A) $30. B) -$30. C) $180. D) -$180. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 22) For a firm facing a downward-sloping demand curve, marginal revenue A) is at a minimum at the midpoint of the demand curve. B) is greater at higher prices than at lower prices. C) increases each time prices are lowered. D) falls each time prices are raised. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 23) For the monopolist, marginal revenue is A) equal to price. B) less than average revenue since price must be lowered to sell additional units. C) greater than price. D) not a consideration in the firm's pricing. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

24) The monopolist's marginal revenue is less than price since A) additional units can only be sold if the price is lowered on all units sold. B) the demand function is horizontal. C) average revenue is also less than price. D) average total cost is declining. Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 25) A monopolist faces A) a perfectly elastic demand curve. B) a perfectly inelastic demand curve. C) the market demand curve. D) a two-tiered demand curve. Answer: C Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 26) The demand curve facing a monopolist is A) downward sloping. B) upward sloping. C) horizontal. D) vertical. Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 27) Which of the following is NOT true about the demand curve faced by a monopolist? A) The demand curve is downward sloping. B) The firm's demand curve is the same as the market demand curve. C) The marginal revenue curve is below the market demand curve. D) The demand curve is perfectly elastic. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 35 Copyright © 2021 Pearson Education, Inc.

28) An important difference between perfect competition and monopoly is A) a monopoly is profitable and a perfect competitor is not. B) the monopoly faces a downward sloping demand curve and the perfect competitor faces a horizontal demand curve. C) the monopoly faces an inelastic demand curve and the perfect competitor faces an elastic demand curve. D) a monopoly is not regulated by the market, while a perfect competitor is regulated by the market. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

29) Refer to the above figure. Which of the following statements is TRUE about the demand curves for an individual firm in a perfectly competitive industry and a monopoly? A) Panel A is the demand curve for a perfectly competitive firm and panel B is the demand curve for a monopoly. B) Panel C is the demand curve for a perfectly competitive firm and panel A is the demand curve for a monopoly. C) Panel C is the demand curve for a perfectly competitive firm and panel B is the demand curve for a monopoly. D) Panel B is the demand curve for a perfectly competitive firm and panel A is the demand curve for a monopoly. Answer: C Diff: 3 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

30) Which of the following statements is TRUE about the relationship between a firm's demand curve under perfect competition and monopoly? A) Under perfect competition, the demand curve is perfectly elastic; under monopoly, the demand curve has elastic, unit-elastic and inelastic portions. B) Under monopoly, the demand curve is perfectly elastic; under perfect competition, the demand curve has elastic, unit-elastic and inelastic portions. C) The demand curves for a monopoly and perfect competition are always inelastic. D) We can define a demand curve under perfect competition but not under monopoly. Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 31) If a monopolist raises its price, A) it raises the barriers to entry. B) the quantity demanded increases. C) the quantity demanded remains the same. D) the quantity demanded decreases. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 32) If a monopolist lowers its price, A) the quantity demanded becomes zero. B) the quantity demanded increases. C) the quantity demanded remains the same. D) the quantity demanded decreases. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

33) If a monopolist wants to increase the amount it sells, it A) will keep the price the same. B) must lower the price on all units. C) must accept lower profits. D) must lower the cost of production. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 34) To induce an increase in the quantity demanded of its product, a monopolist must reduce the A) quality of its product and thereby generate a downward shift its ATC curve. B) price of its product and thereby generate a rightward shift in its demand curve. C) price of its product and thereby generate a rightward movement along its demand curve. D) quality of its product and thereby generate a downward movement along its ATC curve. Answer: C Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 35) Successive downward movements along the demand curve for the product of a monopolist always generate successive A) increases in the monopolist's marginal revenue. B) increases in the monopolist's average total costs. C) decreases in the additional per-unit costs incurred by the monopolist. D) decreases in the additional per-unit revenues earned by the monopolist. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

36) A monopolist wishing to increase its profit has just discovered that lowering its price and selling more output yielded the desired result. Profit increased. Based on this, we can conclude that the cost of the additional production is A) greater than the revenue from the additional production. B) precisely equal to the revenue from the additional production. C) less than the revenue from the additional production. D) there is no way to answer this because you have not given us the marginal revenue and marginal cost data. Answer: C Diff: 3 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 37) For a monopolist, A) marginal revenue is less than price. B) marginal revenue equals price. C) marginal revenue is greater than price. D) marginal revenue equals average revenue. Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 38) For a monopolist, the reason that marginal revenue is less than price is A) because of the perfectly elastic demand curve that the monopolist faces. B) because the monopolist must lower the price of the good in order to sell an additional unit. C) because of the U-shaped average revenue curve. D) because of the lack of competition in the market. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

39) Which of the following would best describe the demand curve faced by a monopoly firm? A) horizontal line at the market price B) vertical line at the output level C) same as the market demand curve D) same as the perfect competitor's demand curve Answer: C Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 40) The demand curve faced by the monopolist A) has a constant price elasticity. B) is the industry demand curve. C) is identical to the firm's MR curve. D) is identical to the firm's TR curve. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 41) The demand curve for a monopolist is A) the industry demand curve. B) the same as the demand curve for a perfectly competitive firm. C) a perfectly inelastic demand curve. D) a unitary elastic demand curve. Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 42) Which of the following statements about a monopolist is FALSE? A) A pure monopolist is the sole supplier of one product, good, or service. B) The monopolist faces a demand curve for the entire market for that good. C) A pure monopolist is not the same as a perfect competitor. D) The monopolist faces the industry demand curve, which is upward sloping. Answer: D Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

43) When considering marginal revenue for the monopolist, which of the following is FALSE? A) To sell more of a particular product, given the industry demand curve, the monopoly firm must lower the price. B) An essential point for the monopolist, marginal revenue is always less than price. C) Marginal revenue is always less than price because price must be reduced on all units to sell more. D) The more the monopolist wants to sell, the higher the price it has to charge in order to make more profits. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 44) For a monopolist, A) marginal revenue is equal to price for all units being sold. B) marginal revenue is less than price for all units being sold except the first unit. C) marginal revenue is greater than price for all units being sold except for the first unit. D) there is no relationship between marginal revenue and price. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 45) In order to sell more output units, what must a monopoly do? A) reduce output price B) reduce input price C) increase output price D) increase input price Answer: A Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

46) For a monopolist, marginal revenue is always A) greater than price. B) equal to price. C) equal to zero. D) less than price. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 47) Unlike a perfectly competitive firm, a monopolist faces a demand curve that is A) upward sloping. B) horizontal. C) vertical. D) downward sloping. Answer: D Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

48) Given the data in the above table, what is the marginal revenue when the 15th unit is sold? A) $7.00 B) $5.00 C) $3.00 D) $1.00 Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

49) Given the data in the above table, what is the marginal revenue when the 12th unit is sold? A) $7.00 B) $5.00 C) $3.00 D) $1.00 Answer: A Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 50) Given the data in the above table, what is the marginal revenue when the 13th unit is sold? A) $7.00 B) $5.00 C) $3.00 D) $1.00 Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 51) Given the data in the above table, what is the marginal revenue when the 14th unit is sold? A) $7.00 B) $5.00 C) $3.00 D) $1.00 Answer: C Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 52) Given the data in the above table, the marginal revenue curve A) lies below the demand curve. B) lies above the demand curve. C) intersects the demand curve. D) is equal to the demand curve. Answer: A Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 43 Copyright © 2021 Pearson Education, Inc.

53) The marginal revenue curve of a monopolist is A) downward sloping and below the demand curve. B) downsloping and identical to the demand curve. C) downsloping and above the demand curve. D) horizontal and same as the market demand curve. Answer: A Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 54) When TR is increasing as a monopolist's output increases, A) MR is negative. B) MR is positive. C) MR = 0. D) MR may be positive or negative. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 55) If a monopolist can sell 20 units at price of $200 per unit and 30 units at a price of $180 per unit, its marginal revenue at an output of 30 is A) -$200. B) $800. C) $1400. D) $1800. Answer: C Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

56) If a monopolist can sell 9 units at price of $100 per unit and 10 units at a price of $90 per unit, its marginal revenue at an output of 10 units is A) -$90. B) $0. C) -$10. D) $100. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 57) The demand curve facing a monopolist will be more elastic A) the greater is the number of substitute products. B) as the consumers' need for the good increases. C) the greater is the amount of fixed costs to cover. D) as the number of consumers increases. Answer: A Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 58) The price elasticity of demand for a good produced by a monopolist A) equals zero as long as the good has no close substitutes. B) is always inelastic since the demand curve slopes down. C) does not equal zero because there will always be some substitutes, however imperfect they may be. D) does not equal zero because every good has at least one good substitute for it. Answer: C Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

59) The profit-maximizing monopolist will never operate in a price range over which A) the demand curve slopes downward. B) demand is inelastic. C) P > MR. D) P > MC. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 60) The profit-maximizing monopolist will operate in a price range over which A) demand is elastic. B) demand is inelastic. C) the price elasticity of demand is less than 1. D) supply is elastic. Answer: A Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 61) The price elasticity of demand for a monopolist's product depends on A) the number and similarity of substitutes. B) the ATC of the item it produces. C) the AVC of the item it produces. D) the MC of the item it produces. Answer: A Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 62) What is TRUE of the price elasticity of demand faced by a monopoly firm? A) Demand is inelastic. B) Demand is more elastic at lower prices and more inelastic at higher prices. C) Demand is perfectly elastic because the monopolist has no competition. D) Demand becomes more elastic as the range of imperfect substitutes expands. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

63) Which of the following statements about the elasticity of demand for a monopolist is TRUE? A) Since a monopolist produces a good with no close substitutes, the price elasticity of demand for the good is zero. B) A monopolist produces a good with demand that is perfectly inelastic because people cannot do without the good. C) Since every good has some substitute, even if imperfect, the demand for a good produced by a monopolist will not have zero price elasticity. D) Since the demand curve of a monopolist is downward sloping, the demand for the good must be inelastic. Answer: C Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 64) A monopolist A) can charge whatever price it wants because it is the only firm producing the good. B) can usually keep price equal to marginal revenue by lowering the price on the last unit sold only. C) faces a demand curve that is more elastic than the demand curve for the industry. D) is constrained in its pricing decisions by the demand curve it faces. Answer: D Diff: 3 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 65) The price elasticity of demand for a monopolist A) is infinite since the monopolist is the only firm in the market. B) decreases as more competition occurs in the market. C) increases as similar products enter the market. D) is undefined due to the lack of competition. Answer: C Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

66) The more substitutes there are for a monopolist's product, A) the less elastic is the demand curve. B) the more elastic is the demand curve. C) the steeper is the demand curve. D) the more positively sloped the demand curve becomes. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 67) When the number of substitutes increase, the demand curve for a monopolist will A) not change. B) become more elastic. C) become more inelastic. D) become steeper. Answer: B Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 68) A profit-maximizing monopoly will NEVER produce along a range of output for which A) the demand curve is elastic. B) the demand curve is inelastic. C) the price elasticity of demand is greater than 1. D) the price elasticity of supply is greater than 1. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

69) The monopolist should NEVER produce in the A) elastic segment of its demand curve because it can increase total revenue and reduce total cost by lowering price. B) inelastic segment of its demand curve because further lowering of the price reduces total revenue. C) range of output for which the price elasticity of demand is infinity. D) range of output for which there is a price elasticity exceeding one. Answer: B Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 70) If a monopolist were to produce in the inelastic segment of its demand curve, A) total revenue would be at a maximum. B) total revenue would be at a minimum. C) the firm would maximize profits. D) a further drop in the price will change quantity demanded less than proportionately. Answer: D Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 71) A monopolist produces in the elastic segment of its demand curve because when it lowers the price, A) the percentage change increase in quantity demanded is greater than the percentage change decrease in price and total revenue increases. B) the percentage change increase in quantity demanded is less than the percentage change decrease in price and total revenue increases. C) the percentage change increase in quantity demanded is greater than the percentage change decrease in price and total revenue decreases. D) the percentage change decrease in quantity demanded is less than the percentage change decrease in price and total revenue increases. Answer: A Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

72) Discuss and explain the relationships between the monopolist's demand curve, average revenue curve, and marginal revenue curve. Answer: The monopolist's demand curve is the industry demand curve, and it is downward sloping. Total revenue is PQ, so average revenue is PQ/Q = P. Thus, the average revenue curve is the demand curve. The marginal revenue curve lies below the demand curve. If a firm sells another unit, it receives the price for the unit. But, it must reduce price to make the sale, and hence must lower price on other units it could have sold at a higher price. Consequently, the extra revenue earned from selling an extra unit is less than the price. Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 73) Why is price less than marginal revenue for a monopolist? Answer:

Consider the above figure. If the monopolist reduces its price from P1 to P2, its revenues increase by the area of the rectangle bcde. At the same time, however, its revenues decline by the area of the rectangle P1acP2. Marginal revenue is the difference between these two areas, which is less than the price of the one-unit change entailed in increasing output from Q to Q + 1. Thus, marginal revenue is less than price. Diff: 3 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

74) What does the demand curve facing a monopoly look like? Why? Answer: The demand curve facing a monopoly is downward sloping because the monopoly is the industry. Therefore, it faces the industry demand curve, which is downward sloping. For a monopolist to sell more units, it must lower price. Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 75) Using a graph, show why marginal revenue is always less than price. Answer:

The demand curve slopes down so the firm must lower price to sell another unit. It receives the price for that unit, shown in the figure above by rectangle Q1cb Q1+1. However, it lowers price so it receives less on the Q1 units it could have sold at P1. This reduced revenue is area P1acP2. The extra revenue then is Q1cb Q1+1 - P1acP2, which is less than P2. Hence, the marginal revenue is less than the price. Diff: 3 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

76) What is the main difference between the demand curves for the perfect competitor and the monopolist? Answer: The perfect competitor faces a horizontal demand curve because it has no control over the market price. By contrast, the monopolist is the sole supplier of the entire industry so that it faces the industry demand curve, which is downward sloping. Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 77) What affects the price elasticity of demand for a monopolist's product? Answer: A monopolist may have imperfect substitutes for its product. The price elasticity of demand for the product is higher if the product has more of those imperfect substitutes or the better those products are as substitutes. Diff: 1 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 78) "A monopolist can charge whatever price it wants." Do you agree or disagree? Why? Answer: Disagree. The monopolist is limited by the demand curve it faces. Even a monopolist produces a good that has substitutes, even if they are imperfect substitutes. The more substitutes and the better some of them are as substitutes, the more elastic the demand curve of the monopolist. Diff: 2 Topic: 24.2 The Demand Curve a Monopolist Faces Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24.3 Costs and Monopoly Profit Maximization 1) For a monopolist to maximize profits, its A) price exceeds marginal cost. B) price equals marginal revenue. C) price equals average total cost. D) marginal revenue exceeds price. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

2) A monopoly will maximize profits at the level of output at which A) MR = MC. B) MR = AFC. C) MC = ATC. D) MC = P. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 3) The monopolist will choose the price and output combination at which A) MC equals AR. B) MC equals MR. C) MC equals price. D) MR equals AR. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 4) Suppose a monopolist's costs and revenues are as follows: ATC = $45.00; MC = $40.00; MR = $40.00; P = $45.00. The firm should A) increase output and decrease price. B) decrease output and increase price. C) not change output or price. D) shut down. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

5) Suppose a monopolist's costs and revenues are as follows: ATC = $50; MC = $35; MR = $40; P = $55. The firm should A) increase output and decrease price. B) decrease output and increase price. C) not change output or price. D) shut down. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 6) Suppose a monopolist's costs and revenues are as follows: ATC = $50; MC = $45; MR = $40; P = $55. The firm should A) increase output and decrease price. B) decrease output and increase price. C) not change output or price. D) shut down. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 7) The profit maximizing behavior of a monopoly is different from that of a perfectly competitive firm in that a monopoly can A) only choose the desired output, while a competitive firm can control only price. B) only choose the desired price, while a competitive firm can control only output. C) control the position of its demand schedule, but a competitive firm cannot. D) control the desired price and output to maximize profits, but a perfectly competitive firm can only choose the desired output. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

8) The profit-maximizing price and quantity established by the unregulated monopolist in the above figure are A) Q1 units of output and a price of P5. B) Q3 units of output and a price of P3. C) Q1 units of output and a price of P1. D) Q4 units of output and a price of P4. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 9) In the above figure, at the firm's profit maximizing output, total revenue is rectangle A) 0P1AQ1. B) 0P3FQ3. C) 0P5EQ5. D) 0P2BQ1. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 55 Copyright © 2021 Pearson Education, Inc.

10) In the above figure, marginal cost and marginal revenue are equal at output A) Q5. B) Q1. C) Q3. D) Q2. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 11) In the above figure, the total cost of producing the profit maximizing level of output is shown by rectangle A) 0P1AQ1. B) 0P5EQ5. C) 0P4HQ4. D) 0P2BQ1. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 12) In the above figure, suppose the monopolist is producing at Q3. The firm should A) increase output and decrease price. B) decrease output and increase price. C) not change output or price. D) shut down. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

13) In the above figure, if the firm is producing at Q3 and charging a price of P3, it should A) increase output and decrease price. B) decrease output and increase price. C) not change output or price. D) shut down. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 14) In the above figure, if the firm is producing Q1 units at a price P1, the firm should A) increase output and decrease price. B) decrease output and increase price. C) not change output or price. D) shut down. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

15) In the above figure, if the firm is producing Q2 units at a price P2, it should A) increase output and decrease price. B) decrease output and increase price. C) not change output or price. D) shut down. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 16) Which of the following statements concerning a monopolist is FALSE? A) A monopolist will produce at which MR = MC. B) For a monopolist, marginal revenue is less than price. C) A monopolist will charge the highest price at which any individual will purchase the product. D) A monopolist will shut down if price is less than average variable cost. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 17) As a price searcher, a monopoly firm A) must only determine the price it charges. B) must determine its optimal price-output combination. C) must determine its output level and then accept the market price for its product. D) must determine the prices it pays for its inputs and accept the market price for its output. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

18) In the above figure, the monopolist's profit-maximizing output level is A) A. B) B. C) C. D) D. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 19) In the above figure, the monopolist's profit-maximizing price is A) A. B) B. C) C. D) D. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

20) Suppose a monopolist sells 10,000 units of output at $22 per unit. The firm's total revenue is A) $2,200. B) $22,000. C) $220,000. D) $2,200,000. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 21) The price-output combination that maximizes profits for a monopolist occurs at the point where A) total revenues and total costs are equal. B) the difference between total revenues and total costs is the greatest. C) total revenues are the greatest. D) the elasticity of demand equals one. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 22) A monopolist finds the price-output combination that maximizes its profits by A) equating total revenue and total cost. B) equating marginal revenue and marginal cost. C) finding the combination for which the difference between marginal revenue and marginal cost is the greatest. D) equating price and marginal cost. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

23) In equilibrium, which of the following conditions is common to both unregulated monopoly and pure competition? A) P = MR B) AR = ATC C) MR = MC D) MC = P Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24) Profits can be maximized by equating MR = MC = Price A) only in perfectly competitive markets. B) only in monopoly markets. C) only in discriminating monopoly markets. D) only with government price controls. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 25) In maximizing economic profit, the monopolist will A) choose the highest price that still permits some output sales. B) equate marginal cost to minimum average total cost. C) equate price to marginal cost. D) equate marginal revenue to marginal cost. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

26) The monopolist faces a downward-sloping demand curve, and maximizing profits requires the monopolist to A) accept the market price for its product. B) produce where the demand curve is inelastic. C) search for the price consistent with producing to the point at which marginal revenue equals marginal cost. D) search for the highest possible price consistent with maximizing its revenues, irrespective of its explicit and implicit opportunity costs. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

27) According to the above figure, the profit maximizing price-output combination for the monopolist is a price of A) 50 cents and an output of 40,000 newspapers per day. B) 30 cents and an output of 30,000 newspapers per day. C) 60 cents and an output of 30,000 newspapers per day. D) 45 cents and an output of 45,000 newspapers per day. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

28) The monopolist is a A) price taker who tries to find the profit-maximizing rate of output. B) price taker who tries to find the profit-maximizing price. C) price searcher who tries to find the profit-maximizing price-output combination. D) price searcher who tries to find the rate of output that maximizes price. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 29) A firm that must determine the price-output combination that maximizes profit because it faces a downward-sloped demand curve A) has a perfectly elastic demand curve. B) has a perfectly inelastic demand curve. C) is a price-taker. D) is a price searcher. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 30) A monopolist maximizes profits by finding A) the rate of output where marginal revenue equals marginal cost. B) the rate of output where price equals marginal cost. C) the price where price exceeds marginal revenue by that largest amount. D) the price where average revenue and marginal cost are equal. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

31) Refer to the above table. Given the demand and cost schedules, what is the profit maximizing quantity for this monopolist? A) 14 B) 19 C) 25 D) 30 Answer: C Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 32) Refer to the above table. Given the demand and cost schedules, what is the profitmaximizing price for this monopolist? A) $9 B) $12 C) $11 D) $10 Answer: D Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 33) Refer to the above table. Given the demand and cost schedules, what are the maximum economic profits for this monopolist? A) $155 B) $143 C) $175 D) $164 Answer: C Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

34) Refer to the above table. Given the demand and cost schedules, what is the profit maximizing quantity for this monopolist? A) 15 B) 20 C) 25 D) 30 Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 35) Refer to the above table. Given the demand and cost schedules, what is the profitmaximizing price for this monopolist? A) $13 B) $12 C) $11 D) $10 Answer: C Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 36) Refer to the above table. Given the demand and cost schedules, what are the maximized economic profits for this monopolist? A) $122 B) $152 C) $220 D) $150 Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 65 Copyright © 2021 Pearson Education, Inc.

37) Refer to the above table. Given the demand and cost schedules, what is the profit maximizing quantity for this monopolist? A) 23 B) 21 C) 20 D) 24 Answer: D Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 38) Refer to the above table. Given the demand and cost schedules, what is the profitmaximizing price for this monopolist? A) $3 B) $4 C) $6 D) $7 Answer: A Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 39) If a monopolist is producing the quantity at which price equals marginal cost, it should A) continue to produce this amount if it wants to maximize profits. B) reduce output if it wants to maximize profits. C) reduce price and keep output unchanged if it wants to maximize profits. D) increase output if it wants to maximize profits. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

40) If a monopolist is producing the quantity at which marginal revenue equals marginal cost, it should A) continue to produce this amount if it wants to maximize profits. B) reduce output if it wants to maximize profits. C) increase price and keep output unchanged if it wants to maximize profits. D) increase output if it wants to maximize profits. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 41) If a monopolist is producing the quantity at which marginal revenue exceeds marginal cost, it should A) continue to produce this amount if it wants to maximize profits. B) reduce output if it wants to maximize profits. C) reduce price and keep output unchanged if it wants to maximize profits. D) increase output if it wants to maximize profits. Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 42) A monopolist finds the output (Q*) rate that maximizes profit. It finds the price by A) taking the height of the marginal revenue curve at output rate Q*. B) taking the height of the marginal cost curve at output rate Q*. C) taking the height of the demand curve at output rate Q*. D) setting price equal to marginal cost. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

43) A monopolist who is maximizing profits produces to the point at which A) marginal cost and average total cost are equal. B) price, marginal cost and average variable cost are equal. C) price is greater than marginal cost. D) price is greater than average total cost. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 44) The monopolist determines the price and quantity combination that maximizes short-run profits by A) finding the quantity at which marginal cost and marginal revenue are equal and then using the demand curve to find price. B) determining the price by finding the highest price at which sales can be made and then using the demand curve to find the appropriate quantity. C) finding the point at which marginal revenue and demand intersect. This gives the price and quantity that maximizes profits. D) finding the quantity at which average revenue and average total cost are furthest apart. Answer: A Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 45) If a monopolist produces to a point at which marginal revenue is less than marginal cost, then A) profits are being maximized. B) profits will always be negative. C) the incremental cost of producing the last unit exceeds the incremental revenue. D) the incremental cost of producing the last unit is less than the incremental revenue. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

46) If a monopolist produces to a point at which marginal revenue is greater than marginal cost, then A) profits are being maximized. B) profits will always be negative. C) the incremental cost of producing the last unit exceeds the incremental revenue. D) the incremental cost of producing the last unit is less than the incremental revenue. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 47) If a monopolist produces to a point at which marginal revenue is less than marginal cost, then A) the firm should increase output. B) the firm should reduce output. C) the firm is maximizing profits. D) we do not know if the firm should increase or reduce without more information. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 48) If a monopolist produces to a point at which marginal revenue is more than marginal cost then A) the firm should increase output. B) the firm should reduce output. C) the firm is maximizing profits. D) we do not know if the firm should increase or reduce without more information. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

49) Refer to the above figure. The profit maximizing quantity for this firm is A) zero. B) Q1. C) Q2. D) Q3. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 50) Refer to the above figure. The profit-maximizing price for this firm is A) P1. B) P2. C) P3. D) P4. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

51) Refer to the above figure. Profits for this firm are A) zero. B) negative. C) positive. D) undetermined without more information. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

52) Refer to the above figure. The profit-maximizing price and output for this monopolist are A) a price of P1 and output of Q1. B) a price of P4 and output of Q1. C) a price of P2 and output of Q2. D) a price of P3 and output of Q3. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

53) Refer to the above figure. Profits for this firm are A) negative. B) zero. C) positive. D) undetermined without more information. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 54) Refer to the above figure. The firm is currently producing at Q2. The firm should A) reduce production. B) leave production as it is. C) increase production. D) shut down. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 55) Refer to the above figure. The firm is currently producing at Q1. The firm should A) reduce production. B) leave production as it is. C) increase production. D) shut down. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 56) A monopolist A) is a price searcher. B) is a price taker. C) faces an upward-sloping demand curve. D) faces a vertical demand curve. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 72 Copyright © 2021 Pearson Education, Inc.

57) A firm that can determine the price-output combination in order to maximize profit is known as a A) price searcher. B) price taker. C) demand searcher. D) cost taker. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 58) The point of profit maximization for a monopolist is exemplified by A) TR = TC. B) MR = MC. C) ATCmin. D) MR > MC. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 59) A monopolist determines the profit-maximizing output A) at the point at which TR = TC. B) at the point at which MR = MC. C) at any point it wants because it is the only producer of the product. D) at the point at which TR is maximum. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

60) Which of the following conditions is TRUE for both the perfectly competitive firm and the monopoly at the profit-maximizing output level? A) MR = P B) MC = ATC C) MC = P D) MR = MC Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 61) A pure monopolist is selling 10 units at a price of $10. If the marginal revenue of the 11th unit is $1, then the price of the 11th unit is A) $11. B) $9.18. C) greater than $11. D) $10. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 62) A monopoly sells 10 units of output at $10. If the marginal revenue of the 11th unit is $4.50, then the price of the 11th unit is A) also $10. B) $9.50. C) $11. D) $7.25. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

63) A monopoly sells 5 units of output at $20. If the MR of the 6th unit is $14, then the price of the 6th unit is A) also $14. B) $17. C) greater than $20. D) $19. Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 64) A monopolist is producing at an output level at which MR = $50 and MC = $55. It could increase profits A) by increasing both output and price. B) by reducing output and by increasing price. C) by reducing both output and price. D) by increasing output and by reducing price. Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 65) A monopolist is producing at an output level at which MR = $10 and MC = $9. It could increase profits A) by increasing both output and price. B) by reducing output and by increasing price. C) by reducing both output and price. D) by increasing output and by reducing price. Answer: D Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

66) A monopolist is producing at an output level at which ATC = $50, P = $60, MC = $35, and MR = $45. We can conclude that A) economic profit could be increased by producing more. B) economic profit could be increased by producing less. C) economic profit cannot be increased. D) the firm is earning $10 in economic profits. Answer: A Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 67) A monopolist is producing at an output level at which ATC = $55 P = $65, MC = $45, and MR = $35. We can conclude that A) economic profit could be increased by producing more. B) economic profit could be increased by producing less. C) economic profit cannot be increased. D) the firm is earning $10 in economic profits. Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 68) Assume that a monopoly is producing at a profit-maximizing output level. If the firm's total fixed costs decrease, the firm A) should lower its price. B) should increase its price. C) should continue to produce at the same level. D) increase its output level. Answer: C Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

69) For a profit-maximizing monopolist A) P > MC. B) P = MC. C) P = MR. D) P = ATC. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 70) In the long run, all of the following are true for a monopolist EXCEPT A) P > ATC. B) P = MC. C) MR = MC. D) P > AVC. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 71) Which of the following is TRUE of a perfectly competitive firm and a monopoly in the long run? A) P = MC B) P = ATC C) MR = MC D) P = MR Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

72) For a monopoly earning positive economic profits at the profit-maximizing output level, all of the following are true EXCEPT A) P > ATC. B) P > MR. C) P > MC. D) P = MR. Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 73) If a monopolist is producing at an output rate at which P = ATC, then A) its economic profit will be zero. B) its economic profit will be positive. C) it is maximizing its profits. D) it is minimizing its losses. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

74) Use the above figure. The profit-maximizing output will be A) Q1. B) Q2. C) Q3. D) None of these are correct. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 75) Use the above figure. The profit-maximizing price will be A) P1. B) P2. C) P3. D) P4. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

76) Use the above figure. The profit-maximizing or loss minimizing output and price will be A) Q1 and P2. B) Q2 and P3. C) Q3 and P3. D) Q4 and P1. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

77) In the above figure, what is the profit-maximizing price and output? A) $9, 14 B) $13, 14 C) $11, 16 D) $10, 17 Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 78) In the above figure, what is total revenue at the profit-maximizing point? A) $182 B) $126 C) $170 D) $176 Answer: A Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

79) In the above figure, what is total cost at the profit-maximizing point? A) $182 B) $126 C) $112 D) $170 Answer: C Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 80) In the above figure, what is total profit at the profit-maximizing point? A) $14 B) $56 C) $42 D) $70 Answer: D Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 81) In the above figure, the break-even output and price is A) $9 and 14. B) $13 and 14. C) $11 and 16. D) $10 and 17. Answer: D Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 82) To maximize profits, the monopolist should produce at which A) MR = MC. B) MC intersects the demand curve. C) total revenue is maximized. D) total costs are minimized. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 82 Copyright © 2021 Pearson Education, Inc.

83) A monopolist is maximizing profit at an output rate of 100 units per week. At this output rate, the price that its customers are willing and able to pay is $8 per unit, average total cost is $5 per unit, and marginal cost is $6 per unit. It may be concluded that at this monthly output rate, marginal revenue is A) $5 per unit, and the monopolist earns zero economic profits. B) $6 per unit, and the monopolist earns economic profits of $200 per week. C) $6 per unit, and the monopolist earns economic losses of $100 per week. D) $6 per unit, and the monopolist earns economic profits of $300 per week. Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

84) According to the above figure, the maximum profit the monopolist can receive is A) 0. B) $1,500 per day. C) $9,000 per day. D) $7,500 per day. Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

85) According to the above figure, what are the profits of the firm if it produces 50,000 units? A) -$5,000 per day B) -$10,000 per day C) -$7,500 per day D) -$17,500 per day Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 86) A monopolist will not earn any economic profits when A) AVC is a minimum. B) AFC is very high. C) ATC lies above the demand curve. D) ATC lies below the demand curve. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 87) A monopolist will earn economic profits when A) AVC is a minimum. B) ATC equals MC. C) ATC lies above the demand curve. D) ATC lies below the demand curve. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

88) Suppose that the profit maximizing level of output for the monopolist is 10 units, and price = $50, ATC = $35, and AVC = $25. What is the monopoly's profit? A) $50 B) $150 C) $250 D) $500 Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 89) Suppose that the profit maximizing level of output for the monopolist is 100 units, and ATC = $45.00; MC = $35.00; MR = $35.00; P = $45.00. What is the monopoly's profit? A) -$1000 B) $4500 C) $0 D) $3500 Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 90) Suppose that the profit maximizing level of output for the monopolist is 100 units, and ATC = $45.00; MC = $35.00; MR = $35.00; P = $60.00. What is the monopoly's profit? A) -$1000 B) $4500 C) $5000 D) $1500 Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

91) When the marginal cost curve of the monopolist shifts upward, there will be A) an increase in both price and quantity. B) an increase in price but a decrease in quantity. C) a decrease in price and in marginal revenue. D) a decrease in quantity and a decrease in marginal revenue. Answer: B Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 92) A profit-maximizing monopolist earns an economic loss whenever A) it pays taxes to the government on each unit of output it produces. B) the price it charges for its product exceeds average total cost. C) the demand curve lies completely below the ATC curve. D) it produces along the elastic portion of a demand curve. Answer: C Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 93) A monopolist will not be able to receive a positive economic profit at any price-output combination at which A) marginal cost is less than average total cost when the monopolist has equated marginal revenue and marginal cost. B) the average total cost curve is everywhere above the demand curve. C) marginal cost is less than average variable cost when the monopolist has equated marginal revenue and marginal cost. D) marginal revenue falls at a faster rate than marginal cost increases. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

94) According to the above figure, the profit-maximizing output for this monopolist is found directly below the letter A) R. B) M. C) P. D) N. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 95) According to the above figure, the profit-maximizing price for the monopolist is A) A. B) B. C) C. D) D. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

96) According to the above figure, when the monopolist maximizes profits, its profits are equal to the area given by A) AKMC. B) AKOD. C) BLPE. D) EPRF. Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 97) A profit-maximizing monopolist will receive zero profits when A) the average total cost curve lies above the demand curve for all possible rates of output. B) the average total cost curve is tangent to the demand curve at the profit maximizing price. C) marginal revenue, marginal cost, and average total cost are all equal. D) a second firm enters the industry. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

98) If the above figure accurately portrays the market conditions for a given monopolist, we can be assured that the monopolist A) is making a normal profit. B) is producing at the level that will maximize benefit to society. C) is making excessive profits. D) will be forced to go out of business in the long run. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

99) In the above figure, the area of rectangle ABHG represents the monopolist's A) maximized economic profits. B) maximized total revenue. C) average total profits. D) total costs. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 100) In the above figure, the distance between A and B represents this monopoly firm's A) total profit. B) total revenue. C) average profit per unit. D) average cost per unit. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

101) In the above figure, a monopolist will set its level of output and price at A) Q2 and C, respectively. B) Q3 and F, respectively. C) Q1 and A, respectively. D) Q1 and B, respectively. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 102) The owner of a patented invention A) may or may not have a legal monopoly. B) is guaranteed a profit since her idea cannot be copied. C) will always have demand high enough and costs low enough to ensure a profit. D) will only earn a profit if average total cost is less than price. Answer: D Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

103) Refer to the above figure. Profits for this firm are A) negative. B) zero. C) positive. D) undetermined without more information. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

104) Refer to the above figure. Profits for this firm are A) positive and equal to P2P1ab. B) positive and equal to P3P1ac.. C) negative and equal to P3P2bc. D) negative and equal to 0P3cQ1. Answer: A Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 105) Refer to the above figure. Total cost for this firm equals A) P2. B) P3. C) 0P2bQ1. D) 0P3cQ1. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

106) A monopolist would not be able to make a positive profit at any price output combination when A) marginal cost is less than average total cost for one more unit of output. B) the average variable cost curve is everywhere above the marginal revenue curve. C) the minimum point of the average total cost curve lies to the right of the minimum of the average variable cost curve. D) the average total cost curve is everywhere above the demand curve. Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 107) Which of the following is a TRUE statement about a monopoly? A) A monopoly does not necessarily earn positive economic profits. B) A monopoly must earn an above-normal profit to stay in business. C) As long as there are barriers to entry, a monopoly can always find some price-output combination that generates positive economic profits. D) As long as the demand curve slopes down, a monopoly can always find some price-output combination that generates positive economic profits. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 108) A monopolistic firm will shut down if A) P = ATC for every level of output. B) P > ATC for every level of output. C) P > AVC for every level of output. D) P < AVC for every level of output. Answer: D Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

109) Which of the following is INCORRECT regarding monopoly and profits? A) The mere existence of a monopoly does not guarantee high profits. B) Numerous monopolies have gone bankrupt. C) A monopolist will never experience economic losses. D) The monopolist reaches profit-maximizing output by trial and error. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

110) For the monopoly in the above figure, if the firm is currently producing 700 units, which of the following is correct? A) It could earn higher profits if it produced more units each day. B) It could earn higher profits if it produced fewer units each day. C) It is maximizing its profits. D) It is incurring a loss. Answer: B Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 111) Use the above figure. The profit-maximizing output and price is A) 600 and $16, respectively. B) 600 and $10, respectively. C) 600 and $8, respectively. D) 800 and $10, respectively. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 95 Copyright © 2021 Pearson Education, Inc.

112) Use the above figure. Total revenue at the profit-maximizing output is A) $4,800. B) $9,600. C) $5,600. D) $8,000. Answer: B Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 113) Use the above figure. Total cost at the profit-maximizing output is closet to A) $6,600. B) $9,600. C) $4,800. D) $8,000. Answer: A Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 114) Use the above figure. The profit this monopolist earns is closest to A) $3,000. B) $4,800. C) $1,600. D) $1,000. Answer: A Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

115) A firm that faces a downward-sloping demand curve is A) a price taker. B) a price provider. C) a price searcher. D) a price creator. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 116) A firm that faces a downward-sloping demand curve is known as a A) price taker. B) utility maximizer. C) price searcher. D) perfect competitor. Answer: C Diff: 1 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 117) How does a monopoly maximize profits? What price does it charge? Answer: A monopoly finds the rate of output at which marginal revenue equals marginal cost. Any other output will generate lower profits. If marginal revenue is greater than marginal cost, an extra unit generates more revenue than costs, so profits increase. If marginal cost exceeds marginal revenue, cutting output by one unit reduces costs more than revenues, so profits increase. When marginal cost equals marginal revenue, profits are maximized. The price is found by identifying the price on the demand curve associated with the profit maximizing rate of output. Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

118) "Unlike a perfect competitor, a profit-maximizing monopolist produces at an output rate at which marginal revenue exceeds marginal cost." Do you agree or disagree? Why? Answer: Disagree. To maximize profits, the monopolist produces at an output rate at which marginal revenue equals marginal cost as does a perfect competitor. If it goes past that point, then the incremental cost of producing any more units will exceed the incremental revenue and so profits decrease. Below that point, the incremental revenue of producing any more units will exceed the incremental cost and so profits are not maximized either. However, because price is higher than marginal revenue in a monopoly, the profit-maximizing monopolist sells at a price higher than marginal cost. Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 119) "All monopolies operate with positive economic profits." Do you agree or disagree? Why? Answer: Disagree. Monopolies can receive negative economic profits and can go out of business. If there is no price that lies above average total costs, the firm will receive negative economic profits. In the short run, it will continue to operate as long as price is greater than average variable cost, but it will go out of business in the long run. Diff: 2 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

120) Using a graph, show the profits of a monopoly. Suppose fixed costs increased enough to make the firm earn an economic loss. Show such a situation. Would the monopolist earn economic losses in the long run? Why or why not? Answer:

In the above figure, the monopolist produces to the point at which MR = MC, at Q units. Price is P1, which is the price on the demand curve associated with Q. Economic profits equal area P1abc if the average total cost curve is ATC. If fixed costs increase so average total costs increase toATC1, the firm would lose feaP1. The monopolist will not earn economic losses in the long run because it can go out of business. Diff: 3 Topic: 24.3 Costs and Monopoly Profit Maximization Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

24.4 On Making Higher Profits: Price Discrimination 1) Price discrimination refers to A) selling a product at different prices according to the differences in marginal cost of providing it to different consumers. B) selling a product at different prices, with the price difference being unrelated to differences in marginal cost. C) charging the same prices to all consumers but selling them different quantities. D) a deliberate effort on the part of a monopoly producer to confuse consumers. Answer: B Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 2) A price-discriminating monopolist with two markets will equate A) the prices of two markets. B) price and marginal revenue in each of the two markets. C) marginal revenue and marginal cost in each of the two markets. D) the average costs of the two markets. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 3) A monopolist engages in price discrimination A) by charging a higher price to consumers whose demand is more elastic. B) by charging a higher price when marginal cost is lower. C) by charging a lower price to consumers whose demand is more elastic. D) by charging the same price to all consumers. Answer: C Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

4) A monopolist engages in price discrimination A) by charging a higher price to consumers whose demand is more inelastic. B) by charging a lower price when marginal cost is higher. C) by charging a lower price to consumers whose demand is more inelastic. D) by charging the same price to all consumers. Answer: A Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 5) When grocery stores issue special discount cards for shoppers effectively offering different prices based on quantities purchased, this is an example of A) price discrimination. B) price differentiation. C) product differentiation. D) quantity differentiation. Answer: A Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 6) Which of the following is NOT a necessary condition for price discrimination? A) preventing resale of the product B) downward-sloping demand curve C) separating markets for the good D) having a constant marginal cost Answer: D Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

7) Price discrimination is the A) refusal by a firm to sell to all customers. B) selling of a given product at more than one price when the price differences reflect cost differences. C) pricing of a product so that not everyone can afford it. D) selling of a given product at more than one price when the price difference is unrelated to cost differences. Answer: D Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 8) A monopoly will look for opportunities to price discriminate because the practice A) leads to selling more units. B) leads to greater profits. C) allows it to charge higher prices. D) is desired by customers. Answer: B Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 9) Which of the following conditions is NOT necessary for a firm to be able to engage in price discrimination? I. The firm must be able to produce to the point at which price equals marginal revenue. II. The firm must easily be able to identify consumers with different demand elasticities. III. The firm must be able to prevent resale of the item it produces and sells. A) I only B) III only C) Both I and II only D) Both II and III only Answer: A Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

10) A monopolist sells a homogeneous good in several distinct submarkets, and the elasticities of demand differ in these submarkets. If the monopolist selects the rate of output to sell in each submarket by equating marginal revenue and marginal cost, then A) all customers in all markets end up paying the same price. B) it is not price discriminating, but merely price differentiating. C) customers in markets with more elastic demand will pay higher prices than customers in markets with less elastic demand. D) customers in markets with more elastic demand will pay lower prices than customers in markets with less elastic demand. Answer: D Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 11) If a firm is price differentiating, then it is A) producing a homogeneous product. B) charging different prices to different consumers based on differences in marginal costs. C) charging different prices based on quality. D) charging different prices based on advertising costs. Answer: B Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 12) Other things being equal, a price-discriminating firm will charge more to the customers who A) have the highest incomes. B) have the least elastic demand for its product. C) have the most elastic demand for the product. D) are the least rational in making their decisions. Answer: B Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

13) Other things being equal, a price-discriminating firm will charge less to the customers who A) have the lowest incomes. B) have the least elastic demand for its product. C) have the most elastic demand for the product. D) are the most rational in making their decisions. Answer: C Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 14) In order to price discriminate, a firm must A) produce a product that is a close substitute for products of other firms. B) have different marginal costs for serving different customers. C) sell to customers with identical price elasticities of demand. D) be able to prevent resale of its product. Answer: D Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 15) If different markets for a product produced by a monopolist can be separated and if the elasticity of demand differs between the two markets, then the monopolist will A) be able to make higher profits by using price discrimination. B) charge a single price in all markets. C) go out of business. D) sell the product in only one of the markets with inelastic demand curves. Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

16) A price discriminating monopolist will A) charge a lower price to those consumers who have more elastic demand. B) charge a higher price for a good with more market demand. C) charge more to those consumers who have more substitute goods. D) charge the same price to all consumers. Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 17) If the price elasticity of demand for U.S. automobiles is higher in Mexico than it is in China, and transport costs are zero, a price-discriminating monopolist would charge A) the same price for autos in China as in Mexico. B) a lower price for autos in China than in Mexico. C) a higher price for autos in China than in Mexico. D) a less profitable price for autos in China than in Mexico. Answer: C Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 18) If the price elasticity of demand for airline tickets is 1.2 for a leisure traveler and 0.9 for a business traveler, then a price-discriminating monopolist would charge A) a higher price for the business traveler than the leisure traveler. B) the same price for both travelers. C) a lower price for the business traveler than the leisure traveler. D) a less profitable price for the business traveler than the leisure traveler. Answer: A Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

19) Which of the following is NOT necessary in order for a monopolist to practice effective price discrimination? A) The marginal cost of providing the same good to different groups of buyers must be different. B) The monopolist must be able to segregate its market into different submarkets. C) The buyers in various markets must face different price elasticities of demand. D) The monopolist must have a downward-sloping demand curve. Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 20) Establishing different prices for similar products to reflect differences in marginal cost in providing those goods to different groups of buyers is A) price discrimination. B) cost-plus pricing. C) price differentiation. D) product differentiation. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 21) Which of the following is TRUE? A) Monopoly results in a higher quantity of output being sold compared with perfect competition. B) Price discrimination occurs when there are differences in prices that reflect differences in marginal cost. C) Charging all customers the same price when costs vary can actually be a case of price discrimination. D) Price discrimination guarantees that the monopolist will make a profit. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

22) Which of the following is NOT a necessary condition for a firm to price discriminate? A) The firm must be able to separate markets. B) Buyers in different markets must have different elasticities of demand. C) Resale of the product must be preventable. D) The firm must be a price-taker. Answer: D Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 23) If Samsung sells TVs at a higher price in the United States than in Korea, and if there is no cost difference in producing or transporting the TV sets, Samsung would be practicing A) cartel pricing. B) price discrimination. C) simple monopoly behavior. D) price differentiation. Answer: B Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24) Which of the following will make price discrimination difficult for a monopolist? A) the possibility of resale of the product B) a constant marginal cost curve C) an increasing marginal cost D) a downward-sloping demand curve Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

25) Price discrimination is A) refusing to sell a given product to some group of customers. B) selling a given product to all customers at the same price and same costs. C) selling a given product at more than one price, with the price differences reflecting differences in marginal cost in providing the product to different groups of customers. D) selling a given product at more than one price, with the price differences being unrelated to differences in cost. Answer: D Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 26) When a monopolist sells the same product at different prices and the prices are NOT related to cost differences, we have A) monopoly pricing. B) marginal cost pricing. C) price discrimination. D) price differentiation. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 27) When a monopolist sells the same product at different prices and the prices are related to cost differences, we have A) monopoly pricing. B) marginal cost pricing. C) price discrimination. D) price differentiation. Answer: D Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

28) Price differentiation is a situation in which A) there are different prices for similar products reflecting differences in the marginal cost of providing the commodities to different groups of buyers. B) there are different prices for the same product that are not due to differences in the marginal cost of providing the commodity to different groups of buyers. C) consumers' comparison-shop. D) the demand curve is vertical. Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 29) Monopolies that price discriminate do so because A) they are able to do so and no one else can. B) they can increase their profits. C) it keeps them out of trouble with the government. D) it is more efficient. Answer: B Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 30) For price discrimination to exist, all of the following are necessary EXCEPT A) a downward-sloping demand curve. B) an identifiable group of buyers with different elasticities of demand. C) an upward-sloping marginal cost curve. D) there can be no resale of the product. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

31) For a firm to be able to engage in price discrimination, it must A) face a downward-sloping demand curve. B) produce more than one product. C) have customers of different levels of wealth and age. D) have economies of scale. Answer: A Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 32) A monopolist has four distinct groups of customers. Group A has an elasticity of demand of 0.8, B has an elasticity of demand of 0.9, C has an elasticity of demand of 1.0, and D has an elasticity of demand of 1.2. The group paying the highest price for the product will be A) A. B) B. C) C. D) D. Answer: A Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 33) Price discrimination is more likely in the case of services than in the case of goods because A) producers of goods usually do not face downward-sloping demand curves. B) it is easier to distinguish customers with different elasticities of demand with respect to services than with goods. C) elasticities of demand vary more with services than with goods. D) it is more difficult to resell services. Answer: D Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

34) Which of the following is NOT an example of price discrimination? A) Gasoline stations charge more for gasoline with higher octane and additional additives. B) Colleges give some students more financial aid than they give other students. C) Airlines charge more for people that travel during weekends. D) College bookstore gives a price discount to faculty. Answer: A Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 35) Which of the following is NOT an example of price discrimination? A) student discount at a local movie theater B) breakfast cereal makers sending coupons to select buyers C) a hard cover book selling for more than the same book in electronic form D) Pharmaceutical companies charge customers living in wealthier countries higher prices than for identical drugs in poorer nations. Answer: C Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 36) Selling a product at different prices when the price difference is unrelated to costs is a practice known as A) price fixing. B) price monopolization. C) price discrimination. D) price gauging. Answer: C Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

37) Price discrimination exists when A) a firm charges different buyers different prices for its product but the costs are the same. B) each buyer is treated equally. C) sales are made below cost. D) a firm charges each buyer a price of the product in proportion to its costs. Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 38) Which is NOT a necessary condition for price discrimination to exist? A) The firm must face a downward-sloping demand curve. B) The firm must identify buyers with different elasticities of demand. C) The firm must be able to prevent resale of the product or service. D) The firm must establish different prices to reflect marginal cost. Answer: D Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 39) When a firm sells a given product at more than one price and the price difference is NOT caused by differences in cost, then there is A) price discrimination. B) price differentiation. C) price demarcation. D) price delineation. Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

40) Which of the following is NOT necessary for price discrimination to occur? A) The firm must be able to separate the market into identifiable groups. B) The firm must be selling a durable good. C) The firm must have a downward-sloping demand curve. D) The firm has to be able to prevent resale of the product or service. Answer: B Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 41) A firm will practice price discrimination when it believes that by doing so it will be able to increase total A) sales. B) revenue. C) profits. D) production. Answer: C Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 42) When a firm practices price discrimination, for each separate set of consumers it will determine the rate of output at which A) MR > MC. B) MR = P. C) MR = AVC. D) MR = MC. Answer: D Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

43) Which of the following is NOT a condition for price discrimination to exist? A) downward-sloping demand curve faced by the firm B) identification of buyers with differing elasticities C) unpatented product or the service D) ability to prevent the resale of the product or service Answer: C Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 44) Price discrimination occurs when a firm sells A) a given product at different prices at different points in time. B) a given product at different prices to different ethnic groups. C) a given product at different prices unrelated to differences in cost. D) a given product at different prices when it is produced in different colors. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 45) A monopoly's goal using price discrimination is to increase A) total revenue. B) marginal revenue. C) total profit. D) the per unit profit. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

46) A monopolist will maximize its profits by charging a higher price for customers with a price elasticity of A) 0.8. B) 1. C) 1.5. D) any value. Answer: A Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 47) Which of the following is NOT a precondition for price discrimination? A) The product cannot be resold to another customer. B) The price elasticities of demand are different for each group of consumers. C) The product is a durable good. D) The seller must have some market power. Answer: C Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 48) Senior citizens can buy movie tickets at a lower price than other people. This is an example of A) age discrimination. B) demand discrimination. C) price discrimination. D) market failure. Answer: C Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

49) Which of the following is LEAST likely to be able to regularly engage in price discrimination? A) a farmer B) an airline C) a university D) a producer of copyrighted computer app Answer: A Diff: 1 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 50) An upscale fusion bistro in a small town charges higher prices for the same menu items at dinner time than at lunch time. Does the bistro necessarily practice price discrimination? Explain your answer. Answer: The bistro practices price discrimination if it charges customers at dinner time more than those at lunch time and there is no cost difference. However, the costs for customers at dinner time are typically higher than the costs for customers at lunch time because customers at dinner time tend to stay longer and therefore consume more services. The higher prices at dinner time may well reflect the higher operating costs for the same menu items. Diff: 3 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 51) Explain how a monopolist can increase profits by price discriminating. What are the conditions necessary for price discrimination? Answer: A monopolist can increase profits by price discriminating, in which case it sells some units at a higher price and other units at a lower price. It sells to those whose demand for the good is relatively inelastic at a higher price and to those whose demand is relatively elastic at a lower price. To discriminate, the firm must have monopoly power, it must be able to distinguish different markets, and buyers in those markets must have different elasticities of demand. Finally, the monopolist must be able to prevent the lower-priced consumers from reselling the good in the higher-priced market. Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

52) "Price discrimination is the same as price differentiation." Do you agree or disagree? Why? Answer: Disagree. Price discrimination is the act of selling a given product at more than one price but no difference in marginal cost. In contrast, price differentiation is the act of selling a given product at more than one price in order to reflect differences in marginal cost. Diff: 2 Topic: 24.4 On Making Higher Profits: Price Discrimination Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24.5 The Social Cost of Monopolies 1) Which of the following statements about a monopolist is TRUE? A) Monopolies tend to misallocate resources. B) All monopolies are unlawful in the United States. C) Monopolies tend to supply goods at lower prices than those charged by firms in perfect competition. D) Monopolies will always make a profit in the long run. Answer: A Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

2) In the above figure, the difference between the competitive industry price and that of the monopolist is A) 0B. B) 0A. C) AB. D) CE. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

3) The profit-maximizing price and quantity established by a perfectly competitive firm in the above figure are A) Q1 units of output and a price of P5. B) Q3 units of output and a price of P3. C) Q1 units of output and a price of P1. D) Q4 units of output and a price of P4. Answer: B Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 4) The profit-maximizing price of the monopolist compared to the perfectly competitive industry in the above figure are, respectively A) P1 and P3. B) P1 and P5. C) P1 and P2. D) P2 and P5. Answer: A Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 119 Copyright © 2021 Pearson Education, Inc.

5) The profit-maximizing quantity of the monopolist compared to the perfectly competitive industry in the above figure are, respectively A) Q1 and Q2. B) Q1 and Q3. C) Q1 and Q5. D) Q2 and Q3. Answer: B Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 6) The profit-maximizing price and quantity of the monopolist compared to the perfectly competitive industry in the above figure are, respectively A) A and B. B) A and C. C) A and F. D) C and F. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 7) Monopolies are discouraged in the United States because A) they are more efficient than other industries. B) they can produce at lower cost in the short run. C) they restrict output and raise prices. D) they hire too few workers for their production volumes. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

8) Compared to perfect competition, a monopoly will produce ________ output, and charge a ________ price. A) more; higher B) more; lower C) less; higher D) less; lower Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 9) Which of the following statements is TRUE? A) At the monopolist's equilibrium, resources are being efficiently allocated. B) With a monopoly, the value to society of the last unit produced is less than it's production cost. C) Monopolists raise the price and restrict production, compared to a competitive situation. D) A monopolist always produces a higher level of output than would be produced if the market were competitive. Answer: C Diff: 1 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 10) Which of the following statements is FALSE? A) Other things being equal, society's overall well-being is reduced when a perfectly competitive industry is monopolized. B) When both a perfectly competitive industry and a monopolist face the same production costs and the same market demand curve, the monopolist offers a lower level of output for sale. C) The profit-maximizing monopolist will always produce only along the inelastic portion of the demand curve, whereas equilibrium in a perfectly competitive industry always occurs along the elastic portion of the demand curve. D) When both a perfectly competitive industry and a monopolist face the same production costs and the same market demand curve, the monopolist charges a higher price for its product than what would be charged in a perfectly competitive situation. Answer: C Diff: 1 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

11) Under a monopoly, resources are misallocated such that A) too few resources are used in other industries, and too many are used by the monopoly. B) too few resources are used by the monopoly, and too many are used elsewhere. C) resources are being used as efficiently as possible only by the monopoly. D) consumers are being forced to pay a price below the MC of the monopolist. Answer: B Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 12) Conclusions about the misallocation of resources under conditions of monopoly depend, in part, on the crucial assumption that A) monopolies are interested in economic profits and competitive firms are not. B) the monopolization of a perfectly competitive industry does not change the cost structure of the industry. C) the economies of scale exist only in perfectly competitive industries. D) the marginal cost curve of a monopolist is different from that of a perfectly competitive firm. Answer: B Diff: 1 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 13) Compared to an efficient perfectly competitive industry, the monopolist will A) produce less output at a higher total cost. B) produce less output and charge a higher price. C) produce more output at a higher price and higher profit. D) produce more output at a lower price. Answer: B Diff: 1 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

14) The social cost attached to monopolies is reflected by the fact that A) monopolies produce more output than consumers desire to buy. B) consumers pay prices that exceed the marginal cost of production. C) the demand for a monopolist's product is always lower than the demand for the products of perfectly competitive firms. D) consumers are always willing to pay lower prices for a monopolist's product than for the products of perfectly competitive firms. Answer: B Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 15) Economists criticize monopolies because monopolies A) always price discriminate. B) receive accounting profits. C) restrict output and raise prices compared to a competitive situation. D) make consumers pay more for their product than the customers value the product. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 16) The conclusion that a monopoly results in lower output and higher prices than perfect competition relies on the assumption that A) the demand curve for a monopoly is horizontal. B) consumers are ignorant of the effects of monopoly. C) the costs of production are the same whether the industry is perfectly competitive or a monopoly. D) elasticity of demand varies along the market demand curve. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

17) Which of the following is a TRUE statement about monopoly and perfect competition? A) Price is always higher and output higher under monopoly than under perfect competition. B) Because costs do not depend on market structure, price is usually higher and output is always lower under monopoly than perfect competition. C) If there are substantial economies of scale, price may be lower and output greater under monopoly than under perfect competition. D) If there are substantial economies of scale, price may be lower and output greater under monopoly than under perfect competition, and price may be below marginal cost instead of equal to marginal cost. Answer: C Diff: 3 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

18) Refer to the above figure. What price-output combination would apply under perfect competition? A) P4 and Q1 B) P3 and Q2 C) P2 and Q3 D) P1 and Q1 Answer: B Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 124 Copyright © 2021 Pearson Education, Inc.

19) Refer to the above figure. Suppose this industry was perfectly competitive and then merged into one monopolistic firm. The monopoly would A) raise price from P1 to P2. B) reduce output from Q3 to Q1. C) reduce output from Q2 to Q1 and raise price from P3 to P4. D) raise price from P1 to P4. Answer: C Diff: 3 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 20) Refer to the above figure. What is the socially optimal point of production? A) P1 and Q1. B) P4 and Q1. C) P1 and Q4. D) P3 and Q2. Answer: D Diff: 3 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 21) Refer to the above figure. Which of the following statements is TRUE? A) Under perfect competition, the efficient price is charged, which is the lowest price possible (P1) while under monopoly output is too large (Q4) and price is too high (P4). B) Under perfect competition price equals marginal cost (P3) while under monopoly price (P4) is greater than marginal cost (P1). C) The rate of output is the same under both monopoly and perfect competition (Q1), but price is higher under monopoly (P4 rather than P1). D) Price equals marginal cost under both monopoly and perfect competition, but output is too low under monopoly (Q1 instead of Q2). Answer: B Diff: 3 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

22) Which of the following statements is TRUE about the price that a monopolist charges? A) The price is the same as the price that would be charged if there was perfect competition. B) The difference between the price charged by a monopolist and a perfect competitor is due to differences in costs. C) The value that society places on the last unit produced in a monopoly is greater than its cost. D) Too much of the good is being produced in a competitive market and not enough is being produced in a monopoly. Due to the way that prices are set. Answer: C Diff: 3 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 23) Monopolies are inefficient because A) they price discriminate. B) they maximize profits. C) they always make above-normal profits. D) they charge a price above marginal cost. Answer: D Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24) Monopolies misallocate resources because A) price does not equal marginal cost. B) price does not equal average variable cost. C) marginal cost does not equal average total cost. D) profits are usually positive. Answer: A Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

25) A monopoly misallocates resources when it A) restricts output so that the marginal benefit of the last unit sold exceeds the marginal social cost of producing the good. B) makes an above-normal profit. C) sells the same product to different groups of customers at different prices. D) exploits scale economies. Answer: A Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 26) One problem associated with a monopoly firm is that it A) produces too little output but also charges a low price. B) produces too much output and charges too low a price. C) restricts output and charges a relatively higher price than a purely competitive firm. D) is just as good as a purely competitive firm in terms of output and price. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 27) When comparing perfect competition and monopoly, a major assumption made is that A) the monopolist faces a downward-sloping demand curve. B) consumers only care about the price of the good and not whether the seller is a monopoly or not. C) the costs of production are the same under monopoly as under perfect competition. D) the monopolist can make an above normal rate of return. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

28) A simple way of describing the social cost of monopoly is to say that it A) produces too much. B) makes too much money. C) has too much political power. D) restricts output and charges a higher price than a perfectly competitive firm. Answer: D Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 29) A monopolist charges a price that is ________ and produces ________ than a perfect competitor. A) lower; less B) higher; less C) higher; more D) lower; more Answer: B Diff: 1 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

30) Referring to the above graphic, which of the following statements is FALSE? A) In panel (a), a competitive situation is shown in which equilibrium is established at the intersection of D and S at point E. B) In panel (a), the equilibrium price is Pe and the equilibrium quantity Qe. C) The price the monopolist charges in panel (b) at Pm is lower than the price that the competitive producer charges. D) The monopolist produces at Qm, and charges a price of Pm, while maximizing profits at the intersection of MC and MR. Answer: C Diff: 1 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 31) Which of the following statements with respect to the monopolist is FALSE? A) A monopolist can make higher profits if it can price discriminate. B) A monopoly tends to result in a lower quantity being sold than perfect competition does. C) Monopoly is a situation in which a single firm dominates. D) A monopoly arises in a situation with few barriers to entry into the marketplace. Answer: D Diff: 1 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

32) Economic inefficiency of a monopoly occurs because A) P = ATCmin. B) P > MR. C) P > MC. D) MR = MC. Answer: C Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 33) Economic inefficiency exists when A) P = MR. B) P = MC. C) MR = MC. D) P > MC. Answer: D Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 34) Why is a monopoly inefficient? Answer: A monopoly is inefficient because it produces such that price is greater than marginal cost. To achieve maximum economic profits, the monopolist restricts output and raises price. When price is greater than the opportunity cost to society of producing the last unit, the allocation of resources is inefficient. Society would prefer more resources were allocated into production of the good produced by the monopolist. Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 35) "The social cost of a monopoly comes from the fact that it charges a price higher than what consumers are willing to pay." Do you agree or disagree? Why? Answer: Disagree. The social cost of a monopoly comes from the fact that it charges a price higher than the market clearing price under perfect competition. The monopoly is able to sell at a higher price by producing a smaller quantity than in a perfectly competitive situation. As a result, resources are misallocated. Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 130 Copyright © 2021 Pearson Education, Inc.

36) What is the social cost of a monopoly? Explain. Answer: The social cost of a monopoly comes from the fact that, in order to maximize profits, the monopolist in the market charges a higher price and produces a lower output rate as compared to a perfectly competitive situation. As a result, consumers pay a price that exceeds the marginal cost of production, and the lower production rate represents a resource misallocation. Diff: 2 Topic: 24.5 The Social Cost of Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 24.6 Appendix G: Consumer Surplus in a Perfectly Competitive Market 1) In a perfectly competitive market, if all firms face identical, constant marginal cost curves, then consumer surplus is A) the area under the market demand curve and above the market clearing price. B) the area above the market demand curve and above the market clearing price. C) the total area under the market demand curve. D) definitely zero. Answer: A Diff: 2 Topic: 24.6 Appendix G: Consumer Surplus in a Perfectly Competitive Market Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 2) For a perfectly competitive market in which firms face an identical constant marginal costs, the amount of consumer surplus increases if A) market demand decreases. B) market demand increases. C) marginal cost increases. D) none of these: insufficient information to answer. Answer: B Diff: 2 Topic: 24.6 Appendix G: Consumer Surplus in a Perfectly Competitive Market Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

3) In a perfectly competitive market, consumer surplus typically is A) positive. B) negative. C) zero. D) undefined. Answer: A Diff: 2 Topic: 24.6 Appendix G: Consumer Surplus in a Perfectly Competitive Market Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 4) In a perfectly competitive market in which identical firms face the same horizontal marginal cost curve, if demand increases, then the amount of consumer surplus will A) increase. B) decrease. C) become negative. D) become zero. Answer: A Diff: 2 Topic: 24.6 Appendix G: Consumer Surplus in a Perfectly Competitive Market Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 5) If the marginal cost curve of all identical firms in a perfectly competitive industry are horizontal at the same per-unit cost, then the market's consumer surplus equals the area A) under the demand curve and above the marginal cost curve. B) above the demand curve and beneath the marginal cost curve. C) below the marginal cost curve. D) above the demand curve. Answer: A Diff: 2 Topic: 24.6 Appendix G: Consumer Surplus in a Perfectly Competitive Market Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

6) "Unlike a monopoly, consumer surplus in a perfectly competitive market is zero." Do you agree or disagree? Why? Answer: Disagree. As long as the market demand curve is downward-sloping, consumer surplus, which is represented by the area between the demand curve and the market price curve, is not zero. There is no deadweight loss, however. Diff: 2 Topic: 24.6 Appendix G: Consumer Surplus in a Perfectly Competitive Market Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 24.7 Appendix G: How Society Loses from Monopoly 1) The portion of consumer surplus that no one in society is able to obtain in a situation of monopoly is known as A) a market failure. B) a deadweight loss. C) an opportunity cost. D) a market externality. Answer: B Diff: 1 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 2) A deadweight loss occurs in a A) monopoly. B) perfectly competitive market. C) market in which the market clearing price of a good is the same as the marginal cost of producing it. D) market in which the market clearing price of a good is below the marginal cost of producing it. Answer: A Diff: 1 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

3) If marginal cost is constant, what happens to a market if it alters from perfect competition to monopoly without any change in the position of the market demand curve or any variation in costs? A) Consumer surplus increases, and the previously existing deadweight loss decreases. B) Consumer surplus increases, and the previously existing deadweight loss increases. C) Consumer surplus is eliminated, and an equal-sized deadweight loss is created. D) Consumer surplus decreases in size, and a deadweight loss is created. Answer: D Diff: 1 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 4) If marginal cost is constant, what happens to a market if it alters from perfect competition to monopoly without any change in the position of the market demand curve or any variation in costs? A) Consumer surplus decreases, producer surplus increases and a deadweight loss is created. B) Consumer surplus decreases, producer surplus decreases and a deadweight loss is created. C) Consumer surplus increases, producer surplus decreases and a deadweight loss is created. D) Consumer surplus increases, producer surplus increases and a deadweight loss is created. Answer: A Diff: 2 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 5) Deadweight loss is A) the amount of taxes that consumers and monopolists pay. B) the loss of output when a perfectly competitive firm becomes a monopolist. C) a loss of benefit to consumers in a monopoly that no one else in society can obtain. D) the price that consumers pay for a product in excess of the average cost of producing it. Answer: C Diff: 2 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

6) The portion of consumer surplus that would have existed in a perfectly competitive market but is unobtainable by anyone in society under a monopoly is known as A) monopoly profits. B) an unattainable surplus. C) a deadweight loss. D) an external cost. Answer: C Diff: 1 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 7) If a monopoly situation arises from a perfectly competitive market, the portion of producer surplus that increases in a monopoly is transferred from the perfectly competitive market's A) fixed cost. B) long-run positive economic profit. C) deadweight loss. D) consumer surplus. Answer: D Diff: 2 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 8) Suppose that a perfect-maximizing monopolist operates with a horizontal marginal cost curve and no fixed costs. Which of the following would NOT be represented as part of the area between its demand curve and marginal cost curve? A) total costs B) economic profits C) consumer surplus D) deadweight loss Answer: A Diff: 2 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

9) The loss of economic benefits in society as a result of monopoly arises from A) the loss in consumer surplus. B) the gain in consumer surplus. C) the loss in producer surplus. D) the gain in producer surplus. Answer: A Diff: 2 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 10) What is deadweight loss? Whose loss is it? Explain. Answer: Deadweight loss is the portion of consumer surplus that no one in society is able to obtain in a situation of a monopoly. It is a loss by consumers because the failure of the monopolist to produce as many units as would have been produced under perfect competition eliminates consumer surplus that otherwise would have been a benefit to consumers. Diff: 1 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking 11) "The deadweight loss of a monopoly equals the monopoly firm's profits." Do you agree or disagree? Why? Answer: Disagree. The deadweight loss from a monopoly is the portion of consumer surplus loss that no one in society can obtain. The monopoly firm's profits represent a transfer of consumer surplus away from consumers to the monopolist, and so profits are not a deadweight loss. Diff: 2 Topic: 24.7 Appendix G: How Society Loses from Monopoly Learning Outcome: Micro-7: Discuss the effects of consumer and producer surpluses in a market AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 25 Monopolistic Competition 25.1 Monopolistic Competition 1) Which of the following is NOT a characteristic of monopolistic competition? A) product differentiation B) a large number of entry barriers C) advertising D) a significant number of sellers Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 2) Which of the following is a characteristic of monopolistic competition? A) few firms B) homogeneous products C) easy entry and exit D) strategic dependence Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 3) All of the following are characteristics of monopolistic competition EXCEPT A) a few firms dominate the industry. B) product differentiation. C) many firms in the industry. D) advertising. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

4) Which of the following is NOT a characteristic of monopolistic competition? A) a large number of sellers in a highly competitive market B) differentiated products C) the existence of advertising D) marginal cost pricing in the long run Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 5) Which of the following describes monopolistic competition? A) homogeneous products B) All firms are price takers. C) Advertising plays a key role. D) There is only one seller in the industry. Answer: C Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 6) Which of the following is NOT a characteristic of monopolistic competition? A) large number of sellers B) differentiated products C) advertising D) barriers to entry Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 7) Monopolistic competition is characterized by A) relative ease of entry into the market. B) a standard, undifferentiated product. C) persistent long-run economic profits. D) a horizontal demand curve faced by all firms. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) A good example of a monopolistically competitive industry is A) the restaurant industry. B) the public utility industry. C) the local cable industry. D) diamond mining. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 9) A good example of a monopolistically competitive industry is A) the federal highway system. B) wheat farms in the United States. C) the pop music industry. D) the few major textbook publishers together with nearly 100 percent of industry sales. Answer: C Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 10) In a monopolistically competitive market, the consumer receives the benefit of A) production at minimum average cost. B) production where price equals marginal cost. C) product differentiation. D) allocative efficiency. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

11) In a monopolistically competitive market there are A) many firms producing an identical product. B) many firms producing similar but not identical products. C) many firms producing totally different products. D) few firms producing identical products. Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 12) Entry into a monopolistically competitive industry A) is relatively easy. B) is very difficult. C) can be easy or difficult, depending on the type of product. D) is about the same as entering a monopoly industry. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 13) Advertising by monopolistically competitive firms can do all of the following EXCEPT A) lower the consumer's purchase price. B) help differentiate a firm's product. C) act as a signal to consumers that the company is serious about staying in business. D) result in increased profits for the advertising firm. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

14) In a monopolistically competitive market, a firm should advertise to the point at which A) it is selling the most units it can possibly sell. B) the extra revenue from an additional dollar spent on advertising just equals the marginal cost of producing one more unit of the good. C) the additional revenue generated by one more dollar of advertising just equals the extra dollar cost of advertising. D) it can raise price to the highest level possible. Answer: C Diff: 3 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 15) In a monopolistically competitive market if the additional revenue generated from advertising equals the additional cost of advertising, the firm should A) advertise more to increase sales. B) advertise more to lower marginal costs. C) maintain its current amount of advertising. D) advertise less to decrease costs. Answer: C Diff: 3 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 16) The main objective of advertising for a monopolistically competitive firm is A) to differentiate the product and raise sales. B) to reduce cost. C) to earn long run profits. D) to comply with government requirements on product information. Answer: A Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

17) In which industry structure is advertising and sales promotion likely to be most important? A) perfect competition B) monopoly C) monopolistic competition D) All of these are equally reliant on effective advertising and promotion. Answer: C Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 18) A market situation in which a large number of firms produce similar but not identical products is A) a collusive market structure. B) competitive monopoly. C) a homogeneous market. D) monopolistic competition. Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 19) A market situation in which a large number of firms produce similar but not identical products is A) a monopoly. B) an oligopoly. C) monopolistic competition. D) perfect competition. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

20) The theory of monopolistic competition was developed in two separate models by A) Adam Smith and David Ricardo. B) John Kenneth Galbraith and John Maynard Keynes. C) Edward Chamberlin and Joan Robinson. D) Roger Leroy Miller and Paul Samuelson. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 21) Entry into a monopolistically competitive industry A) is easy. B) is hard. C) requires governmental approval. D) requires collusion. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 22) All of the following are assumptions of monopolistic competition EXCEPT A) many buyers and sellers. B) homogeneous product. C) easy entry of new firms in the long run. D) profit-maximizing behavior. Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 23) Which of the following assumptions is TRUE about monopolistic competition? A) The firm's products are differentiated. B) There are few producers of the product. C) Firms will not advertise. D) It is difficult for firms to enter this industry. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 7 Copyright © 2021 Pearson Education, Inc.

24) For a monopolistically competitive market, the number of firms in the market implies that A) each firm faces a perfectly elastic demand. B) all firms will make losses. C) each firm acts independently of other firms. D) firms will collude to set monopoly price and output. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 25) The number of firms in a monopolistically competitive market means that A) all firms will have substantial monopoly power since there are so few firms in the industry. B) each firm has a relatively small share of the total market since there are many firms in the industry. C) the firms will be likely to collude since there are only a few firms in the industry. D) firms will have a hard time earning non-negative profits since there are many firms in the industry. Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 26) The number of firms in a monopolistically competitive industry means that A) firms will collude. B) existing firms in the industry will make sure new firms do not enter. C) firms will not cooperate to set a pure monopoly price. D) firms will try to set a common price. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

27) In a monopolistically competitive market, having a large number of firms in the market means that A) no firm attempts to take into account the reaction of rival firms. B) individual firms will have a large portion of the market giving them monopoly power. C) firms will get together and collude because this will be the only way to earn monopoly profits. D) firms will cooperate with each other to drive competitors out of the market. Answer: A Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 28) The meaning of interdependence in a monopolistically competitive market is A) that it is difficult for firms to get together to collude. B) that products produced by firms will be good substitutes. C) that firms will not take into account the reaction of rival firms. D) that price rigging commonly occurs. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 29) The distinguishing of products by brand name, color, and other attributes A) is known as interdependence. B) is known as product differentiation. C) leads to many firms in the market. D) leads to collusion. Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

30) Products can be differentiated A) if the buyers are homogeneous and their number increases. B) by location and by brand name. C) only by brand name. D) none of these Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 31) The model of perfect competition and the model of monopolistic competition differ in that A) perfect competition assumes many buyers and sellers while monopolistic competition assumes many buyers but few sellers. B) perfect competition assumes easy entry of new firms while there are more significant barriers to entry in monopolistic competition. C) perfect competition assumes firms make zero profits in the long run and monopolistic competition assumes firms make positive profits. D) perfect competition assumes the product is homogeneous and monopolistic competition assumes the product is differentiated. Answer: D Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 32) The demand curve for the product of a monopolistic competitor is A) downward sloping. B) horizontal. C) vertical. D) unitary elastic. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

33) Because of product differentiation in a monopolistically competitive market, the demand curve for an individual firm will be A) horizontal. B) vertical. C) downward sloping. D) upward sloping. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 34) The demand curve for a monopolistically competitive firm is A) more elastic than for a perfectly competitive firm. B) more elastic than for a monopoly firm. C) more inelastic than for a monopoly firm. D) the same elasticity as a perfectly competitive firm. Answer: B Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 35) The demand curve for a monopolistically competitive firm is A) elastic because the products produced are homogeneous. B) inelastic because of barriers to entry. C) inelastic because of the profit maximizing behavior of the firm. D) elastic because of product differentiation. Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

36) The major similarity between monopolistic competition and perfect competition is A) the shape of the demand curve. B) that both assume many buyers and sellers. C) price equals marginal revenue in each. D) both assume products are differentiated. Answer: B Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 37) The market demand for the product of a monopolistic competitor will likely be A) unitary elastic. B) relatively inelastic. C) relatively elastic. D) perfectly elastic. Answer: C Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 38) An implication of the downward slope of the demand curve for a monopolistically competitive firm is that A) its marginal revenue curve slopes upward. B) its marginal revenue curve is the same as the demand curve. C) its marginal revenue curve slopes downward but lies above the demand curve. D) its marginal revenue curve slopes downward but lies below the demand curve. Answer: D Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

39) The demand for the product of a monopolistically competitive firm is highly elastic when A) firms collude. B) there are fewer firms in the industry. C) there is a lot of product differentiation. D) there are a lot of close substitutes. Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 40) The key feature of monopolistic competition is A) interdependence of the firms. B) lack of advertisement. C) product differentiation. D) the small number of firms in the industry. Answer: C Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 41) Monopolistic competitors advertise because A) they have downward-sloping demand curves. B) the demand curves they face are very elastic. C) they produce goods that can be differentiated from the goods of other firms in the industry. D) they can earn long-run profits if they advertise. Answer: C Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

42) A monopolistic competitor behaving in a profit-maximizing way will A) not advertise. B) advertise as much as it can in order to increase its sales. C) advertise to the point where the additional sales from advertising equal the additional marginal costs of the product. D) advertise to the point where the additional revenue from one more dollar of advertising just equals the extra dollar cost of advertising. Answer: D Diff: 3 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 43) Firms in a monopolistically competitive market will advertise because A) they want to differentiate their products. B) they want to increase the elasticity of the demand curve. C) of the significant differences in their product over their competitors. D) the elasticity for their product is inelastic. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 44) Which of the following is NOT a feature of a monopolistically competitive market? A) numerous buyers and sellers B) differentiated products C) advertising D) perfectly elastic demand curve Answer: D Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

45) The products sold by monopolistically competitive firms A) are differentiated. B) are homogeneous. C) can be either homogeneous or differentiated. D) have no close substitutes. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 46) Which of the following is NOT a characteristic of monopolistic competition? A) large number of sellers B) sales promotion and advertising C) homogeneous product D) easy entry of new firms in the long run Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 47) The demand curve for the product of a monopolistically competitive firm A) is perfectly elastic. B) is unitary elastic. C) is downward sloping. D) is perfectly inelastic. Answer: C Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

48) Which of the following products is most likely to be sold in a monopolistically competitive market? A) fast food B) an electric vehicle C) wheat D) electricity Answer: A Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 49) Which of the following is most likely to be a monopolistically competitive firm? A) wheat farmer B) local Internet provider C) college textbook publisher D) computer app maker Answer: D Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 50) Monopolistic competition means A) monopolies from several countries compete in the global market. B) a large number of firms producing homogeneous products. C) a large number of firms producing differentiated products. D) few firms producing differentiated products. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

51) In a monopolistically competitive market, entry into the industry A) is relatively easy. B) is blocked. C) is difficult due to extensive government regulation. D) is as difficult as entry into a monopoly. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 52) Which of the following is NOT a characteristic of firms in a monopolistically competitive market? A) advertising B) differentiated products C) ease of entry and exit D) existence of significant economies of scale Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 53) Which of the following products would most likely be produced in a monopolistically competitive market? A) corn B) gasoline C) local water supply D) pizza Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

54) All of the following are characteristics of a monopolistically competitive industry EXCEPT A) homogeneous products. B) many firms. C) low barriers to entry and exit. D) sales promotion and advertising. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 55) Which of the following is most likely to be a monopolistically competitive firm? A) a soybean farmer B) a lettuce farmer C) a municipal water district D) a fast food restaurant Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 56) Monopolistically competitive firms advertise to attempt to A) lower their average variable costs. B) build brand loyalty. C) lower barriers to entry. D) increase barriers to entry. Answer: B Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 57) The greater the product differentiation between monopolistically competitive firms, A) the lower the barriers to entry. B) the greater the price elasticity of demand. C) the higher the average variable costs. D) the greater the price elasticity of supply. Answer: B Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 18 Copyright © 2021 Pearson Education, Inc.

58) The greater the number and closeness of substitutes available between monopolistically competitive firms, A) the greater the ability of a firm to raise its price above the price of close substitutes. B) the smaller the ability of a firm to raise its price above the price of close substitutes. C) the more inelastic the demand curve. D) the greater the positive economic profits for a single firm. Answer: B Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 59) Because the products of firms in a monopolistically competitive market are NOT homogeneous, the A) demand curve for the industry is the same for the firm. B) demand curve for the firm's product is horizontal. C) demand curve for the firm's product is downward sloping. D) demand curve for the firm's product is upward sloping. Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 60) A market situation in which a large number of firms produce similar but not identical products is called A) pure monopoly. B) monopolistically competitive. C) oligopolistic behavior. D) perfectly competitive. Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

61) In the 1920s and 1930s, economists became increasingly aware that there were industries that did not fit the model of perfect competition or pure monopoly. Two separate theories of monopolistic competition resulted. Edward Chamberlin of Harvard published the Theory of Monopolistic Competition in 1933. Chamberlin defined monopolistic competition as A) a relatively large number of producers offering similar but differentiated products. B) a relatively small number of producers offering similar but differentiated products. C) a market situation in which a large number of firms produce identical products. D) a market situation in which a small number of firms produce similar products. Answer: A Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 62) Which of the following is NOT a feature of monopolistic competition? A) significant numbers of sellers in a highly competitive market B) differentiated products C) sales promotion and advertising D) inability of firms to enter or exit the market Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 63) Considering the relevant market structures, which is an INCORRECT statement? A) In a perfectly competitive situation, there is an extremely large number of firms. B) In pure monopoly, there is only one firm. C) In monopolistic competition, there is a large number of firms. D) In any market situation, the number of firms is not very important. Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

64) Which is NOT a characteristic of monopolistic competition? A) small share of market to each firm B) lack of collusion among firms C) few firms in the industry D) independence of each firm's decisions Answer: C Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 65) The two economists associated with the development of the theory of monopolistic competition were A) Joan Robinson and Edward Chamberlin. B) David Hume and Adam Smith. C) John Neville Keynes and John Maynard Keynes. D) Carl Menger and Eugen Von Bohm-Bawerk. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 66) A monopolistic competitor would face a demand curve with a A) positive slope. B) negative slope. C) constant slope. D) slope equal to 0. Answer: B Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

67) When Crest claims that its toothpaste product whitens teeth more than the products of its competitors, Crest is practicing A) product differentiation. B) false advertising. C) marginal revenue pricing. D) marginal cost pricing. Answer: A Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 68) Advertising is used by firms in a monopolistically competitive industry to A) differentiate their product from those of competitors. B) increase brand loyalty. C) increase demands for their individual products. D) all of these. Answer: D Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 69) Because there are low barriers to entry in a monopolistically competitive market, A) there are many firms in the industry. B) they produce a homogeneous product. C) the firms are price takers. D) there is no non-price competition. Answer: A Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

70) The demand curve for the product of a monopolistically competitive firm slopes downward because A) products are perceived by consumers as different. B) products are homogeneous. C) people only care about price when they buy a good. D) the firm's goal is to maximize profits. Answer: A Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 71) The demand curve for the product of a monopolistic competitor A) is the same as the market demand curve. B) is horizontal. C) is vertical. D) slopes downward. Answer: D Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 72) Compared with a monopolist, the demand curve faced by a monopolistically competitive firm is A) more elastic. B) more inelastic. C) perfectly elastic. D) perfectly inelastic. Answer: A Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

73) What is the most important characteristic of monopolistic competition? How do firms behave differently from perfect competitors? Answer: Product differentiation is the most important characteristic of monopolistic competition. Product differentiation generates the downward-sloping demand curve that a firm faces. With heterogeneous products, monopolistic competitors will advertise and use sales promotion techniques that perfect competitors would not use. Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 74) What are the implications of there being a large number of firms in a monopolistically competitive market? Answer: A large number of firms has three implications. (1) Each firm will have a small share of the market since there are many firms. (2) There will be a lack of collusion among the firms because the large number will make it impossible for the firms to agree on price and output decisions. (3) Each firm will act independently from their competitors since they cannot take into account how their numerous competitors will react to changes in their behavior. Diff: 1 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 75) Why do firms in a monopolistically competitive industry advertise? Answer: In a monopolistically competitive industry, products sold by firms are differentiated or at least perceived to be different by consumers. Other things being equal, product differentiation can result in more profits. Firms can therefore increase their monopoly power and thus profits by differentiating their own products from those of other firms. Diff: 2 Topic: 25.1 Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

25.2 Price and Output for the Monopolistic Competitor 1) In the short run, a monopolistically competitive firm can earn A) positive profits only. B) zero profits only. C) zero or positive profits only. D) zero, positive or negative profits. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

2) In the above figure, the profit-maximizing output and price for this monopolistically competitive firm are A) 10,000 units at a price of $10 per unit. B) 10,000 units at a price of $5 per unit. C) 13,000 units at a price of $7 per unit. D) 12,000 units at a price of $8 per unit. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

3) In the above figure, total revenue for this profit-maximizing monopolistically competitive firm is A) $50,000. B) $91,000. C) $96,000. D) $100,000. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 4) In the above figure, total cost for this profit-maximizing monopolistically competitive firm is A) $91,000. B) $50,000. C) $70,000. D) $72,000. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 5) In the above figure, the profit-maximizing monopolistically competitive firm will A) make a profit of $24,000. B) make a profit of $30,000. C) make a profit of $0. D) incur a loss of $20,000. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge

6) The above figure shows the situation of a monopolistic competitor in the short run. The maximum economic profits of the firm equal A) $50,000. B) $30,000. C) 15,000. D) zero. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 7) The above figure shows the situation of a monopolistic competitor in the short run. To maximize profits, the firm should produce A) 10,000 units. B) 12,000 units. C) 13,000 unit. D) somewhere between 10,000 and 12,000 units. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 8) In the short run, the profit-maximizing monopolistically competitive firm will produce the rate of output at which A) P = MC. B) MR = MC. C) P = ATC. D) MR = ATC. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

9) The demand curve faced by a monopolistically competitive firm is A) horizontal. B) vertical. C) downward sloping. D) upward or downward sloping, depending on market competition. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 10) For a monopolistically competitive firm, which of the following is TRUE in the long run? A) ATC is minimized. B) P = ATC. C) P = MC. D) all of these Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 11) Which of the following is TRUE for a monopolistically competitive firm? A) MR = P B) MR > P C) MR < P D) MR = AFC Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 12) Which of the following statements about a monopolistically competitive firm is FALSE? A) It tries to differentiate its product from that of competitors. B) It may earn short-run economic profits. C) It produces the quantity at which MC=MR. D) It sets price like a perfectly competitive firm. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 28 Copyright © 2021 Pearson Education, Inc.

13) Graphically, how does a monopolistically competitive firm determine its profit-maximizing price? A) It accepts the price set by the industry-wide forces of supply and demand. B) Graphically, it finds the place where MR = MC and charges the price directly to the left of that point. C) The firm's pricing structure is set by government regulators. D) The firm determines its profit-maximizing output and then charges the price associated with the point on its demand curve directly above that quantity. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

14) In the above figure, the monopolistically competitive firm's profit-maximizing output is A) 1,000 units. B) 300 units. C) 900 units. D) 700 units. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 15) In the above figure, when this monopolistically competitive firm produces its profitmaximizing output, it sets a per-unit price of A) $13. B) $11. C) $10. D) $8. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge

16) At its profit-maximizing output, the firm in the above figure incurs a total cost of production of A) $7,000. B) $9,000. C) $6,300. D) $3,900. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 17) In the above figure, this profit-maximizing monopolistically competitive firm will realize an economic profit of A) -$1,400. B) $2,100. C) $1,400. D) $700. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 18) Since the firm in the above figure is operating in a monopolistically competitive industry, in the long run we can expect to see A) the typical firm's economic profits expand as production becomes more efficient. B) more firms entering the industry until economic profits are zero. C) the typical firm producing at the minimum point on its ATC curve. D) each firm expand its share of the total market. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

19) The demand curve for a monopolistically competitive firm is A) the same as the industry demand curve. B) more elastic than the demand curve of the perfectly competitive firm. C) less elastic than the demand curve of the perfectly competitive firm. D) horizontal. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 20) For the monopolistically competitive firm, in both the short run and the long run, A) the demand curve is inelastic. B) price will exceed marginal cost. C) there will be no economic profit. D) production will be at minimum average cost. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 21) The demand curve faced by a monopolistically competitive firms is A) horizontal. B) vertical. C) downward sloping. D) unitary elastic. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

22) The monopolistically competitive firm in short-run equilibrium may experience economic profits that are A) always zero. B) greater than, equal to, or less than zero. C) always positive. D) always negative. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 23) In both a monopolistically competitive market and a pure monopoly market, firms A) can make long-run profits. B) set price greater than marginal cost. C) are protected by entry barriers. D) advertise extensively. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 24) The monopolistically competitive firm maximizes profit by producing to the point at which A) ATC = AVC. B) MC = MR. C) MR = AR. D) MC = P. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

25) In the short run, a firm operating as a monopolistic competitor will produce to the point at which A) MR = ATC. B) MC = ATC. C) P = MC. D) MR = MC. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 26) Which will be TRUE for a monopolistic competitor experiencing short-run losses? A) P > ATC B) P = ATC C) P < ATC D) P < MC Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 27) A monopolistically competitive firm finds its profit-maximizing rate of output by equating A) the marginal revenue of advertising with the marginal cost of advertising. B) average revenue and average total cost. C) price and marginal cost. D) marginal revenue and marginal cost. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

28) In the short run, a monopolistically competitive firm A) always earns positive economic profits. B) never earns positive economic profits. C) can earn positive, negative, or zero economic profits. D) always earns positive accounting profits. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 29) In the long run, in a monopolistically competitive market, price will be A) equal to MR. B) equal to MC. C) greater ATC. D) equal to ATC. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 30) In the long run in a monopolistically competitive market, a firm will, in theory, A) earn economic profits. B) suffer losses. C) break even. D) earn zero accounting profits. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 31) In the long run, the monopolistically competitive firm's demand curve will A) intersect the ATC at its minimum point. B) intersect the ATC curve somewhere past the minimum point. C) become tangent to the ATC curve at its minimum point. D) become tangent to the ATC curve somewhere to the left of its minimum point. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 35 Copyright © 2021 Pearson Education, Inc.

32) The monopolistically competitive firm's economic profits tend toward zero in the long run. Why is this so? A) Monopolistically competitive firms are rarely able to maintain the corporate discipline necessary to sustain profits in the long run. B) If a monopolistically competitive firm is profitable for more than 2 years, the Justice Department orders a corporate restructuring to pull the company back to a normal rate of return. C) In the long run, other firms will successfully offer substitutes for the profitable firm's product, and competition will eliminate economic profits. D) Even though the monopolistically competitive firm can successfully maintain barriers to entry, keeping competition at bay becomes very expensive. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 33) The long-run equilibrium of monopolistic competition is characterized by A) P = MC = ATC. B) P = MC > ATC. C) P = MR = MC. D) P = ATC > MC. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 34) In the long run, monopolistically competitive firms will not earn economic profits because A) average total cost will shift up to meet the demand curve. B) input prices will be bid up. C) production will not be at minimum average cost. D) new firms will enter the industry. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

35) In the long run, if some monopolistically competitive firms are incurring economic losses, then A) firms will leave the industry. B) they will raise prices until they earn economic profits. C) they will increase production until marginal costs fall. D) new firms will enter the industry. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 36) If firms in a monopolistically competitive industry are operating with economic losses, over time we would see A) firms alter their advertising rates until they made at least normal profits. B) some firms exiting the industry, causing the market supply curve to shift to the left, raising price. C) some firms exiting the industry, causing the demand curves of the remaining firms to shift to the right. D) the firms working together to increase price and everyone's profitability. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 37) If firms in a monopolistically competitive industry are operating with positive economic profit, over time we would see A) firms alter their advertising rates until they made at least normal profits. B) some firms entering the industry, causing the market supply curve to shift to the right, lowering price. C) some firms entering the industry, causing the demand curves of the existing firms to shift to the left. D) some firms entering the industry, causing the demand curves of the existing firms to shift to the right. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

38) In the long run, firms in a monopolistically competitive market A) usually earn positive economic profits. B) always earn monopoly profits. C) usually earn economic losses. D) earn zero economic profits. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 39) The long-run equilibrium of a monopolistically competitive firm is characterized by A) a tangency of the average total cost curve with the firm's demand curve. B) price equal to marginal cost. C) production at the minimum point of the firm's average total cost curve. D) production at the minimum point of the firm's average variable cost curve. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 40) Long-run equilibrium is characterized by zero profits in A) monopolistic competition only. B) perfect competition only. C) both perfect competition and monopolistic competition. D) market structures in which there are barriers to entry. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

41) A monopolistically competitive firm maximizes profits when it A) produces the quantity at which marginal cost equals the market price. B) produces the quantity at which marginal cost equals marginal revenue and uses the demand curve to determine the market price. C) produces the quantity at which marginal cost equals marginal revenue and sets the price equal to the marginal cost. D) produces the quantity at which marginal cost equals marginal revenue and sets the price equal to the marginal revenue. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 42) Which of the following statements about a monopolistically competitive firm is TRUE? A) A monopolistically competitive firm does not always equate marginal cost to marginal revenue because it uses other means to maximize profits. B) A monopolistically competitive firm maximizes profits by charging a price equal to marginal cost. C) A monopolistically competitive firm produces the quantity at the point at which the demand curve crosses the marginal cost curve. D) A monopolistically competitive firm maximizes profits when it produces the quantity at which marginal cost equals marginal revenue. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 43) A monopolistic competitor finds its profit-maximizing rate of output by A) equating the marginal revenue from advertising with the marginal revenue from selling the good. B) setting average revenue equal to average total cost. C) equating marginal revenue and marginal cost. D) equating price and marginal revenue. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

44) In the short run, the monopolistic competitor is just like the perfect competitor in that A) equilibrium is determined by setting price equal to marginal cost. B) either type of firm can earn economic profits, experience economic losses, or break even in the short run. C) each equates marginal revenue and marginal cost in order to maximize profits, with the result that price exceeds marginal revenue. D) new firms enter in the short run when firms are making profits. Answer: B Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 45) If firms in a monopolistically competitive industry experience short-run losses, A) some firms would like to exit the industry but find they cannot. B) firms increase prices further, until they make at least a normal return. C) firms increase advertising spending to increase demand, until they make at least a normal return. D) some firms exit the industry, causing the demand curves for the remaining firms to shift to the right until they earn a normal profit. Answer: D Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 46) If monopolistically competitive firms earn short-run economic profits, we expect to see A) new firms enter the industry, which shifts the demand curves of the existing firms to the left until firms earn zero economic profits. B) new firms trying to enter the industry, but unable to do so because of barriers to entry. C) existing firms altering their scale of plant to try to capture larger profits. The combined effect is to cause all firms to earn zero economic profits. D) existing firms increasing prices to try to capture larger economic profits. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

47) A monopolistic competitor is like a competitive firm in the long run, because A) it earns positive economic profits. B) it earns zero economic profits C) both firms will earn positive economic profits. D) both firms will increase price to increase profits. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 48) A monopolistic competitor is like a monopolist in the short run in that when economic profits are A) equal to zero, price equals marginal cost. B) equal to zero, price below marginal cost. C) greater than zero, changes in output are due to changes to plants by existing firms and there is no entry. D) greater than zero, price exceeds marginal cost. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 49) A monopolistic competitor is in long-run equilibrium when A) economic profits are equal to zero and the average total cost curve is tangent to the demand curve. B) economic profits are equal to zero and the marginal cost curve is tangent to the demand curve. C) economic profits are greater than zero and the average total cost curve is tangent to the demand curve. D) economic profits are greater than zero and the marginal cost curve is tangent to the demand curve. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

50) Which of the following statements is TRUE about the economic profits earned by a monopolistic competitor firm in the long run? A) Economic profits can be positive since firms have some degree of monopoly power. B) Economic profits will be positive since the firm has a downward-sloping demand curve. C) Economic profits will tend towards zero since positive profits will attract new firms into the industry. D) Economic profits can be negative since there is so much competition in the market. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

51) Refer to the above figure. The profit maximizing quantity for a monopolistic competitor is A) Q1. B) Q2. C) Q3. D) Q4. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge

52) Refer to the above figure. The profit maximizing price for a monopolistic competitor is A) P1. B) P2. C) P3. D) P4. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 53) Refer to the above figure. As more and more firms are able to and actually do enter the industry, the demand curve of each firm and its marginal revenue curve A) will shift inward until the demand curve is tangent to the average total cost curve. B) will become vertical. C) will become upward sloping. D) None of these will occur. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 54) Refer to the above figure. This firm is operating in the A) long run since economic profits are greater than zero. B) long run since economic profits are less than zero. C) short run since economic profits are greater than zero. D) short run since economic profits are less than zero. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

55) Refer to the above figure. Economic profits for this firm are A) negative. B) zero. C) positive. D) undetermined without more information. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

56) Refer to the above figure. Economic profits for this firm are A) negative. B) zero. C) positive. D) undetermined without more information. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge

57) Refer to the above figure. Economic profits for this firm are A) negative and equal to P2bcP3. B) negative and equal to P1bcP2. C) positive and equal to P2bcP3. D) positive and equal to P1abP2. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 58) A monopolistic competitor is in long-run equilibrium when A) it is making zero profits and price equals marginal cost. B) its average total cost curve is tangent to the demand curve at the profit-maximizing rate of output. C) price is greater than marginal cost. D) it is making positive profits or zero profits and price is greater than marginal cost. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

59) Refer to the above figure. Which panel does NOT represent a possible short-run situation for a monopolistically competitive firm? A) Panel A B) Panel B C) Panel C D) Panel D Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 60) Refer to the above figure. Which panel represents the long-run situation for a monopolistically competitive firm? A) Panel A B) Panel B C) Panel C D) Panel D Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

61) Refer to the above figure. A long-run equilibrium in monopolistic competition is pictured by A) Panel A. B) Panel B. C) Panel C. D) Panel D. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 62) Refer to the above figure. Which panel shows a possible short-run equilibrium for monopolistic competition, but is NOT also a long-run equilibrium? A) Panel A B) Panel B C) Panel C D) Panel D Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

63) Refer to the above figure. Which of the following statements about panel D in the figure is TRUE? A) The figure represents a long-run equilibrium for a monopolistic competitor. B) The figure represents an industry long-run equilibrium for monopolistic competition. C) The figure is in error since it doesn't show the monopolistic competitor making profits in the long run. D) The figure is in error since it has marginal cost intersecting the ATC curve at a point other than the minimum of ATC. Answer: D Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 64) Refer to the above figure. Which panel represents a monopolistic competitor that is earning zero economic profits? A) Panel A B) Panel B C) Panel C D) Panel D Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

65) In the above figure for a monopolistically competitive firm, the profit-maximizing output and price are respectively A) 80 units and $11. B) 50 units and $8. C) 60 units and $9. D) 60 units and $14. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 66) In the above figure for a monopolistically competitive firm, the total revenue at the profitmaximizing point is A) $540. B) $840. C) $400. D) $880. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge

67) In the above figure for a monopolistically competitive firm, the total cost at the profitmaximizing point is A) $480. B) $400. C) $540. D) $880. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 68) In the above figure for a monopolistically competitive firm, the total economic profit at the profit-maximizing point is A) $0. B) $240. C) $360. D) $300. Answer: C Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 69) In the above figure, what would happen to the monopolistically competitive industry in the long run? A) More producers would enter the market, and the share of the market to this firm would fall, which would cause the demand curve to shift leftward until there is zero economic profit. B) More producers would exit the market, and the share of the market to this firm would fall, which would cause the demand curve to shift leftward until there is zero economic profit. C) More producers would enter the market, and the share of the market to this firm would rise, which would cause the demand curve to shift rightward until there is zero economic profit. D) More producers would enter the market, and the share of the market to this firm would fall, which would cause the demand curve to shift leftward until there is negative economic profit. Answer: A Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

70) For the monopolistic competitor, which of the following is INCORRECT? A) Because the firm is not a perfect competitor, its demand curve slopes downward. B) The marginal revenue curve is downward sloping and lies below the demand curve. C) The profit-maximizing rate of output arises at the point at which the marginal cost curve intersects the marginal revenue curve. D) If the firm in a monopolistically competitive industry were making economic losses, new firms will enter the industry. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

71) Use the above figure. For this monopolistic competitor, which of the following is INCORRECT? A) The profit-maximizing rate of output is qe, and the profit-maximizing price is P. B) The demand curve shows a direct relationship between price and quantity demanded. C) The profit-maximizing rate of output is at E, where MR intersects MC. D) A downward-sloping marginal revenue curve that is below the demand curve. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

72) Use the above figure. The economic profit for this firm is A) zero. B) the distance between T and E. C) the distance between E and x-axis. D) the distance between T and x-axis. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

73) The above table depicts prices, quantities, and marginal costs faced by the campus bookstore. At the profit-maximizing level of output, what is the total revenue earned by the store? A) $12 B) $5 C) $15 D) $6 Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge 74) The above table depicts prices, quantities, and marginal costs faced by the campus bookstore. Based on marginal analysis, what is the profit-maximizing level of output for the bookstore? A) 1 book B) 2 books C) 3 books D) 4 books Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Application of knowledge

75) For a monopolistically competitive firm, A) price equals marginal revenue at all levels of output. B) price is less than marginal revenue at all levels of output. C) price is greater than marginal revenue at all levels of output except for the first unit. D) the demand curve is perfectly inelastic and marginal revenue is zero. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 76) A firm in a monopolistically competitive market determines the profit-maximizing output at which A) MR = P. B) MR = ATC. C) MR = AVC. D) MR = MC. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 77) Which of the following is TRUE of the price charged by a monopolistically competitive firm at the profit-maximizing level of output? A) P > MC B) P = MC C) P = MR D) P < AVC Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

78) In the long run, a monopolistically competitive firm A) earns positive economic profits. B) earns zero economic profits. C) earns negative economic profits. D) can have positive, zero, or negative profits. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 79) Which of the following short-run outcomes for monopolistic competition is NOT possible? A) P = MR = MC B) P > MC > ATC C) P = ATC D) P > ATC Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 80) Which of the following is the long-run outcome for monopolistic competition? A) MR > MC B) P > ATC > MC C) P = ATC D) P = AVC Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 81) A monopolistic competitor will maximize its profits at the output level at which A) ATC = price. B) MC = MR. C) the MC curve intersects the demand curve. D) MR = ATC. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

82) In the long run, what level of economic profits can a monopolistic competitor expect to receive? A) positive B) zero C) negative D) either negative or positive, depending on the demand for its product and its costs Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 83) Which of the following is NOT a characteristic of the demand curve faced by a firm in a monopolistically competitive market? A) The demand curve is downward sloping. B) The slope of the demand curve is negative. C) The firm will produce where the demand curve is inelastic. D) The firm will produce where the demand curve is elastic. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 84) The marginal revenue curve of a monopolistically competitive firm is A) downward sloping and above the demand curve. B) downward sloping and below the demand curve. C) identical to the demand curve as there are many small firms in the market. D) perfectly elastic. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

85) Use the above figure. The profit-maximizing monopolistically competitive firm A) is losing $0.05 per unit of output. B) is earning $0.40 per unit of output. C) is earning $0.15 per unit of output. D) is earning $0.05 per unit of output. Answer: D Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 86) Use the above figure. The total revenue earned by the monopolistically competitive firm is A) $300. B) $285. C) $180. D) $255. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 87) Use the above figure. The total profit earned by the monopolistically competitive firm is A) +$300. B) +$15. C) -$15. D) $0. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 56 Copyright © 2021 Pearson Education, Inc.

88) Use the above figure. The total cost of producing at the optimal level for the monopolistically competitive firm is A) $285. B) $255. C) $180. D) $300. Answer: A Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 89) The short-run profit-maximizing output level for a monopolistically competitive firm is the point at which A) P = ATC. B) MR = MC. C) MR > P. D) MR > ATC. Answer: B Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

90) Use the above figure. The profit-maximizing output and price for this monopolistically competitive firm are respectively A) 100 and $19. B) 160 and $13. C) 160 and $16. D) 210 and $15. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 91) Use the above figure. The total revenue earned by this monopolistically competitive firm is A) $2,560. B) $1,600. C) $480. D) $1,900. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

92) Use the above figure. The total cost faced by this monopolistically competitive firm is A) $2,080. B) $3,150. C) $1,600. D) $1,900. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 93) Use the above figure. The total profit earned by this monopolistically competitive firm is A) $2,560. B) $1,600. C) $480. D) $1,900. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

94) Use the above figure. When it maximizes its economic profits, the monopolistically competitive firm depicted in the figure A) is earning an economic profit. B) is earning an accounting profit. C) is earning an economic loss. D) must increase output to reduce the ATC. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 59 Copyright © 2021 Pearson Education, Inc.

95) Which of the following statements is TRUE for a monopolistically competitive firm in the long run? A) P = ATC > MR B) MC > P > ATC C) P > MC > ATC D) P = MC = MR Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 96) In the long run, the economic profits of a monopolistically competitive firm A) will tend to be larger than in the short run. B) equal zero. C) will be the average short-run profits earned in the last five years. D) will be the same as in the short run. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 97) Suppose a sushi restaurant is making significant economic profit in the short run. In the long run, A) more people will open sushi restaurants, reducing the economic profit for each restaurant. B) high barriers to entry keep people from opening sushi restaurants. C) the government will require the sushi restaurant to sell part of its interests in the city. D) more people will open steak restaurants, increasing the economic profit for the sushi restaurant. Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

98) Compared with a firm in a perfectly competitive market, the demand curve faced by a monopolistically competitive firm is A) more elastic. B) more inelastic. C) perfectly elastic. D) perfectly inelastic. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 99) In the long run, monopolistically competitive firms are considered to be operating inefficiently because their A) economic profits are positive. B) economic profits are zero. C) average total costs are not at a minimum. D) marginal costs are rising. Answer: C Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 100) Which of the following is FALSE about a comparison between a perfectly competitive firm and a monopolistically competitive firm? A) A perfectly competitive firm has a horizontal demand curve, while a monopolistically competitive firm has a downward-sloping demand curve. B) In the short run, a perfectly competitive firm will earn zero economic profits, while a monopolistically competitive firm will earn positive economic profits. C) Both the perfectly competitive and monopolistically competitive firm will earn economic profits equal to zero in the long-run. D) In the long run, the perfectly competitive firm will produce at the minimum of the average total cost curve, while the monopolistically competitive firm will produce to the left of the minimum of the average total cost curve. Answer: B Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

101) Refer to the above figure. Which panels represent long-run equilibrium for the perfectly competitive firm and monopolistically competitive firm, respectively? A) Panel C and Panel A B) Panel C and Panel B C) Panel B and Panel C D) Panel C and Panel D Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

102) A monopolistically competitive firm differs from a perfectly competitive firm in the long run in that A) the demand curve faced by a monopolistically competitive firm is downward sloping, while the demand curve faced by a perfectly competitive firm is horizontal. B) profits are positive for a monopolistically competitive firm and zero for a perfectly competitive firm. C) profits are zero for a monopolistically competitive firm and positive for a perfectly competitive firm. D) marginal cost equals the market price for a monopolistically competitive firm but not for a perfectly competitive firm. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 103) In long-run equilibrium in a monopolistically competitive industry, a firm will A) always earn an economic profit. B) produce an output rate at which P = MC. C) produce at a point to the left of the minimum point on its average total cost curve. D) have a perfectly elastic demand curve. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 104) Compared with a perfectly competitive firm facing the same costs, long-run equilibrium for a monopolistically competitive firm will result in A) a higher price and greater output. B) a lower price and less output. C) a higher price and less output. D) a lower price and greater output. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

105) Compared to perfect competition, a monopolistically competitive market will produce ________ output and charge a ________ price. A) more; higher B) more; lower C) less; higher D) less; lower Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 106) Compared to a perfectly competitive firm, in a long run the monopolistically competitive firm will have A) a lower price. B) a lower average cost. C) a horizontal demand function. D) a lower rate of output. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 107) In which market structure will a firm choose not to shut down when price is less than average variable cost? A) perfect competition B) monopoly C) monopolistic competition D) None of these. Any firms will shut down when P < AVC. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

108) Monopolistic competition and perfect competition are similar in that each market structure is characterized by A) advertising. B) production at minimum average cost in the long run. C) a horizontal demand curve. D) the absence of long-run economic profits. Answer: D Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 109) Monopolistic competition and perfect competition are different in that A) only monopolistically competitive firms advertise. B) only monopolistically competitive firms can earn economic losses in the short-run. C) only perfectly competitive firms maximize profits where marginal revenue equals marginal cost. D) only perfectly competitive firms are characterized by long-run economic profits of zero. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 110) One way to view the cost structure of monopolistic competition is to say that the cost of product differentiation is equal to A) the difference between marginal revenue and marginal cost. B) the difference between the cost of production for a monopolistically competitive firm in an open market and the minimum average total cost. C) the sum of price and marginal cost. D) the sum of marginal cost and minimum average cost. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

111) What did Harvard economist Edward Chamberlin say about the observation that a monopolistically competitive firm's average cost of production exceeds its minimum average total cost? A) Chamberlin argued that these higher costs represent the wastefulness of this market structure. B) Chamberlin argued that this belief is incorrect. In his view, monopolistically competitive firms do not produce at a cost above their minimum average total costs. C) According to Chamberlin, this cost difference represents the value consumers place on variety and having more choice. D) In Chamberlin's view, this is evidence that monopolistic competition uses society's resources inefficiently and in a fashion that merits government intervention. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 112) The long-run equilibrium of a monopolistic competitor differs from the long-run equilibrium of a perfect competitor in that A) the monopolistic competitor makes economic profits. B) the monopolistic competitor sets price equal to marginal cost. C) the monopolistic competitor produces at the minimum point of its average total cost curve. D) the monopolistic competitor charges a price that exceeds marginal cost. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 113) A monopolistic competitor in long-run equilibrium is like a perfect competitor in that A) price equals marginal cost. B) price is greater than marginal cost. C) zero economic profits are made. D) both produce at the minimum points of their average total cost curves. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

114) Long-run equilibrium for a monopolistic competitor is characterized by A) a price exceeding marginal cost. B) marginal cost pricing. C) economic profits. D) too few firms in the industry. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 115) It has been argued that a monopolistically competitive industry involves "waste" because A) there is too much product differentiation making shelves too crowded. B) they end up producing to the right of the minimum of the average total cost curve and the price is below the marginal cost. C) the firms do not equate marginal cost to marginal revenue to find the profit maximizing price and output. D) the firms do not produce at the minimum of the average total cost curve and price is above marginal cost. Answer: D Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 116) According to Chamberlin, the fact that in the long run average total cost exceeds its minimum value under monopolistic competition is A) the social cost of monopolistic competition. B) the most important reason for why monopolistic competition is not efficient. C) part of the cost of producing different products for consumers. D) actually beneficial because it makes adjustments easier when demand increases. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

117) In the long run, a monopolistic competitor will produce to the point at which A) average total costs are at the minimum of possible ATC. B) average total costs are higher than the minimum of possible ATC. C) resources are used at the lowest possible cost. D) at the lowest possible price. Answer: B Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 118) In the long run, equilibrium positions that arise in both monopolistically competitive and perfectly competitive markets are A) MR = MC and P = MC. B) P = ATC and P = MC. C) MR = MC and P = ATC. D) MR = MC = P. Answer: C Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 119) In a long-run monopolistically competitive equilibrium A) P = ATC, and ATC is not at its minimum value. B) P = ATC, and ATC is at its minimum value. C) P > ATC, and ATC is at its minimum value. D) P > ATC, and ATC is not at its minimum value. Answer: A Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

120) In the long run, both monopolistically competitive and perfectly competitive firms attain A) lowest cost production. B) positive economic profits. C) zero economic profits. D) productive efficiency. Answer: C Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 121) It has been argued that in the long run monopolistic competition is inefficient because A) there are too many firms, each with excess capacity, producing too little output. B) there are few many firms, each with excess capacity, producing too much output. C) minimum average total costs are achieved but price exceeds marginal cost. D) minimum average total costs are not achieved and marginal cost exceeds price. Answer: A Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 122) In the long run, a perfectly competitive market produces at ________, whereas the monopolistically competitive firm does not. A) the output at which the lowest average total cost of production is reached B) an output level at which positive economic profits exist C) zero economic profits D) the point at which MR = MC=ATC Answer: A Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

123) The most significant difference between perfect competition and monopolistic competition is that A) in a perfectly competitive market products are differentiated, while in a monopolistically competitive market products are homogeneous. B) in a perfectly competitive market products are homogeneous, while in a monopolistically competitive market products are differentiated. C) in a perfectly competitive market there is a large number of sellers, while in a monopolistically competitive market there is a small number of sellers. D) in a perfectly competitive market there is a small number of sellers, while in a monopolistically competitive market there is a large number of sellers. Answer: B Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 124) Why can't a monopolistic competitor earn economic profits in the long run? Answer: A monopolistic competitor may earn economic profits in the short run. In the long run, however, other firms will enter the market and produce substitutes for the product so that any economic profits earned by the existing firms will disappear due to competition. This means that the monopolistic competitor will earn zero economic profits in the long run. Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 125) Explain what will happen if firms in a monopolistically competitive industry are earning positive economic profits. Answer: Positive economic profits will attract new firms into the industry. The new firms will produce a product that is slightly different attracting customers away from existing firms. The demand curves of the existing firms will shift downward until economic profits equal zero. Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

126) Why is it that a monopolistically competitive firm cannot earn positive economic profits in the long run? Answer: A monopolistically competitive firm can earn positive economic profits only in the short run. In this case, other firms will enter the industry and produce substitutes for the existing firm's product so that its demand curve will become more elastic. Because of the increased competition in the long run, the existing firms' economic profits will disappear. Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 127) How is monopolistic competition like perfect competition? How is it like monopoly? Answer: Monopolistic competition is like perfect competition in that there are many buyers and sellers and it is easy for firms to enter and exit the industry. But it is like monopoly in that firms face downward sloping demand curves. The demand curves slope down because the product is not homogeneous, so the product of one firm is not a perfect substitute for the product of another firm. Diff: 1 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 128) How does the short-run equilibrium of a monopolistic competitor differ from a monopolist? How does it differ from a perfect competitor? Answer: The short-run equilibrium of a monopolistic competitor looks just like that for a monopolist, with the exception that the demand curve facing the monopolist will be less elastic than the demand curve facing the monopolistic competitor. The equilibrium differs from a perfect competitor in that the demand curve slopes down, so price is greater than marginal cost. Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

129) Is monopolistic competition efficient? Explain. What is Edward Chamberlin's view about the efficiency of monopolistic competition? Answer: Monopolistic competition is not efficient because a monopolistically competitive firm produces where price exceeds marginal cost and because in the long run a monopolistically competitive firm produces to the point at which average total cost is above minimum point of its average total cost curve. However, Chamberlin argued that the difference between the average cost of production for a monopolistic competitor and the minimum of average total cost represented the cost of producing differentiated products, which consumers value. Diff: 3 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 130) According to Edward Chamberlin, is the "differentness" of products a waste of resources? Explain. Answer: According to Chamberlin, the "differentness" of products that consumers pay for is represented by the difference between the average cost of production for a monopolistic competitor and the minimum average total cost. He did not consider this amount a waste of resources but what consumers are willing to pay for in exchange for more choice and variety in output. Diff: 2 Topic: 25.2 Price and Output for the Monopolistic Competitor Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 25.3 Brand Names and Advertising 1) When a telemarketer calls you about a service, this is an example of A) direct marketing. B) indirect marketing. C) scam marketing. D) persuasive marketing. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

2) A product with qualities that consumers lack the expertise to assess without assistance is called a(n) A) search good. B) experience good. C) credence good. D) inferior good. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 3) By promoting its brand name heavily, the monopolistically competitive firm A) earns more profit in the long run. B) signals its long-term intention to stay in the industry. C) signals its intention to leave the industry. D) guarantees a short run profit. Answer: B Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 4) If a firm produces an experience good, its mode of advertising will be A) persuasive advertising. B) direct advertising. C) not to advertise. D) none of these. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

5) To differentiate its product, a monopolistically competitive firm will engage in all of the following advertising practices EXCEPT A) direct marketing. B) mass marketing. C) interactive marketing. D) indirect marketing. Answer: D Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 6) Persuasive advertising is used to A) induce a consumer to try a product and discover a previously unknown taste for it. B) promote only used goods. C) sell to an established clientele. D) cut costs. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 7) Mass marketing involves A) using all types of media, such as television and radio, to reach as many consumers as possible. B) Internet ads only. C) using direct mailings only. D) lower-cost methods of advertising. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

8) The brand name of a firm A) has nothing to do with the profitability of a firm. B) has been considered irrelevant by economists since profits for a monopolistically competitive firm are zero in the long-run. C) relates to consumers' perception of product differentiation and to the market value of a firm. D) is important in the short-run but not in the long-run. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 9) A firm's trademark is protected from misuse if it is registered with the A) F.D.A. B) U.S. Patent and Trademark Office. C) U.S. Supreme Court. D) F.C.C. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 10) In order to differentiate their product brands from those of competing firms, monopolistically competitive firms A) equate marginal cost to marginal revenue to determine the profit maximizing quantity. B) spread false rumors about their competitors. C) take their competitor's reactions to changes in their policies into account. D) advertise their product. Answer: D Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

11) Personalized advertising that uses postal mailings, phone calls, and e-mail messages is known as A) direct marketing. B) mass marketing. C) indirect marketing. D) guerilla marketing. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 12) Direct marketing is A) advertising that permits a consumer to follow up directly by searching for more information and placing direct product orders. B) advertising that targets a specific audience and allows the consumer to follow up directly by placing direct product orders usually through television or radio. C) advertising targeted at specific consumers. D) advertising intended to reach as many consumers as possible. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 13) When a firm relies on social media ads to reach potential customers, the firm is engaging in A) direct marketing. B) mass marketing. C) false marketing. D) none of these. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

14) Mass marketing is A) advertising that permits a consumer to follow up directly by searching for more information and placing direct product orders. B) advertising that targets a specific audience and allows the consumer to follow up directly by placing direct product orders usually through television or radio. C) advertising targeted at specific consumers. D) advertising intended to reach as many consumers as possible. Answer: D Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 15) Interactive marketing is A) advertising that permits a consumer to follow up directly by searching for more information and placing direct product orders. B) advertising that targets a specific audience and allows the consumer to follow up directly by placing direct product orders usually through television or radio. C) advertising targeted at specific consumers. D) advertising intended to reach as many consumers as possible. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 16) Advertisement in which firms aim messages to as many customers as possible via media is known as A) direct marketing. B) mass marketing. C) indirect marketing. D) interactive marketing. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

17) The advertisement approach that allows a consumer to follow up directly to an advertising message is known as A) direct marketing. B) mass marketing. C) indirect marketing. D) interactive marketing. Answer: D Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 18) All of the following are advertisement methods EXCEPT A) direct marketing. B) mass marketing. C) indirect marketing. D) interactive marketing. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 19) Jaime has just researched and purchased a book through the Internet as a result of responding directly to an ad on Facebook. The Facebook ad is an example of A) mass marketing. B) direct marketing. C) indirect marketing. D) interactive marketing. Answer: D Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

20) Judy has just looked through her favorite catalog that came in the mail and has placed an order. The catalog is an example of A) mass marketing. B) direct marketing. C) indirect marketing. D) interactive marketing. Answer: B Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 21) Stephanie has just placed an order for the latest video after she received a personalized email. The e-mail is an example of A) mass marketing. B) direct marketing. C) indirect marketing. D) interactive marketing. Answer: B Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 22) Carol has just purchased a cereal she saw advertised on TV because of the health benefits contained in the ad. The TV ad is an example of A) mass marketing. B) direct marketing. C) indirect marketing. D) interactive marketing. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

23) Bonnie has just purchased a crystal vase she saw advertised when she went online to find her local weather forecast. The Internet ad is an example of A) mass marketing. B) direct marketing. C) indirect marketing. D) interactive marketing. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 24) A good that has qualities that are easy for a consumer to assess in advance of a purchase is called A) a credence good. B) a search good. C) an experience good. D) a persuasive good. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 25) A search good is a product A) with qualities that consumers lack the expertise to assess without assistance. B) that emphasizes the features of its product. C) with characteristics that enable an individual to evaluate the product's quality in advance of a purchase. D) that an individual must consume before the quality can be established. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

26) A good that people must actually consume before they can determine qualities is called A) a credence good. B) a search good. C) an experience good. D) a persuasive good. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 27) An experience good is a product A) with qualities that consumers lack the expertise to assess without assistance. B) that emphasizes the features of its product. C) with characteristics that enable an individual to evaluate the product's quality in advance of a purchase. D) that an individual must consume before the quality can be established. Answer: D Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 28) A good with qualities that consumers lack the experience to assess without assistance is called A) a credence good. B) a search good. C) an experience good. D) a persuasive good. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

29) A credence good is a product A) with qualities that consumers lack the expertise to assess without assistance. B) that emphasizes the features of its product. C) with characteristics that enable an individual to evaluate the product's quality in advance of a purchase. D) that an individual must consume before the quality can be established. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 30) All of Paula's friends have been telling Paula that she must see a certain movie but she is not sure that she will like it. The movie is a(n) A) experience good. B) credence good. C) logo good. D) search good. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 31) Jacob has just tried on the most comfortable pair of pants that he has ever known. The pants are a(n) A) experience good. B) credence good. C) logo good. D) information good. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

32) Christopher needs to hire an accountant but does NOT know how to find a good one. The accountant can best be regarded as a(n) A) experience good. B) credence good. C) inferior good. D) search good. Answer: B Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 33) Stephenie can tell if her car has been fixed or not—it works, or it doesn't—but she cannot tell how it was fixed. The car repair is a(n) A) experience good. B) credence good. C) luxury good. D) search good. Answer: B Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 34) If a customer buys an airline ticket based only on the price of the ticket for a particular destination, then the airline ticket is best regarded as a(n) A) experience good. B) credence good. C) inferior good. D) search good. Answer: D Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

35) The type of advertising that emphasizes the features of its product is A) informational advertising. B) persuasive advertising. C) search advertising. D) experience advertising. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 36) The type of advertising that is used to induce a consumer to discover a previously unknown taste for an item is known as A) informational advertising. B) persuasive advertising. C) false advertising. D) experience advertising. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 37) Informational advertising is the type of advertising that A) is used exclusively on television. B) is used exclusively on radio. C) emphasizes the features of a product. D) is used to influence a consumer's tastes and preferences. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

38) Persuasive advertising is the type of advertising that A) is used exclusively on television. B) is used exclusively on radio. C) emphasizes the features of its product. D) is used to induce a consumer to discover previously unknown tastes and preferences. Answer: D Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 39) Informational advertising is mostly used for A) an inexperience good. B) a search good. C) an experience good. D) a persuasive good. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 40) Persuasive advertising is mostly used for A) an inferior good. B) a search good. C) an experience good. D) a persuasive good. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 41) The type of advertising used for a search good is A) informational advertising. B) persuasive advertising. C) search advertising. D) experience advertising. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 85 Copyright © 2021 Pearson Education, Inc.

42) The type of advertising used for an experience good is A) informational advertising. B) persuasive advertising. C) search advertising. D) experience advertising. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 43) When you see an advertisement on TV for a hair care product in which the actor using the product is depicted as beautiful and happy, this is A) informational advertising. B) direct market advertising. C) indirect market advertising. D) persuasive advertising. Answer: D Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 44) When you see a preview of a coming movie at the movie theater, this is A) informational advertising. B) direct market advertising. C) indirect market advertising. D) persuasive advertising. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

45) The goal of advertising is to A) increase the price elasticity of demand for the firm's product. B) reduce the price elasticity of demand for the firm's product. C) increase the standardization of the industry. D) encourage firms to enter into the industry. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 46) The goal of advertising is to A) pay for public broadcasting. B) differentiate a firm's product. C) overwhelm the buyer so they buy a firm's product. D) minimize cost curves for the firm. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 47) Typically a mix of informational and persuasive advertising is used for A) experience goods. B) credence goods. C) credible goods. D) search goods. Answer: B Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

48) Which statement is INCORRECT with respect to sales promotion and advertising? A) Perfect competition differs from monopolistic competition in that no individual firm in a perfectly competitive market will advertise. B) A perfectly competitive firm, by definition, can sell all that it wants to sell at the going market price. C) A perfect competitor advertises a product that is different from the products that all other firms in the industry are selling. D) Advertising should be carried to the point at which the additional revenue from one more dollar of advertising just equals that one dollar of marginal cost. Answer: C Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 49) Advertising intended to reach as many consumers as possible, typically through television, newspaper, or magazine ads is referred to as A) interactive advertising. B) direct marketing. C) mass marketing. D) subliminal advertising. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 50) Which of the following is FALSE with respect to brand names and advertising? A) Because "differentness" has value to customers, monopolistically competitive firms regard their brand names as valuable. B) Firms use trademarks—words, symbols, and logos—to distinguish their product brands. C) Companies do not regard their brands as valuable private (intellectual) property because the value cannot be quantified. D) There is considerable shifting over time in the market value rankings of various U.S. product brands. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

51) Which of the following is most likely to be the subject of informational advertising? A) a search good B) a credible good C) an experience good D) an inexperience good Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 52) Advertising that is intended to alter a consumer's tastes and preferences and induce the customer to purchase a particular product is A) persuasive advertising. B) educational advertising. C) informational advertising. D) directional advertising. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 53) An example of direct marketing is A) the use of coupons in newspapers. B) allowing the use of the product for 7 days before the consumer is billed for the product. C) charging customers who pay with cash a different price than those using credit cards. D) the use of personalized advertising by using mailing lists. Answer: D Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

54) Out of all advertising spending, the largest share goes to A) television ads. B) false advertising. C) direct marketing. D) newspaper ads. Answer: C Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 55) A product that must be actually consumed before the quality of the product can be determined is a(n) A) search good. B) consumable good. C) consumption good. D) experience good. Answer: D Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 56) Advertising intended to induce a consumer to discover a previously unknown taste or preference is A) persuasive advertising. B) informational advertising. C) direct advertising. D) mass marketing advertising. Answer: A Diff: 1 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

57) Products such as office supplies are examples of A) experience goods. B) simple goods. C) search goods. D) selective goods. Answer: C Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 58) When a pharmaceutical company advertises that its allergy medication is clinically proven to alleviate hay fever symptoms, the pharmaceutical company is engaging in A) informational advertising. B) trademark protection. C) persuasive advertising. D) direct marketing. Answer: A Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 59) Explain why the amount that firms spend on advertising depends on the characteristics of their products. Answer: There are three types of goods: search goods, whose quality can be evaluated by consumers in advance of a purchase; experience goods, whose quality can be evaluated only after consumption; and credence goods, whose quality cannot be assessed by consumers without assistance. For search goods, firms are likely to use informational advertising that emphasizes the features of the product. For experience goods, firms are likely to use persuasive advertising to induce consumers to try the products. For credence goods, firms are likely to use a mix of informational and persuasive advertising. Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

60) Explain how advertising can act as a signal. Answer: Advertising can act as a signal that the firm plans to stay in business for a long time and it is not a fly-by-night operation. Advertising can entail significant expenses, so by engaging in costly advertising the firm indicates that it plans to remain in business and aims to count on repeat business to recoup the costs. Of course, in this process the firm also seeks to differentiate its product from the products of other firms. Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 61) Explain the difference between informational advertising and persuasive advertising. Give an example of a product that would be the subject of each type of advertising and explain why that type of advertising fits the product. Answer: Informational advertising explains the features of a good while persuasive advertising tries to influence a consumer's tastes and preferences. Informational advertising is used when a consumer can assess the benefits of the good before purchasing while persuasive advertising is used when a consumer must purchase the good to determine the good's benefits. Furniture would be advertised by informational advertising. The consumer can touch and try the furniture out before purchasing. A candy bar would be advertised by persuasive advertising since you must eat the candy before you know whether or not you will like it. Diff: 3 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 62) Why would Sunkist incur substantial costs to advertise and establish a brand name when the quality of its oranges can easily be evaluated by consumers? Answer: Oranges might be considered as experience goods, whose quality in terms of taste and sweetness can be established only after consumption. Because of this characteristic, the Sunkist brand name can convey a signal of high quality to consumers. Diff: 2 Topic: 25.3 Brand Names and Advertising Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

25.4 Information Products and Monopolistic Competition 1) If a monopolistically competitive firm selling an information product engages in marginal cost pricing, it will A) earn additional profits. B) fail to earn sufficient revenues to cover its fixed costs. C) lower costs. D) break even. Answer: B Diff: 3 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 2) The providers of information products typically A) have low fixed costs. B) have high marginal costs. C) have high fixed costs. D) have zero fixed costs. Answer: C Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 3) In the long run, the price of information products in monopolistically competitive markets will be equal to A) zero. B) MC. C) AFC. D) ATC. Answer: D Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

4) The production of information products is characterized by A) relatively low fixed cost. B) relatively low marginal cost. C) diseconomies of operation. D) an upward-sloping marginal cost curve. Answer: B Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 5) The ATC curve for a firm that produces an information product A) slopes downward, because AVC is constant, AFC slopes downward, and ATC = AVC + AFC. B) slopes upward, because AFC is constant, AVC slopes upward, and ATC = AFC + AVC. C) is U-shaped, because AVC is U-shaped, AFC slopes downward, and ATC = AVC + AFC. D) slopes downward, because MC slopes downward, AVC is constant, and ATC = AVC +MC. Answer: A Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 6) Which of the following conditions best explain the short-run economies of operation associated with production of an information product? A) AVC slopes downward, and AFC is constant, so that ATC slopes downward. B) AVC is constant, and AFC slopes downward, so that ATC slopes downward. C) AFC is constant, and MC slopes downward, so that AVC slopes downward. D) MC is constant, and MC slopes upward, so that AVC slopes upward. Answer: B Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

7) If the producer of an information product engages in marginal cost pricing, it earns A) a normal profit. B) negative economic profits. C) zero economic profits. D) positive economic profits. Answer: B Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 8) There is no incentive for additional producers of an information product to enter the industry when the price charged for these products by each firm already in the industry is equal to A) marginal cost. B) average total cost. C) average fixed cost. D) average variable cost. Answer: B Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 9) In a long-run equilibrium in a monopolistically competitive industry that produces information products, revenues are equal to the ________ costs of developing, producing, and selling the product. A) total B) fixed C) variable D) marginal Answer: A Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

10) A good that entails relatively high fixed costs associated with the use of knowledge and other information-intensive inputs as key factors of production is A) a logo good. B) a search good. C) a persuasive good. D) an information product. Answer: D Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 11) Which of the following statements is generally TRUE about information products? A) high fixed costs and low marginal costs B) high fixed costs and high marginal costs C) low fixed costs and low marginal costs D) low fixed costs and high marginal costs Answer: A Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 12) Marginal cost for an information product would A) first decrease and then increase as quantity increases. B) increase constantly as quantity increases. C) decrease constantly as quantity increases. D) remain constant as quantity increases. Answer: D Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

13) A very high fixed cost and a relatively low marginal cost is associated with A) every type of good or product. B) an information product. C) a persuasive good. D) an experience good. Answer: B Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 14) Average total cost for an information product would A) first decrease and then increase as quantity increases. B) increase constantly as quantity increases. C) decrease constantly as quantity increases. D) remain constant as quantity increases. Answer: C Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 15) Average fixed cost for an information product would A) first decrease and then increase as quantity increases. B) increase constantly as quantity increases. C) decrease constantly as quantity increases. D) remain constant as quantity increases. Answer: C Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

16) An information product is a product for which A) the first item is produced inexpensively but additional units are more costly to produce. B) the first unit is very costly to make but additional units are less costly to produce. C) the marginal cost first falls and then rises but the average total cost rises throughout its range. D) the average fixed cost first falls and then rises, but the average total cost falls throughout its range. Answer: B Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 17) Average variable cost for an information product would A) first decrease and then increase as quantity increases. B) increase constantly as quantity increases. C) decrease constantly as quantity increases. D) remain constant as quantity increases. Answer: D Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

18) Refer to the above figure. The above figure shows the cost structure of a firm producing an information product. Which curve represents average total cost? A) Curve 1 B) Curve 2 C) Curve 3 D) Any of the 3 could be ATC. Answer: A Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 19) Refer to the above figure. The above figure shows the cost structure of a firm producing an information product. Which curve represents average fixed cost? A) Curve 1 B) Curve 2 C) Curve 3 D) Any of the 3 could be AFC. Answer: B Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

20) Refer to the above figure. The figure shows the cost structure of a firm producing an information product. Which curve would represent the marginal cost for an information product? A) Curve 1 B) Curve 2 C) Curve 3 D) none of these Answer: C Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 21) Refer to the above figure. The above figure shows the cost structure of a firm producing an information product. Which curve would represent the average variable cost? A) Curve 1 B) Curve 2 C) Curve 3 D) none of these Answer: C Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 22) Because the short-run average total cost curve slopes downward for an information product, the firm experiences A) a downward-sloping marginal cost curve. B) a downward-sloping average variable cost curve. C) short-run economies of operation. D) long-run diseconomies of scale. Answer: C Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

23) Firms that produce an information product experience short-run economies of operation because A) the firm will always produce in the decreasing portion of the marginal cost curve. B) of the U-shaped nature of the average total cost curve. C) of the U-shaped nature of the average variable cost curve. D) the average total cost of producing and selling the product declines as output increases. Answer: D Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 24) If a firm that produces an information product uses marginal cost pricing, then the firm A) will earn negative profits. B) will earn profits equal to zero. C) will earn positive profits but could earn a higher profit by using a different method. D) will maximize profits. Answer: A Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 25) For a firm that sells an information product, the long-run equilibrium exists at a point at which economic profits are A) negative. B) zero. C) positive. D) dependent upon the particular product. Answer: B Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

26) The long-run equilibrium for a firm in an information product industry exists at a point at which A) marginal cost exceeds marginal revenue. B) the demand curve crosses the marginal cost curve. C) the demand curve is tangent to the average total cost curve. D) average total cost is minimized. Answer: C Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 27) For a firm that sells an information product, the long-run equilibrium exists at a point where A) price equals average total cost. B) price equals average variable cost. C) price equals average fixed cost. D) price equals marginal cost. Answer: A Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 28) Information products (e.g., software) A) have relatively high fixed costs but low marginal and average variable costs. B) have relatively low fixed costs but high marginal and average variable costs. C) have relatively high fixed costs and relatively high marginal and average variable costs. D) have relatively low fixed costs and relatively low marginal and average variable costs. Answer: A Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

29) Which of the following statements is INCORRECT regarding the properties of information products? A) Providing an information product entails incurring relatively high fixed costs. B) The average total cost curve for a firm that sells an information product slopes upward. C) The firm experiences economies of operation in the short run. D) In the long run, the producer earns sufficient revenue to cover the opportunity cost of capital. Answer: B Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 30) Which of the following statements is INCORRECT regarding the model for information products? A) Average total costs slope downward, because average variable cost is constant, average fixed cost slopes downward. B) The firm maximizes profit by setting the price of its product equal to marginal cost. C) Marginal cost equals average variable cost. D) In the long run, accounting profit is positive. Answer: B Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 31) The first unit of an information product is produced at a high fixed cost. Producing additional units entails relatively A) high average variable cost. B) low marginal cost. C) low external cost. D) high social cost. Answer: B Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

32) A distinguishing characteristic of producers of information products is their A) high social cost. B) short-run economies of operation. C) low average fixed costs. D) low fixed costs. Answer: B Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 33) In the short run, the ATC curve and the AFC curve for information products are A) downward sloping. B) horizontal. C) upward sloping. D) vertical. Answer: A Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 34) A computer game is an example of A) a free product. B) an information product. C) a search product. D) a credibility product. Answer: B Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

35) Firms that sell information products experience relatively high fixed costs but, once they have produced the first unit, can A) sell additional units at a loss, or above cost. B) provide expensive information products to consumers. C) sell additional units at a relatively low cost per unit. D) experience short-run diseconomies of scale. Answer: C Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 36) An information product typically has A) high total fixed costs and high marginal costs. B) low total fixed costs and low marginal costs. C) low total fixed costs and high marginal costs. D) high total fixed costs and low marginal costs. Answer: D Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 37) Marginal cost pricing for an information product A) would cause the firm to experience economic losses. B) would allow the firm to break even. C) would cause the firm to earn economic profits. D) would cause the firm to expand output to increase economic profits. Answer: A Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

38) Explain how information products are "special." Answer: Producing an information product entails incurring relatively high fixed costs, but once the first unit is produced, a firm can produce additional units at a constant and relatively low unit cost. Consequently, producers of information products experience short-run economies of operation, because their short-run average total cost curves slope downward. Furthermore, the constant marginal cost is always less than average total cost, so marginal cost pricing would result in economic losses for these firms. In the long-run equilibrium for monopolistically competitive producers of information products, price and average total cost are equal, so the firms earn revenues just sufficient to cover the relatively high fixed costs of developing the first unit of their products, plus the relatively low variable costs of selling additional units. Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 39) How does an information product differ from a product such as a desk? Answer: An information product has a very high fixed cost component compared to the marginal cost of production while a desk does not. Once an information product has been developed it is relatively inexpensive to reproduce while the cost of reproducing a desk is more expensive. Diff: 1 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 40) For an information product, why is a profit-maximizing firm unable to practice marginal cost pricing? How is its price determined in the long run? Answer: An information product has the characteristics of high fixed costs, low marginal costs, and a short-run downward-sloping average total cost curve. As a result, marginal cost pricing will result in economic losses. In the long run, the firm's price equals average total cost. Thus, the firm charges a price that covers its average total cost and earns zero economic profits in the long run. Diff: 2 Topic: 25.4 Information Products and Monopolistic Competition Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 26 Oligopoly and Strategic Behavior 26.1 Oligopoly 1) Which of the following does NOT help explain why oligopolies exist? A) economies of scale B) mergers C) product homogeneity D) barriers to entry Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 2) Which of the following is a characteristic of oligopoly? A) easy entry and exit B) many firms C) strategic dependence D) horizontal market demand curve Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 3) A merger between firms that are in the same industry is called a A) conglomerate merger. B) horizontal merger. C) vertical merger. D) none of these Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

4) A merger between firms in which one firm purchases an input from the other is called a A) conglomerate merger. B) horizontal merger. C) vertical merger. D) none of these Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 5) Strategic behavior and game theory are features of which market structure? A) perfect competition B) monopoly C) monopolistic competition D) oligopoly Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 6) In oligopoly, any action by one firm to change price, output, or quality causes A) a reaction by other firms. B) no reaction from the other firms. C) a profit gain for the other firms. D) loss of market share by the acting firm. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 7) Which of the following is NOT a characteristic of oligopoly firms? A) strategic dependence B) product differentiation C) non-price competition, such as advertising and promotions D) perfectly elastic demand curves Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 2 Copyright © 2021 Pearson Education, Inc.

8) Which one of the following industries is best classified as an oligopoly? A) textbook publishers B) retailing C) wheat farms in the United States D) fast food restaurants Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 9) Which of the following is most likely to be sold in an oligopoly market? A) pizza B) wireless service with a few suppliers C) electricity supply in a small town D) cotton Answer: B Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 10) Which of the following is NOT a necessary condition for oligopoly? A) barriers to entry B) strategic dependence of firms C) differentiated products D) either a small number of firms or market dominance by a small number of firms Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

11) Managers in oligopoly firms must A) eliminate any barriers to entry if they hope to make short-run profits. B) advertise heavily in order to differentiate their product. C) anticipate the reaction of rival firms. D) establish many varieties of their products to cover the spectrum of consumer tastes. Answer: C Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 12) In an oligopolistic market, each firm A) has a constant marginal cost. B) faces a perfectly elastic demand function. C) must consider the reaction of rival firms when making a pricing or output decision. D) produces at minimum average cost in the long run. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 13) An oligopoly is a market situation in which A) there are many firms producing differentiated products. B) there is a single firm producing several varieties of a product. C) all the sellers act independently of the others. D) there are very few sellers and they recognize their strategic dependence on one another. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 14) Which of the following is NOT a common characteristic of oligopoly? A) strategic dependence among firms in the industry B) product differentiation C) barriers to entry D) marginal cost pricing Answer: D Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 4 Copyright © 2021 Pearson Education, Inc.

15) If a firm is an oligopolist, which is NOT true? A) It must pay attention to other firms' prices. B) It is one of a relatively small number of firms dominating its industry. C) It can sell all the units it wants at the going market price. D) It is engaged in a strategic game. Answer: C Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 16) The most common reason for the existence of oligopolies is A) ease of entry. B) economies of scale. C) product homogeneity. D) advertising. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 17) Monopolies and oligopolies both erect barriers to entry through the use of A) price cutting. B) patents. C) franchising. D) advertising. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

18) Oligopolies can result from any of the following EXCEPT A) economies of scale. B) vertical mergers. C) government regulation. D) diseconomies of scale. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 19) When U.S. Steel, a steel producer, bought control of iron ore companies at the beginning of the 20th century, the company was initiating A) a horizontal merger. B) a vertical merger. C) a cartel. D) an expropriation. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 20) If Verizon Wireless and T-mobile, another wireless service company, were to merge, this would represent A) a vertical merger. B) a horizontal merger. C) a cartel. D) an up-and-down merger. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

21) Which of the following combinations would constitute a vertical merger? A) General Motors and Bridgestone Tire Company B) Samsung Electronics and Ford Motor Company C) Dell and Apple computer companies D) Yahoo! and Google Internet search engine companies Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 22) In general, horizontal mergers will A) increase the number of firms in an industry. B) decrease the number of firms in an industry. C) increase competition in an industry. D) reduce economic profits in an industry. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 23) The combining of First Union National Bank and The National Bank of Memphis is an example of A) a vertical merger. B) a horizontal merger. C) a downstream formation. D) a conglomerate merger. Answer: B Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

24) The joining of firms that are producing or selling a similar product is A) a conglomerate merger. B) a horizontal merger. C) a vertical merger. D) a cross or diagonal merger. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 25) If Apple, a company that produces smartphones, purchases a company that specializes in developing phone apps, we would have an example of A) a horizontal merger. B) a vertical merger. C) a monopoly. D) excessive product differentiation. Answer: B Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 26) A horizontal merger involves A) the joining of two firms at different stages of the production process. B) the separation of management from ownership. C) the joining of two firms selling similar products. D) the exchange of debt for stock. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

27) How do economies of scale contribute to the development of an oligopoly? A) Economies of scale make it legally difficult for new firms to enter. B) Economies of scale make small-scale producers inefficient. C) Economies of scale are based on control of a key resource, without which other firms cannot enter an industry. D) Economies of scale are guaranteed when a patent is granted. Answer: B Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 28) Over the past several decades, U.S. firms have faced more competition from overseas firms. Does this have any impact on the market power of U.S. oligopoly firms? A) no, because domestic firms in oligopoly markets are always so dominant that overseas producers have little or no impact on those markets B) no, because the United States government has effectively blocked all imports that might compete with domestic firms in oligopoly industries C) Yes, competition from overseas firms can substantially limit domestic firms' market power. D) There is no way to know. Answer: C Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 29) Which of the following is a characteristic of oligopoly? A) mutual firm independence B) zero economic profits in the short run C) marginal cost pricing D) only a few firms in the industry Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

30) Oligopoly is a situation when there A) is one firm in the industry that is large relative to the size of the economy. B) are a few large firms in the industry. C) are too many firms in the industry and there is excess capacity. D) is one large firm and many smaller firms forming a competitive fringe. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 31) Which of the following is TRUE of an oligopoly? A) They engage in nonprice competition. B) They do not react to actions of their competitors. C) Each firm produces a small portion of the total output. D) Firms do not care what their competitors do. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 32) Which of the following is NOT true of an oligopoly? A) They advertise their product. B) The firms recognize their interdependence. C) A few firms account for a large portion of the total output. D) Firms are price takers. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 33) When managers in oligopolistic firms make decisions that affect output or price, they must A) also be sure they erect barriers to entry to prevent new entrants from affecting their plans. B) anticipate the reactions of their rivals and plan accordingly. C) register with the Antitrust Division of the Department of Justice. D) inform the regulators of their industry about their plans. Answer: B Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

34) A situation in which one firm's actions with respect to price, quality, advertising and related changes may be strategically countered by the reactions of one or more other firms in the industry is known as A) strategic dependence. B) economies of scale. C) the concentration ratio. D) barriers to entry. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 35) All of the following are reasons for an oligopoly to occur EXCEPT A) economies to scale. B) barriers to entry. C) independence among firms. D) merger. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 36) The existence of economies of scale is one reason oligopolies exist because A) a firm is able to increase price leading to increased profits. B) the marginal cost decreases as output increases. C) of strategic dependence. D) as output increases, average total cost decreases, leading to large-scale firms. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

37) Which of the following is NOT a reason why some industries are oligopolies? A) economies of scale B) barriers to entry C) independence in pricing behavior D) mergers Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 38) Horizontal merger occurs when A) two firms merge where one had sold its output to the other as an input. B) the merger moves the combined firm onto the horizontal portion of its long-run average cost curve. C) two firms merge where each is about the same size. D) two firms producing a similar product merge. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 39) Vertical merger occurs when A) two firms merge where one had sold its output to the other as an input. B) the merger moves the combined firm onto the horizontal portion of its long-run average cost curve. C) two firms merge where each is about the same size. D) two firms producing a similar product merge. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

40) Jacob' sandwich stand merges with a company that supplies the condiments to Jacob. This is an example of A) conglomerate merger. B) concentration ratio. C) vertical merger. D) horizontal merger. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 41) Supercut beauty salon merges with Clean-Cut beauty salon. This is an example of A) conglomerate merger. B) concentration ratio. C) vertical merger. D) horizontal merger. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 42) Which of the following is an example of a vertical merger? A) Northwestern Idaho University merging with Starbucks Coffee. B) Northwestern Idaho University merging with a training academy for new professors. C) Northwestern Idaho University merging with Roosevelt University. D) Northwestern Idaho University going from a public to a private university. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

43) Which of the following is an example of a horizontal merger? A) Northeastern Illinois University merging with a local bookstore. B) Northeastern Illinois University merging with a training academy for new professors. C) Northeastern Illinois University merging with Bush University. D) Northeastern Illinois University going from a public to a private university. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 44) The joining of firms that are producing or selling a similar product is known as A) a conglomerate merger. B) a horizontal merger. C) a vertical merger. D) economies to scale. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 45) The joining of a firm with another to which it sells an output or from which it buys an input is known as A) a conglomerate merger. B) a horizontal merger. C) a vertical merger. D) economies to scale. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

46) All of the following can create an oligopolistic structure EXCEPT A) low barriers to entry. B) economies of scale. C) government licensing rules. D) mergers. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 47) Suppose a cereal firm, Nabisco, merges with both a wheat firm and milling firm. This is an example of a A) vertical merger. B) horizontal merger. C) parallel merger. D) diagonal merger. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 48) A market structure characterized by a small number of interdependent sellers is called a(n) A) monopoly. B) monopolistic competition. C) monopsony. D) oligopoly. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

49) If a retail food chain merged with a meat packing company, this would be an example of a A) horizontal merger. B) conglomerate merger. C) vertical merger. D) diagonal merger. Answer: C Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 50) The merger of Southwest Bell (SBC) and AT&T companies is an example of a A) horizontal merger. B) vertical merger. C) consolidation merger. D) cooperative merger. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 51) Which of the following is NOT a cause for an oligopoly to exist? A) economies of scale B) structural dependence C) barriers to entry D) horizontal mergers Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 52) Which of the following would be the best example of an oligopolistic industry? A) agriculture B) large aircraft manufacturing C) the local water supply D) retail convenience stores Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 16 Copyright © 2021 Pearson Education, Inc.

53) There are fewer than half as many publishers of college textbooks in the United States now as a generation ago. Three companies alone account for almost two-thirds of the sale of new textbooks. This market situation characterized by very few sellers is known as A) an oligopoly. B) perfect competition. C) pure monopoly. D) monopolistic competition. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 54) Between World War II and the 1970s, three firms—General Motors, Chrysler, and Ford— produced and sold nearly all the output of the U.S. auto industry. These three firms had A) an oligopoly. B) monopolistic competition. C) colluded. D) a pure monopoly. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 55) Which does NOT cause an industry that might otherwise be competitive to tend toward oligopoly? A) economies of scale B) barriers to entry C) mergers D) strategic independence Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

56) The joining of firms that are producing or selling a similar product is A) competition by merger. B) a vertical merger. C) a horizontal merger. D) a hostile takeover. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 57) If a company that drilled for and produced oil acquired a firm which refined oil into gasoline, this would be referred to as a A) horizontal merger. B) vertical merger. C) conglomerate merger. D) reverse merger. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 58) If Target were to merge with Wal-Mart, this would be referred to as a(n) A) horizontal merger. B) vertical merger. C) conglomerate merger. D) anti-competitive merger. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

59) All of the following are characteristics of an oligopoly EXCEPT A) diseconomies of scale over all ranges of output. B) small number of firms. C) high barriers to entry. D) interdependence. Answer: A Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 60) The situation of oligopoly suggests A) many firms compete in an industry. B) mergers have not occurred. C) interdependence among firms. D) no barriers to entry exist. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 61) One of the strongest reasons that oligopolies exist is due to A) the homogeneity of their products. B) marginal cost pricing. C) lowest cost production. D) economies of scale. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 62) Economies of scale means that A) the average fixed cost curve slopes downward over its entire range. B) the four-firm concentration ratio is below 80. C) the long-run average total cost curve slopes downward over it entire range. D) the long-run total cost curve slopes downward over it entire range. Answer: C Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 19 Copyright © 2021 Pearson Education, Inc.

63) The merger of two pizza restaurant chains would be an example of A) a horizontal merger. B) a vertical merger. C) a conglomerate merger. D) an independent merger. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 64) A market situation in which there are a few large firms is called A) monopolistic competition. B) imperfect competition. C) oligopoly. D) monopoly. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 65) Strategic dependence is found in A) monopoly markets. B) oligopolistic markets. C) monopolistically competitive markets. D) perfect competitive markets. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

66) Industry A comprises only very few large firms engaged in stiff competition with each other. Industry A can best be described as A) pure competition. B) monopolistic competition. C) pure monopoly. D) oligopoly. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 67) Interdependence is the key characteristic of A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 68) A market situation in which there are a few firms that recognize their mutual interdependence is A) monopolistic competition. B) oligopoly. C) monopoly. D) regulated monopoly. Answer: B Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

69) A market situation in which there are very few sellers is A) oligopoly. B) perfect competition. C) monopoly. D) monopolistic competition. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 70) For which market structure do economists have the least precise model of price determination? A) perfect competition in the short run B) perfect competition in the long run C) oligopoly D) monopoly Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 71) Product differentiation exists in A) oligopolies only. B) monopolies only. C) monopolistic competition only. D) all market structures except perfect competition. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

72) The number of firms in an oligopolistic industry A) must be less than 10. B) must be less than 20. C) must be small enough that firms are interdependent. D) must be large enough for firms to be independent. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 73) The outputs of an oligopolistic industry A) can be homogeneous or differentiated. B) must be at high levels so that price exceeds average total cost. C) always have excise taxes imposed on them. D) have no substitutes on the market. Answer: A Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 74) Oligopolistic industries are characterized by a A) few large firms and no barriers to entry. B) large number of firms and no barriers to entry. C) few large firms and substantial barriers to entry. D) large number of firms and substantial barriers to entry. Answer: C Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 75) Economies of scale A) do not arise in oligopolistic industries. B) can exist but are rare in oligopolistic industries. C) can exist but fail to create barriers to entry in oligopolistic industries. D) are commonplace and often a barrier to entry in oligopolistic industries. Answer: D Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 23 Copyright © 2021 Pearson Education, Inc.

76) What is oligopoly? How does oligopoly differ from the other kinds of market structures? Answer: Oligopoly is an industry characterized by a small number of firms. The firms are interdependent, and they recognize that they are interdependent. This leads to strategic dependence, which means that firms must recognize that their actions will affect the other firms, and they must take into account the actions of the other firms. Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 77) Distinguish between a horizontal merger and a vertical merger. Answer: A horizontal merger is a merger between two firms selling a similar product. A vertical merger is a merger between two firms when one firm purchases the output of the other firm as an input. Diff: 1 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 78) "Oligopoly is the only market structure in which rivalry among firms takes place." Do you agree or disagree? Why? Answer: Agree. Oligopolists recognize their strategic dependence and must take into consideration likely reactions by rivals to any decision they make. The firms realize they are in competition with other firms and may actively compete with them. Under perfect competition and monopolistic competition, there is no rivalry because the firms are too small to have any impact on the other firms. Each firm acts independent of the other firms. By definition there is no rival under monopoly. So, oligopoly is the only market structure where competitive behavior actually takes place. Diff: 3 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

26.2 Measuring Industry Concentration 1) A concentration ratio measures A) the average size of the firms in the industry. B) the sales of the three largest firms in the industry minus the costs of these three largest firms in the industry. C) the share of industry sales accounted for by the largest firms in the industry. D) the excess capacity found in a particular oligopolistic industry. Answer: C Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 2) The percentage of all sales contributed by the leading firms in an industry is known as A) the Herfindahl index. B) the Hirschman index. C) the zero sum. D) the concentration ratio. Answer: D Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 3) Which of the following statements about concentration ratios is correct? A) A high concentration ratio indicates that the industry is a monopoly. B) A high concentration ratio indicates that the industry is monopolistically competitive. C) A high concentration ratio suggests that the industry is characterized by strategic independence. D) A high concentration ratio suggests that the industry is characterized by strategic dependence. Answer: D Diff: 3 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

4) A concentration ratio is used to A) determine whether a market structure is oligopoly. B) determine the price level relative to firms' marginal costs. C) determine the degree of homogeneity in the market. D) determine the absolute size of a market. Answer: A Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

5) Refer to the above table. The four-firm concentration ratio is A) 85.8 percent. B) 75 percent. C) 72.5 percent. D) 59.2 percent. Answer: C Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 6) Suppose that Industry X has two firms with equal market shares, and Industry Y has three firms with 65 percent, 30 percent, and 5 percent market shares, respectively. Which of the following is TRUE? A) The HHI for Industry X is 50 higher than the HHI for Industry Y. B) The HHI for Industry X is 150 lower than the HHI for Industry Y. C) The HHI for Industry X is 100 higher than the HHI for Industry Y. D) The HHI is the same between Industry X and Industry Y. Answer: B Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

7) In a 20-firm industry, two of the smallest firms merge. Yet the 4-firm concentration ratio and the 8-firm concentration ratio did not change. All things considered, we can say that the industry has A) moved closer to pure competition because the number of firms decreased. B) moved farther away from competition because the number of firms decreased. C) experienced no change in competition even though the number of firms decreased. D) to be identified first; otherwise there is no way to tell. Answer: B Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

8) Refer to the above table. The four-firm concentration ratio is A) 86.5 percent. B) 33.3 percent. C) 13.3 percent. D) 11.6 percent. Answer: A Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 9) The Herfindahl-Hirschman index is a measure of A) the profit margin of an industry. B) market size. C) the degree of collusion among firms in a market. D) the degree of concentration among firms in a market. Answer: D Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

10) Suppose there are four firms in an industry. The market shares of the four firms are 5 percent, 20 percent, 35 percent, and 40 percent. The Herfindahl-Hirschman index for that industry is A) 6,650. B) 3,250. C) 1,250. D) 100. Answer: B Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 11) Which of the following has the highest Herfindahl-Hirschman index? A) monopoly B) monopolistic competition C) oligopoly D) any of these, depending on the size of firm sales Answer: A Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 12) Industry A has four firms. The largest firm in Industry A has more than 90 percent of the market share. Industry B also has four firms, but each of those four firms in Industry B has 25 percent of the market share. The Herfindahl-Hirschman index will be A) the same for both industries, but the four-firm concentration will be larger for Industry B than Industry A. B) the same for both industries, but the four-firm concentration will be larger for Industry A than Industry B. C) larger for Industry B than Industry A, but the four-firm concentration will be the same. D) larger for Industry A than Industry B, but the four-firm concentration will be the same. Answer: D Diff: 3 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

13) The market power of a firm refers to its ability to A) erect entry barriers in the industry. B) make a profit even when other firms in the industry are making losses. C) control its own output level while keeping its price the same as the prices charged by other firms. D) affect the market price for its industry's output. Answer: D Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 14) Based on the table below, the four-firm concentration ratio equals what percentage of annual sales?

A) 33 percent B) 40 percent C) 60 percent D) 100 percent Answer: C Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge

15) Use the above table. If firms 3 and 4 merge, the four-firm concentration ratio will A) increase from 75 percent to 80 percent. B) increase from 60 percent to 75 percent. C) decrease from 75 percent to 60 percent. D) not change. Answer: A Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 16) If an industry has 25 firms that collectively have $150 million in total sales and the top four firms in this industry account for $90 million in sales, what is the concentration ratio of the top four firms in this industry? A) 42 percent B) 60 percent C) 70 percent D) 80 percent Answer: B Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge

17) If an industry has 25 firms that collectively have $150 million in total sales and the top three firms in this industry account for $78 million in sales and the fifth through twenty-fifth firms account for $60 million in sales, what is the amount of sales for the fourth largest firm? A) $12 million B) $6 million C) $18 million D) none of these Answer: A Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 18) Which of the following is likely among the most concentrated industries in the United States? A) printing and publishing B) soft drinks C) tobacco products D) household vacuum cleaners Answer: C Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 19) Which of the following is likely among the most concentrated industries in the United States? A) wheat farms B) breakfast cereals C) primary aluminum D) computers Answer: B Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

20) The higher the concentration ratio is in an industry, the more likely it is that A) the industry is perfectly competitive. B) the market share of the smallest four firms is larger. C) the market share of the largest four firms is smaller. D) the industry has an oligopoly. Answer: D Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 21) Suppose an industry consists of 20 firms. Each firm's share of total sales in the industry is 5 percent. If two of the firms merge, then the four-firm concentration ratio in the industry will A) remain unchanged. B) decrease as there are fewer firms in the industry. C) increase. D) depend on the market condition faced by the industry. Answer: C Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 22) Suppose an industry is composed of 10 firms. Each firm's share of total sales in the industry is 10 percent. If two of the firms merge, then the four-firm concentration ratio in the industry is A) 40 percent. B) 45 percent. C) 50 percent. D) unable to determine Answer: C Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

23) If the four-firm concentration ratio for an industry is 84 percent, then A) each of the firms account for 21 percent of total sales. B) the four largest firms in the industry account for 16 percent of the total sales. C) the four largest firms in the industry account for 84 percent of the total sales. D) the remaining firms in the industry accounts for 84 percent of the total sales. Answer: C Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 24) Using the concentration ratio to measure the degree of competition A) may understate the degree of competition because it ignores imported goods. B) may overstate the degree of competition because it ignores imported goods. C) may overstate the degree of competition because inter-industry competition is ignored. D) may understate the degree of competition because market share changes annually. Answer: A Diff: 3 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking Four-Firm Concentration Ratios

25) The most competitive industry of those presented in the above table is likely to be industry A) W. B) X. C) Y. D) Z. Answer: B Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

26) The most oligopolistic industry of those presented in the above table is likely to be industry A) W. B) X. C) Y. D) Z. Answer: C Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 27) Suppose an industry has total sales of $25 million per year. The two largest firms have sales of $6 million each, the third largest firm has sales of $2 million, and the fourth largest firm has sales of $1 million. The four-firm concentration ratio for this industry is A) 36 percent. B) 60 percent. C) 50 percent. D) 25 percent. Answer: B Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 28) Suppose a ten firm industry has total sales of $50 million per year. The two largest firms each has sales of $10 million, the third largest firm has sales of $8 million, and the fourth largest firm has sales of $2 million. If fifth through tenth largest firms combined have annual sales of $20 million, the four-firm concentration ratio for this industry is A) 45.7 percent. B) 25 percent. C) 60 percent. D) none of these Answer: C Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge

29) Suppose a ten firm industry has total sales of $35 million per year. The largest firm has sales of $10 million, the third largest firm has sales of $4 million, and the fourth largest firm has sales of $2 million. If the rest of the industry has annual sales of $12 million, the second largest firm has sales of A) $8 million. B) $7 million. C) $4 million. D) none of these Answer: B Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 30) Suppose that an industry consists of 15 firms, and the top 4 firms have annual sales of $2.5 million, $2 million, $1.5 million, and $1 million, respectively. If the entire industry has annual sales of $10 million, the four-firm concentration ratio is A) 85 percent. B) 50 percent. C) 25 percent. D) 70 percent. Answer: D Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 31) The industry concentration ratio measures the A) value of the assets owned by the largest corporations in the market. B) percentage of industry sales accounted for by the top four or eight firms. C) difference between price and marginal cost for the largest firms in the industry. D) degree of product differentiation in the market. Answer: B Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

32) If industry sales are $1,250, and the top four firms have sales of $500, $200, $100, and $50, respectively, what will be the four-firm concentration ratio? A) 95 percent B) 68 percent C) 75 percent D) 43 percent Answer: B Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 33) As the definition of products narrows (i.e., becomes more specific), the concentration ratio A) is not valid. B) tends to decrease. C) tends to increase. D) does not change in any predictable manner. Answer: C Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 34) A concentration ratio gives A) the average size of the firms in an industry. B) the total sales of four or eight of the mid-sized firms in the industry. C) the percentage of all sales contributed by the four or eight largest firms in the industry. D) the sales of the four largest firms in the industry divided by the sales of the eight largest firms in the industry. Answer: C Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

35) According to the above table, the four-firm concentration ratio of this industry is A) 69.2 percent. B) 35.1 percent. C) 66.7 percent. D) 67.5 percent. Answer: A Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 36) According to the above table, if the fourth and fifth largest firms in the industry merge, the four-firm concentration ratio in the industry will be A) 82.5 percent. B) 35.8 percent. C) 69.0 percent. D) 84.1 percent. Answer: A Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 37) The Herfindahl-Hirschman index is measured by A) adding the market shares of all firms in an industry. B) adding the squares of the market shares of all firms in an industry. C) squaring the sum of the market shares of the all firms in an industry. D) adding the market shares of the four largest firms in an industry. Answer: B Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

38) There are 30 firms in an industry. What happens to that industry's four-firm concentration when the third- and fourth-largest firms merge? A) Nothing, because their shares are already included in the concentration calculation. B) The industry's concentration ratio will fall. C) The industry's concentration ratio will increase. D) It is impossible to know without more information. Answer: C Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 39) The measurement of industry concentration which calculates the percentage of all sales contributed by a specific number of leading firms is called the A) Herfindahl-Hirschman Index. B) concentration ratio. C) competition index. D) payoff matrix. Answer: B Diff: 1 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 40) For Industry A, its 1-firm, 2-firm, 4-firm and 8-firm concentration ratios are the same. Based on this, we can conclude that Industry A is A) pure competition. B) monopolistic competition. C) oligopoly. D) pure monopoly. Answer: D Diff: 2 Topic: 26.1 Oligopoly Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

41) What is meant by the concentration of an industry? How is concentration measured? What are likely causes of high concentration? Answer: Industry concentration means that a relatively large share of the industry's output is produced by the largest firms in the industry. It is often measured with concentration ratios. The four-firm concentration ratio is the percentage of total industry sales generated by the four largest firms in the industry. High concentration is likely to be associated with economies of scale, barriers to entry, and a history of mergers. Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 42) Using the information in the table, develop the four-firm concentration ratio. Would you classify this industry as an oligopoly? Explain your answer.

Answer: The four-firm concentration ratio is 93 percent (800/860 multiplied by 100). This industry would be classified as an oligopoly if we use the rule of thumb that says that an oligopoly exists when the four-firm concentration ratio is at least 75%. Diff: 2 Topic: 26.2 Measuring Industry Concentration Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 26.3 Strategic Behavior and Game Theory 1) Game theory is used to explain the pricing behavior of A) monopolies. B) perfect competition. C) monopolistic competition. D) oligopolies. Answer: D Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 39 Copyright © 2021 Pearson Education, Inc.

2) Within a game theory model, if a change in decision-making raises firm A's profits by $1 million and lowers firm B's profits by $1 million, the game is a A) negative-sum game. B) zero-sum game. C) positive-sum game. D) cooperative game. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 3) Within a game theory model, if a change in decision-making raises corporation A's profits by $100 and lowers corporation B's profits by $80, the game is a A) negative-sum game. B) zero-sum game. C) positive-sum game. D) cooperative game. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge 4) Within a game theory model, if a change in decision-making raises corporation A's profits by $200 and lowers corporation B's profits by $250, the game is a A) negative-sum game. B) zero-sum game. C) positive-sum game. D) cooperative game. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Application of knowledge

5) Game theory would classify a cartel under the topic of A) zero-sum games. B) cooperative games. C) noncooperative games. D) dominant-strategy games. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 6) A game in which players as a group lose at the end of the game is referred to as A) zero-sum game. B) negative-sum game. C) positive-sum game. D) tit-for-tat game. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 7) A game in which players as a group gain at the end of the game is referred to as A) zero-sum game. B) negative-sum game. C) positive-sum game. D) tit-for-tat game. Answer: C Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 8) A noncooperative game would refer to a situation in which oligopoly firms A) are too small to be interdependent. B) do not engage in collusive behavior together. C) are made worse off by their actions. D) behave as a joint monopoly. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 41 Copyright © 2021 Pearson Education, Inc.

9) In game theory, the strategy that always yields the highest benefit for the player using it is the A) dominant strategy. B) cooperative strategy. C) prisoners' strategy. D) matrix strategy. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 10) Collusion always involves firms engaging in a A) vertical merger. B) horizontal merger. C) cooperative game. D) noncooperative game. Answer: C Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 11) A noncooperative game situation may occur when A) firms collude. B) firms find collusion too costly. C) firms merge. D) firms agree to price fixing. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

12) The dominant strategy allows a firm to A) obtain the highest benefit, regardless of its rivals' actions. B) transform a negative-sum game into a positive-sum game. C) transform a zero-sum game into a positive-sum game. D) escape from a Prisoners' Dilemma situation. Answer: A Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 13) Suppose a firm can charge a relatively low price to try to compete actively with its rivals, or it can charge a relatively high, collusive price. If its strategy is to charge the low price regardless of the other firms' decisions, this low-price is the firm's A) dependent strategy. B) independent strategy. C) dominant strategy. D) positive sum strategy. Answer: C Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 14) In a zero-sum game A) both players are better off at the end of the game. B) both players are worse off at the end of the game. C) one player's losses are exactly offset by another player's gains. D) both players collude to make both of them better off. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

15) When decisions are guided strictly by short-run gains, this is known as A) opportunistic behavior. B) the prisoners' dilemma. C) tit-for-tat strategy. D) a positive-sum game. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 16) A tit-for-tat strategy is one in which oligopolies A) cooperate as long as other members cooperate, but if anyone cheats, they cut the price until the cheater reverts to cooperation. B) cooperate almost all of the time, but occasionally do not cooperate in order to fool the antitrust authorities. C) keep cutting prices to punish rivals until the competitive price is reached. D) try to avoid the problems of the prisoners' dilemma, but actually make themselves worse off. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 17) The dominant strategy in the prisoners' dilemma is for A) neither player to confess. B) both players to confess. C) only the dominant player to confess. D) the dominant player not to confess. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

18) The prisoners' dilemma is a game in which A) the dominant strategy for all participants is the best outcome no matter what the other side does. B) the dominant strategy is to cooperate. C) only one of the firms is able to make above-normal profits. D) each firm, in making decisions on the basis of its own self-interest, also makes decisions that benefit the group as a whole. Answer: A Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 19)

Refer to the above payoff matrix (in years of sentence) for two people (Bo and Max) charged for robbery. Which of the following is the outcome of the dominant strategy without cooperation? A) Both Bo and Max confess. B) Both Bo and Max do not confess. C) Bo confesses while Max does not confess. D) Bo does not confess while Max confesses. Answer: A Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

20)

Refer to the above payoff matrix (in years of sentence) for two people (A and B) charged for robbery. Which of the following is the outcome of the dominant strategy without cooperation? A) Both A and B confess. B) Both A and B do not confess. C) A confesses while B does not confess. D) A does not confess while B confesses. Answer: A Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

21)

Refer to the above payoff matrix for the profits (in $ millions) of two firms (A and B) and two pricing strategies (high and low). Which of the following is the outcome of the dominant strategy without cooperation? A) Both firm A and firm B choose the low price. B) Both firm A and firm B choose the high price. C) Firm A chooses the low price while firm B chooses the high price. D) Firm A chooses the high price while firm B chooses the low price. Answer: A Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

22)

Refer to the above payoff matrix for the profits (in $ millions) of two firms (A and B) and two pricing strategies (high and low). Which of the following is the outcome of the dominant strategy without cooperation? A) Both firm A and firm B choose the high price. B) Both firm A and firm B choose the low price. C) Firm A chooses the low price while firm B chooses the high price. D) Firm A chooses the high price while firm B chooses the low price. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

23)

Refer to the above payoff matrix for the profits (in $ millions) of two firms (A and B) making a decision to advertise or not. Which of the following is the outcome of the dominant strategy without cooperation? A) There is no dominant strategy in this scenario. B) Both firm A and firm B choose to advertise. C) Firm A chooses to advertise while firm B chooses not to advertise. D) Firm A chooses not to advertise while firm B chooses to advertise. Answer: A Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

24)

Refer to the above payoff matrix for the profits (in $ millions) of two firms (X and Y) making a decision to advertise or not. Which of the following is the outcome of the dominant strategy without cooperation? A) Both firm X and firm Y choose not to advertise. B) There is no dominant strategy in this scenario. C) Firm X chooses to advertise while firm Y chooses not to advertise. D) Firm X chooses not to advertise while firm Y chooses to advertise. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 25) The mutual interdependence of oligopolists ensures that each oligopolist has A) a unique demand curve. B) a perfectly elastic demand curve. C) a reaction function. D) a fundamental dilemma about whether to collude or not. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

26) A reaction function is A) companies colluding in order to make higher than competitive rates of return. B) the manner in which one oligopolist reacts to a change in price made by another oligopolist in the industry. C) a game in which firms will not negotiate in any way. D) when plans made by firms are known as game strategies. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 27) The manner in which one oligopolist reacts to a change in price, output, or quality made by another oligopolist in the industry is A) a cooperative game. B) the reaction function. C) a zero-sum game. D) the concentration ratio. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 28) In a "game," strategies are A) the reactions of firms to the changes in the economy. B) the laws regulating the industry. C) the plans made by the participants. D) the potential returns the participants may get. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

29) The analytical framework in which two or more firms compete for certain payoffs that depend on the strategy that the others employ is A) game theory. B) the concentration ratio. C) a horizontal merger. D) network effect. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 30) A noncooperative game is A) companies colluding in order to make higher than competitive rates of return. B) the manner in which one oligopolist reacts to a change in price made by another oligopolist in the industry. C) a game in which firms will not negotiate in any way. D) when plans made by firms are known as game strategies. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 31) A cooperative game is A) companies colluding in order to make higher than competitive rates of return. B) the manner in which one oligopolist reacts to a change in price made by another oligopolist in the industry. C) a game in which firms will not negotiate in any way. D) when plans made by firms are known as game strategies. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

32) A game in which the players explicitly coordinate their decisions to make themselves better off is a A) cooperative game. B) noncooperative game. C) zero-sum game. D) negative-sum game. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

33) Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. If Bob confesses, what is the best strategy for Harry? A) Confess. B) Don't confess. C) Flip a coin to decide what to do. D) There is no best strategy. Answer: A Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

34) Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. If Bob does NOT confess, what is the best strategy for Harry? A) Confess. B) Don't confess. C) Flip a coin to decide what to do. D) There is no best strategy. Answer: A Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 35) Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. What is dominant strategy for Bob? A) Confess. B) Don't confess. C) Flip a coin to decide what to do. D) There is no dominant strategy. Answer: A Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 36) Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. Which of the following is the outcome of the dominant strategy without cooperation? A) Both confess. B) Both don't confess. C) Bob confesses while Harry does not confess. D) Harry confesses while Bo does not confess. Answer: A Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

37) Refer to the above figure. The figure gives the payoff matrix for two individuals who are being accused of robbing a bank together. Which of the following is the outcome with cooperation? A) Both confess. B) Both don't confess. C) Bob confesses while Harry does not confess. D) Harry confesses while Bo does not confess. Answer: B Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

38) Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the best strategy for Greenco if Ajax decides on charging a high price? A) high price B) low price C) There is no best strategy. D) Not enough information is given to determine the best strategy. Answer: B Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

39) Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the best strategy for Greenco if Ajax decides on charging a low price? A) high price B) low price C) There is no best strategy. D) Not enough information is given to determine the best strategy. Answer: B Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 40) Refer to the above figure. Ajax and Greenco are oligopolists. Above you are given the payoff matrix for the two firms giving the payoff associated with different pricing strategies. What is the dominant strategy for Greenco? A) high price B) low price C) There is no best strategy. D) Not enough information is given to determine the best strategy. Answer: B Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 41) Refer to above figure, which represents a duopoly industry. What would be the likely total industry payoff or profit? A) $8 million B) $9 million C) $10 million D) $14 million E) zero Answer: A Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

42) Suppose two firms are in a game situation, and they each must decide on a strategy regarding whether to select a high price or a low price. Profits for a firm are highest when it selects a low price, while the other selects a high price; profits are lowest if one selects a high price, while the other selects a low price; profits are in between when both select low prices; and profits are slightly higher when both select high prices. In the absence of collusion we expect A) one of the firms to select a high price and the other a low price. B) one firm to select a high price and the other a low price in the first period, followed by a reversal in the second period. C) both to select high prices. D) both to select low prices. Answer: D Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 43) A game in which the players neither negotiate nor coordinate in any way is a A) cooperative game. B) noncooperative game. C) zero-sum game. D) negative-sum game. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 44) An example of a zero-sum game is A) exchange. B) a consumer purchasing a used car from a used car dealer. C) the prisoners' dilemma. D) poker. Answer: D Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

45) A game in which any gains within the group are exactly offset by equal losses by the end of the game is a A) positive-sum game. B) zero-sum game. C) strategy. D) negative-sum game. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 46) Any rule that is used to make a choice is a A) positive-sum game. B) zero-sum game. C) strategy. D) rational decision. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 47) Your teacher decides to play a game where every student must contribute a dollar. All money collected is distributed at the end of the game among the students. This is an example of a A) positive-sum game. B) zero-sum game. C) strategy. D) negative-sum game. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

48) A dominant strategy is one that A) yields a position of the winner so long as the other participants act as planned. B) every participant in the game will follow. C) turns a negative-sum game into a positive-sum game. D) always yields the highest benefit regardless of what the other players do. Answer: D Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 49) Actions that ignore the possible long-run benefits of cooperation and focus solely on shortrun gains are A) a zero-sum game. B) a negative-sum game. C) tit-for-tat strategic behavior. D) opportunistic behavior. Answer: D Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 50) Cooperation that continues as long as the players continue to cooperate is A) a zero-sum game. B) a negative-sum game. C) tit-for-tat strategic behavior. D) opportunistic behavior. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

51) People do NOT usually behave in a noncooperative fashion even when it is in their immediate interest to do so because A) they realize such behavior is immoral. B) they know there can be 2 winners. C) they know they will have repeated dealings with the other people. D) they understand the difficulties with game theory. Answer: C Diff: 3 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 52) When oligopolistic companies engage in collusion, the companies are involved in a A) noncooperative game. B) negative-sum game. C) competitive game. D) cooperative game. Answer: D Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 53) When a player in a game adopts a strategy which always yields the highest benefit regardless of what the other player does, that player is using a(n) A) opportunistic strategy. B) dominant strategy. C) tit-for-tat strategy. D) aggressive strategy. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

54) A game in which all the players are better off at the end of the game is a A) tit-for-tat game. B) dominant strategy game. C) positive-sum game. D) noncooperative game. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 55) A game in which all the players are worse off at the end of the game is a A) negative-sum game. B) dominant strategy game. C) positive-sum game. D) noncooperative game. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 56) A game in which any gains by the group are exactly offset by equal losses by the end of the game is called the A) negative-sum game. B) zero-sum game. C) positive-sum game. D) cooperative game. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

57) The manner in which one oligopolist reacts to a change in price, output, or quantity on the part of another oligopolist in the industry is known as A) a positive-sum game. B) the reaction function. C) a noncooperative game. D) a zero-sum game. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 58) The analytical framework in which two or more individuals, companies, or nations compete for certain payoffs that depend on the strategy that others employ is A) game theory. B) opportunistic behavior. C) the dominant equilibrium. D) the tit-for-tat equilibrium. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 59) Decision makers in oligopolistic firms must devise a strategy. One that yields the highest benefit, regardless of what the other players do is a A) pricing strategy. B) rule-of-thumb strategy. C) dominant strategy. D) revenue strategy. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

60) The payoff matrix shows all of the following EXCEPT

A) if both oligopolists choose a high price, each makes $6 million. B) if they both choose a low price, each makes $4 million. C) if one chooses a low price and the other doesn't, the low priced firm will make $8 million. D) if one oligopolist chooses a high price and the other doesn't, the high-priced firm makes $8 million. Answer: D Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 61) In game theory, actions such as cheating that focus solely on short-run gains are referred to as A) territorial behavior. B) tit-for-tat strategic behavior. C) predatory behavior. D) opportunistic behavior. Answer: D Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

62) In game theory, behavior that results in cooperation as long as the other players continue to cooperate, is referred to as A) nice behavior. B) tit-for-tat strategic behavior. C) simple behavior. D) opportunistic behavior. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 63) The way in which an oligopolist acts in response to a price change by a competitor is known as a A) zero-sum game. B) positive-sum game. C) reaction function. D) cooperative game. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 64) When OPEC meets to set production levels, this organization is playing a A) negative sum game. B) cooperative game. C) non-cooperative game. D) reaction function game. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

65) When Goodyear increases its production when Michelin reduces its production, Goodyear is playing a A) negative-sum game. B) cooperative game. C) non-cooperative game. D) reaction function game. Answer: C Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 66) A game in which any gains one player makes are offset by equal losses by another player is known as a A) zero-sum game. B) positive-sum game. C) negative-sum game. D) cooperative game. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 67) A game in which players collectively lose is known as a A) zero-sum game. B) positive-sum game. C) negative-sum game. D) cooperative game. Answer: C Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

68) A game in which players collectively gain is known as a A) zero-sum game. B) positive-sum game. C) negative-sum game. D) cooperative game. Answer: B Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 69) Games can be judged according to the payoffs A) as zero-sum, negative-sum, and positive-sum games. B) as collusive or noncollusive games. C) as competitive or noncompetitive games. D) whether all companies participate or not. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 70) Which of the following statements concerning the prisoners' dilemma is TRUE? A) The player who moves last will always win. B) Confessing is the dominant strategy for both players. C) Neither player will pick the dominant strategy. D) The player who moves first will always win. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 71) The prisoners' dilemma shows that A) players are better off if they act independently. B) a game always ends in a positive sum condition. C) people will always cheat. D) players could be better off if they cooperated. Answer: D Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

72) An action that is the best choice under all conditions is known as the A) profit-maximizing strategy. B) prisoners' dilemma. C) tit-for-tat strategy. D) dominant strategy. Answer: D Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 73) When a cartel breaks down and its members start cheating, the behavior in the industry becomes a A) noncooperative game. B) zero-sum game. C) high stakes game. D) positive sum game. Answer: A Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 74) Opportunistic behavior by oligopolies means A) that firms cooperate in both the long run and in the short run to prevent others from entering the industry. B) that firms cooperate in the short run for current gains. C) that firms refuse to cooperate in the short run. D) that firms refuse to honor their product guarantees. Answer: B Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

75) A dominant strategy is a A) last-mover strategy. B) negative-sum strategy. C) player's best strategy when she can make the first move. D) player's best strategy regardless whatever strategies are adopted by the rivals. Answer: D Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 76) Explain the basic operations of an economic game. Answer: Games can be either cooperative, in which the firms collude, or noncooperative. The players of the game are the decision-makers in oligopolistic firms, and they devise strategies, which are rules used to make a decision. Payoffs are the outcomes of the strategies employed by all of the players. Diff: 1 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 77) Firms faced with prisoners' dilemma can always make more profits by engaging in opportunistic behavior. Why is this type of behavior NOT commonly found even in oligopolistic markets? Answer: The prisoners' dilemma describes noncooperative behavior, but in reality most businesses engage in repeat transactions so that cooperation is likely to occur. One cooperative strategy is tit-for-tat behavior. Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

78) Explain how the prisoners' dilemma can be used to examine pricing strategies in an oligopoly. Answer: The players can choose either a high-price strategy or a low-price strategy. If both choose high, they each make substantial profits. If both choose low, they each make smaller profits. If one chooses high and the other low, the one who chooses high makes low profits and the other makes the most profits possible. Each firm will choose low because that is their dominant strategy—regardless of what the other firm does, a firm has higher profits if it chooses the low-price strategy. When both choose low, though, their profits are less than they could have been. Diff: 2 Topic: 26.3 Strategic Behavior and Game Theory Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 26.4 The Cooperative Game: A Collusive Cartel 1) A group of firms that try to work together to earn monopoly profits is called a(n) A) monopolistic merger. B) public enterprise. C) cartel. D) natural monopoly. Answer: C Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 2) According to game theory, a cartel of several firms is an example of a(n) A) zero-sum game. B) positive-sum game. C) cooperative game. D) noncooperative game. Answer: C Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

3) An example of a cooperative game would be A) oligopoly. B) monopolistic competition. C) a cartel. D) perfect competition. Answer: C Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 4) An association of producers in an industry that agree to set common prices and output quotas to prevent competition is A) a tariff. B) a patent. C) economies of scale. D) a cartel. Answer: D Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 5) Which of the following is NOT true about a cartel? A) Members earn economic profits. B) Members experience large economies to scale relative to industry demand. C) Cartels will set common prices for their members. D) Members of a cartel will have production quotas. Answer: B Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

6) The main objective of the members of a cartel is to A) earn economic profits. B) produce efficiently. C) make the industry more competitive. D) obtain a patent. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 7) A group of producers that agree to coordinate their production is called a A) cartel. B) monopoly. C) free market competition. D) vertical merger. Answer: A Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 8) In a cartel, firms jointly act as A) a monopolistically competitive firm. B) a perfectly competitive firm. C) a monopoly firm. D) an oligopolistic firm. Answer: C Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 9) An association of producers that fixes common prices and output quotas is known as a A) cartel. B) common selling organization. C) joint-marketing arrangement. D) trade association. Answer: A Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 71 Copyright © 2021 Pearson Education, Inc.

10) Which of the following is LEAST likely to be a reason for firms to form a cartel? A) to maximize profits of the cartel B) to raise competition among firms in the cartel C) to cut back output of the cartel D) to set common prices among firms in the cartel Answer: B Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 11) Cheating in a cartel is more likely to occur if the industry A) has a large number of firms. B) has homogeneous products. C) has easily observable prices. D) has little ability to affect market prices. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 12) A cartel is a form of A) collusion. B) vertical merger. C) noncooperative competition. D) negative sum game. Answer: A Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

13) The success of a cartel rests upon A) inducing all members to limit their combined output and charge the same price. B) inducing all members to differentiate their products and charge different prices. C) making exit from the cartel as nearly costless as possible. D) discouraging some firms in the market from joining. Answer: A Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 14) Which of the following is LEAST likely to be an outcome of a cartel as compared to the situation before the cartel was formed? A) Cartel members charge higher prices. B) Cartel members reduce production. C) Cartel members make fewer profits. D) Cartel members do not compete with each other in pricing decisions. Answer: C Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 15) After participating members of a cartel form an agreement on common prices and output quotas, then an individual firm can increase its own profits by A) increasing production. B) increasing prices. C) leaving the cartel. D) incurring higher input costs. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

16) After participating members of a cartel form an agreement on common prices and output quotas, then an individual firm can increase its own profits by A) decreasing production. B) decreasing prices. C) advertising. D) paying its employees higher wages. Answer: B Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 17) Which of the following is a condition that helps enforce a cartel agreement? A) a large number of firms B) relatively differentiated products C) easily observable prices D) large variation in prices Answer: C Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 18) Which of the following is NOT a condition that helps enforce a cartel agreement? A) a small number of firms B) nearly homogeneous products C) easily observable prices D) large variation in input prices Answer: D Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

19) One of the fundamental problems a cartel faces is A) to determine how much each producer will decrease its output. B) to determine how much each producer will increase its output. C) to determine how much each producer will lower it price. D) to determine how much each producer will lower its profit. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 20) Cartel agreements are more likely to break down when A) there are few variations in market demand. B) new firms enter the market. C) participating firms earn huge profits. D) none of these. Answer: B Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 21) A cartel is likely to last longer if A) more new firms enter the market. B) the profits of participating members are relatively stable. C) market prices vary more over time. D) there are more firms in the industry. Answer: B Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 22) The goal of a cartel is to A) increase competition among members. B) maximize industry profits. C) increase industry supply. D) none of these Answer: B Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

23) A cartel most likely forms in A) an oligopolistic market. B) a perfectly competitive market. C) a monopolistically competitive market. D) a heavily regulated industry. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 24) A member in a cartel can earn more profits by A) charging a slightly lower price and raising production. B) producing less than the agreed rate. C) selling less than the agreed amount. D) none of these Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 25) A cartel will break down more easily if A) there are only a few members. B) industry demand is very stable. C) market prices can be observed easily. D) there are many entrants in the industry. Answer: D Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

26) In a cartel, participating members can cheat by A) letting more entrants join the cartel. B) leaving the industry. C) producing a lower production level than the cartel quota. D) charging a slightly lower price and raising production. Answer: D Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 27) A cartel is A) a group of producers that agree to set common prices and output quotas. B) a group of consumers that bid against each other for the same product. C) a government agency that regulates markets. D) an arbitrator to settle disputes between consumers and producers. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 28) Between 1986 and 1998 the De Beers company controlled the world diamond market. De Beers and its affiliated association of producers restricted diamond sales to maximize profits. De Beers and its association was "the only game in town" and had what is known as A) a cartel. B) a duopoly. C) monopolistic competitor. D) perfect competitor. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

29) A cartel behaves like A) a monopolistically competitive firm. B) a perfectly competitive firm. C) a monopolist. D) an oligopolistic firm. Answer: C Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 30) If three firms of similar sizes join to form a cartel, then it is most likely that A) they will charge a common, higher market price. B) they will collectively produce more than before. C) all three firms will stop producing. D) all three firms will earn zero profits. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 31) If five firms of similar sizes join to form a cartel, then it is most likely that A) they will charge a common, lower market price. B) they will collectively produce less than before. C) all five firms will earn the same profits as before. D) all five firms as a group will have falling profits, but increased output. Answer: B Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 32) When oligopolistic firms in an industry form a cartel, then it is most likely that A) both industry output and prices will increase. B) both industry output and prices will decrease. C) industry output will increase while prices will decrease. D) industry output will decrease while prices will increase. Answer: D Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 78 Copyright © 2021 Pearson Education, Inc.

33) An association of producers in an industry that agree to set common prices and output quotas to prevent competition is A) an oligopolist. B) a monopolistic competitor. C) a constrained monopoly. D) a cartel. Answer: D Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 34) A group of producers that agree to set common pricing or output goals is known as a A) cartel. B) conglomerate. C) perfect competitor. D) monopoly. Answer: A Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 35) What is a cartel? Can cartels generate long-term profits without the existence of barriers to entry? Answer: A cartel is an association of producers in an industry that agree to set common prices and output quotas to prevent competition. If they successfully earn profits, new firms will enter, so barriers to entry are still needed. Diff: 1 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 36) Why do firms form a cartel? How do cartels achieve their goals? Answer: Firms form a cartel in order to maximize their combined profits by acting as a single producer. To do so, they agree on setting common prices and output quotas for participating members. Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 79 Copyright © 2021 Pearson Education, Inc.

37) What are the main characteristics that make it more likely for a cartel to enforce agreements among participating members? Answer: A cartel is more effective in enforcing agreements if there are a small number of firms, relatively homogeneous products, easily observable prices, and little variation in prices. Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 38) Why would a member of a cartel cheat? Answer: After setting a common price or production quotas, a member of a cartel can earn more profits individually by "cheating": setting a slightly lower price than the cartel price and producing and selling more output than specified under the cartel agreement. Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 39) Why do cartels often break down? Answer: Cartels often break down because of the incentives for each individual member of the cartel to reduce its own price slightly and increase its production in order to reap more profits than those under a cartel agreement. Also, economic profits due to the cartels often provide an incentive for new firms to enter the market and act as a cheating cartel member. Diff: 2 Topic: 26.4 The Cooperative Game: A Collusive Cartel Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 26.5 Network Effects and Two-Sided Markets 1) When a consumer's willingness to buy a good or service is influenced by the number of people who have purchased that good or service, this is called A) a switching cost. B) an opportunity cost. C) a network effect. D) an advertising gimmick. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

2) For years, your neighbor insisted she had no desire to own a computer. Recently, however, she purchased one and says she did so because all her relatives have computers and she wants to exchange e-mail with them. Your neighbor's behavior is an example of A) a switching cost. B) the impact of negative market feedback. C) limited-pricing behavior. D) a network effect. Answer: D Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 3) For years, your parents claimed they had no desire to join a social web site. Recently, however, they joined one and said they did so because all their relatives have joined the same site with them. Your parents' behavior is an example of A) a switching cost. B) a network effect. C) the impact of perfectly competitive market feedback. D) the impact of negative market feedback. Answer: B Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 4) A network effect arises whenever A) firms in an oligopolistic industry engage in limit pricing. B) firms in an oligopolistic industry engage in a zero-sum game. C) a consumer's willingness to purchase a good or service is influenced by how many others also buy or have bought the item. D) a producer's willingness to produce a good or service is influenced by how many other firms also produce or have produced the item. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

5) When there is a tendency for a particular product to come into favor with additional consumers because other consumers have chosen to purchase the product, A) negative market feedback occurs. B) positive market feedback occurs. C) there is no dominant strategy. D) a price war must result. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 6) When there is a tendency for a particular product to fall out favor with additional consumers because other consumers have chosen not to purchase the product, A) negative market feedback occurs. B) positive market feedback occurs. C) the tit-for-tat strategy will begin. D) the network effect will decrease. Answer: A Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 7) Negative market feedback refers to a tendency for A) one or two firms in an oligopolistic industry to respond to price decreases by initiating efforts to engage in price leadership. B) a particular product to fall out of favor with additional consumers because other consumers have stopped purchasing the product. C) the dominant firm in an oligopolistic industry to react to competing firms' price increases by decreasing the price of its own product. D) price wars to break out in oligopolistic industries in which firms produce products possessing characteristics that make them prone to network effects. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

8) Positive market feedback refers to a tendency for A) potential entrants to an oligopolistic industry to respond to entry deterrence strategies by contemplating setting their prices above prices established by firms already in the industry. B) potential entrants to an oligopolistic industry to respond to entry deterrence strategies by contemplating producing more output than the quantities produced by firms already in the industry. C) a particular product to come into favor with additional consumers because other consumers have chosen to purchase the product. D) price leaders to respond to an increase in market demand by increasing the prices of their products. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 9) A network effect exists whenever A) a firm's willingness to produce a particular good or service is influenced by the costs of inputs it must utilize in order to manufacture the item. B) a consumer's willingness to purchase a particular good or service is influenced by how many others also buy or have bought the item. C) a firm's willingness to purchase a particular factor of production depends on the other types of inputs it utilizes to manufacture an item. D) a consumer's willingness to purchase a particular good or service is influenced by the prices of other complementary or substitute items. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 10) A situation where a consumer's willingness to use an item depends on how many others use it is A) a positive-sum game. B) a network effect. C) price-leadership. D) a vertical merger. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

11) When network effects are important, then an industry can experience A) positive market feedback. B) prince-leadership. C) a zero-sum game. D) a vertical merger. Answer: A Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 12) When a new product is introduced in the market, a consumer always wants to see how popular the item becomes before she purchases it. The consumer's behavior is known as A) overt collusion. B) an irrational choice. C) a network effect. D) a rational decision. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 13) When a falloff in usage of a product by some consumers causes others to stop purchasing the item there is A) a dominant effect. B) a negative-sum game. C) a tit-for-tat feedback. D) negative market feedback. Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

14) A tendency for a good to come into favor with consumers because other consumers have chosen to buy the item is A) price-leadership. B) a negative-sum game. C) positive market feedback. D) negative market feedback. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 15) Frank purchases snickle-dees only because his friends do. This is a A) dominant strategy B) negative-sum game. C) positive market feedback. D) negative market feedback. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 16) Megan listens to rap music because her friends do. This is A) a positive-sum game. B) collusion. C) positive market feedback. D) negative market feedback. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

17) David has decided not to purchase another can of Stosh because his friends laughed at him the last time he purchased some. Stosh is no longer a popular item. David's decision is known as A) price-leadership. B) negative-sum game. C) positive market feedback. D) negative market feedback. Answer: D Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 18) Because all of his friends stopped exclusively wearing black clothes, Roberto wears anything but black clothes. This is known as A) a negative sum game. B) collusion. C) positive market feedback. D) negative market feedback. Answer: D Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 19) In an industry with network effects and differentiated products, it is possible for the industry to become an oligopoly if A) they engage in a zero-sum game. B) they use a price-leadership model. C) they use a kinked demand curve model. D) a few firms reap most of the sales gains resulting from positive market feedback. Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

20) The idea that if enough consumers cut back on their use of a product it induces other consumers to do the same is referred to as A) positive market feedback. B) non-dynamic market feedback. C) negative market feedback. D) elicit market feedback. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 21) People's willingness to buy an iPhone or Android phone depends on how popular the smartphone format is among other consumers. This is an example of A) a cartel. B) an opportunity cost. C) a network effect. D) the prisoners' dilemma. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 22) Which of the following is NOT subject to a network effect? A) the layout of the keys on your keyboard B) rotating your tires every six months C) listening to popular songs D) purchasing a new LED TV set Answer: B Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

23) An example of a positive market feedback is A) installation of a phone app. B) routine maintenance on a car. C) the declining use of land-line telephones for long distance calls. D) the use of telegraph services in the twenty-first century. Answer: A Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 24) How can network effects lead an industry to become an oligopoly? Answer: If a few firms selling products subject to network effects can differentiate them from other products, and if the products from these few firms experience positive market feedback, then that group of firms will capture the bulk of industry sales. Consequently, oligopoly is likely to emerge as the prevailing market structure. Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 25) The main function of a platform firm is to A) deal with the government on behalf of sellers. B) link producers with consumers. C) perform collective bargaining with sellers on behalf of buyers. D) create entry barriers for an industry on behalf of existing firms. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 26) In a two-sided market, a firm that provides services that link together groups of consumers and producers is called a(n) A) end user. B) platform. C) monopoly. D) tit-for-tat. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 88 Copyright © 2021 Pearson Education, Inc.

27) In the television broadcasting industry, ________ is an end user and ________ is a platform. A) an advertiser; a TV service provider B) an advertiser; a TV regulatory agency C) a TV service provider; a TV maker D) a TV maker; TV audience Answer: A Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 28) A realtor in the real estate market is an example of A) an end user in a shared-input market. B) a platform in a shared-input market. C) a platform in a matchmaking market. D) an end user in a matchmaking market. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 29) Credit card companies that operate as intermediary firms between credit card holders and business vendors are best described as A) platforms in a shared-input market. B) end users in a shared-input market. C) platforms in a transaction-based market. D) end users in a transaction-based market. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

30) In the wireless communication industry, firms that provide broadband access to the Internet are best regarded as A) platforms in a shared-input market. B) end users in a shared-input market. C) platforms in a matchmaking market. D) end users in a matchmaking market. Answer: A Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 31) In the industry of phone apps, end users are A) advertisers only. B) app users only. C) both advertisers and app users. D) no one. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 32) A radio station is best described as A) an end user in a transaction-based market. B) a platform in an audience-making market. C) an end user in a matchmaking market. D) a platform in a shared-input market. Answer: B Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

33) An online dating firm is A) a platform in a shared-input market. B) an end user in a matchmaking market. C) a platform in a matchmaking market. D) an end user in a shared-input market. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 34) In a two-sided market with network effects, the platform will most likely A) set the same prices for the two sides of the market. B) set different prices for the two sides of the market. C) set a price of zero for both sides of the market. D) combine the two groups of the market before setting its price. Answer: B Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 35) In a two-sided market, an intermediary firm that links groups of producers and consumers is called A) an operator. B) an oligopoly. C) a platform. D) an end user. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

36) The network effect in the TV broadcasting industry results in A) a positive market feedback between the number of advertisers and the size of TV audience. B) a negative market feedback between the number of advertisers and the size of TV audience. C) a positive market feedback between the number of advertisers and the number of TV channels. D) a negative market feedback between the number of advertisers and the number of TV channels. Answer: A Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 37) In a two-sided market, the platform may offer different prices to different group of end users due to A) the budget constraints of end users. B) substitution effects between the end users and the platform. C) different network effects between groups of end users. D) a lack of product differentiation in the products sold. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 38) In the mobile device industry, an example of a platform firm is A) a mobile apps developer. B) a developer of mobile device operation systems. C) a retailer of mobile device accessories. D) a provider of wifi networks. Answer: B Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

39) In a two-sided market with network effects, the platform will likely A) charge a lower price for end users that are more affected by a positive market feedback. B) charge a higher price for end users that are more affected by a positive market feedback. C) charge a zero price for all end users regardless of the market feedback effects. D) randomly charge end users. Answer: B Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 40) Why would Apple subsidize developers of mobile applications that operate with its iPhone's operating system? A) There is a positive market feedback from the mobile applications to consumer's willingness to buy iPhones. B) Apple attempts to ensure that all developers of mobile applications are profitable. C) Apple thinks iPhones are too cheap for consumers. D) Applies attempts to create competition among developers of its mobile applications. Answer: A Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 41) In industries in which strong network effects exist, which market structure is likely to emerge? A) perfect competition B) monopoly C) monopolistic competition D) oligopoly Answer: D Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

42) Other things being equal, which market structure would produce the least output and the highest average product price? A) monopoly B) oligopoly C) monopolistic competition D) perfect competition Answer: A Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 43) Other things being equal, which market structure is most likely to yield the greatest industry long-run economic profit? A) monopolistic competition B) oligopoly C) monopoly D) perfect competition Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 44) In which market structure does a firm have the LEAST influence over the market price? A) monopoly B) monopolistic competition C) oligopoly D) perfect competition Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

45) Product differentiation always exists in A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 46) Firms face downward-sloping demand curves in A) monopolies only. B) monopolies and oligopolies only. C) monopolies and oligopolies that collude only. D) all market structures except perfect competition. Answer: D Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 47) If we observe firms earning zero economic profits in the short run, we know that A) the industry must be perfectly competitive. B) the industry must be either perfectly competitive or monopolistically competitive. C) there must not be any barriers to entry. D) any market structure is possible since firms under any market structure can earn zero profits at some time. Answer: D Diff: 3 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-9: Discuss the fundamental characteristics of firms AACSB: Analytical thinking 48) The market structure of oligopoly is when A) there are a small number of interdependent firms that constitute the entire market. B) there is a single producer of a product. C) there are many producers of a differentiated product. D) there are many producers of a homogeneous product. Answer: A Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 95 Copyright © 2021 Pearson Education, Inc.

49) The market structure of monopoly exists when A) there are a small number of interdependent firms that constitute the entire market. B) there is a single producer of a product. C) there are many producers of differentiated products. D) there are many producers of a homogeneous product. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 50) The market structure of monopolistic competition exists when A) there are a small number of interdependent firms that constitute the entire market. B) there is a single producer of a product. C) there are many producers of differentiated products. D) there are many producers of a homogeneous product. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 51) The market structure of perfect competition exists when A) there are a small number of interdependent firms that constitute the entire market. B) there is a single producer of a product. C) there are many producers of differentiated products. D) there are many producers of a homogeneous product. Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

52) In which market structures is the firm able to earn long-run economic profits? A) perfect competition and monopolistic competition B) monopolistic competition and oligopoly C) oligopoly and monopoly D) monopolistic competition, oligopoly and monopoly Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 53) In which market structures does a firm have at least some ability to set the market price? A) perfect competition and monopolistic competition B) monopolistic competition and oligopoly C) oligopoly and monopoly D) monopolistic competition, oligopoly and monopoly Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 54) In which market structures do firms engage in nonprice competition? A) perfect competition and monopolistic competition B) monopolistic competition and oligopoly C) oligopoly and monopoly D) perfect competition and monopoly Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 55) In which market structures do firms earn long-term profits of zero? A) perfect competition and monopolistic competition B) monopolistic competition and oligopoly C) oligopoly and monopoly D) perfect competition and monopoly Answer: A Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 97 Copyright © 2021 Pearson Education, Inc.

56) In which market structures is there product differentiation? A) perfect competition and monopolistic competition B) monopolistic competition and oligopoly C) oligopoly and monopoly D) perfect competition and monopoly Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 57) Monopolistically competitive markets and oligopolies are similar in that A) the number of firms is identical. B) the kinked demand curve can be used to analyze the firms' pricing decisions. C) there is mutual interdependence amongst the firms. D) nonprice competition is a tool used. Answer: D Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 58) A market with many sellers, no influence over price, no barriers to entry, a homogeneous product, and an absence of non-price competition is known as A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: A Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking

59) A market with many sellers, some influence over price, low barriers to entry, a differentiated product, and non-price competition often taking the form of advertising is known as A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: B Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 60) A market with few sellers, some influence over price, high barriers to entry, a differentiated product, and non-price competition is known as A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 61) A market with one seller, considerable influence over price, high barriers to entry, a homogeneous product, and non-price competition to allow for price discrimination is known as A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

62) Which is FALSE about perfect competition? A) There are numerous sellers. B) Market entry and exit is unrestricted. C) There is no ability to set price. D) There is considerable product differentiation. Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 63) All of the following are true regarding oligopoly EXCEPT A) there are few sellers. B) there is some ability to set price. C) there is no competition. D) entry and exit is partially restricted. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 64) Which of the following is NOT a characteristic of pure monopoly? A) many sellers B) considerable price setting ability C) restricted ability to enter market D) Long-run economic profits are possible. Answer: A Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 65) Long-run economic profits are possible under A) perfect competition and oligopoly. B) monopolistic competition and monopoly. C) oligopoly and monopoly. D) monopolistic competition and oligopoly. Answer: C Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking 100 Copyright © 2021 Pearson Education, Inc.

66) Retail trade is an example of A) perfect competition. B) oligopoly. C) monopoly. D) monopolistic competition. Answer: D Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-15: Discuss the role of differentiation in monopolistic competition in comparison to other market conditions AACSB: Analytical thinking 67) Agriculture is an example of A) perfect competition. B) oligopoly. C) monopoly. D) monopolistic competition. Answer: A Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 68) The college textbooks market is an example of A) perfect competition. B) oligopoly. C) monopoly. D) monopolistic competition. Answer: B Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

69) A local utility is an example of A) perfect competition. B) oligopoly. C) monopoly. D) monopolistic competition. Answer: C Diff: 1 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 70) Unrestricted entry and exit into the market is found in A) perfect competition and monopolistic competition. B) perfect competition and oligopoly. C) monopolistic competition and oligopoly. D) perfect competition, monopolistic competition and oligopoly. Answer: A Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-13: Explain the relationship between production and profits under perfect competition AACSB: Analytical thinking 71) How does the presence of network effects in a two-sided market affect the pricing behavior in the market? Answer: In a two-sided market, platform firms may set different prices for groups of end users with different network effects. Platform firms are intermediary firms that link together groups of producers and consumers as end users. In a transaction-based market for credit cards, for example, credit card issuers are platforms while retailers and credit card holders are end users. Credit card issuers may find network effects to be greater for retailers than for credit card holders. As such, retailers' willingness to accept credit cards responds to greater customer use more strongly than customers' willingness to use the cards responds to retailers' acceptance. If both retailers and card holders are equally responsive to changes in card fees, then credit card issuers would find it more profitable to charge lower card-usage fees to card holders than to retailers. Diff: 2 Topic: 26.5 Network Effects and Two-Sided Markets Learning Outcome: Micro-16: Discuss the functions of cooperation, competition, and public policies in oligopolies AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 27 Regulation and Antitrust Policy in a Globalized Economy 27.1 Forms of Industry Regulation 1) U.S. government regulation of social and economic activity A) only began after World War II. B) costs less now than it did in the 1980s. C) has increased steadily since 1970. D) is confined to antitrust law. Answer: C Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 2) The Federal Trade Commission is an agency that would enforce A) social regulation. B) economic regulation. C) antitrust laws. D) fair pricing for consumers. Answer: A Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 3) Which of the following government agencies enforces social regulation? A) Environmental Protection Agency B) Federal Deposit Insurance Corporation C) Federal Reserve D) Securities and Exchange Commission Answer: A Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

4) The two basic types of government regulation are A) regulation of natural monopolies and regulation of cartels. B) economic regulation and industry regulation. C) social regulation and labor law. D) social regulation and economic regulation. Answer: D Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 5) Which of the following is NOT an objective of economic regulation? A) to regulate the prices enterprises are allowed to charge B) to fix prices so that they are never allowed to rise C) to keep rates of return in an industry at a competitive level D) to prevent monopoly profits Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) The Securities and Exchange Commission and the Federal Aviation Administration are examples of agencies engaged in A) the regulation of natural monopolies. B) the regulation of nonmonopolistic industries. C) social regulation. D) health and safety regulation. Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

7) Which of the following federal agencies is NOT engaged in social regulation? A) Environmental Protection Agency B) Federal Trade Commission C) Food and Drug Administration D) Federal Deposit Insurance Corporation Answer: D Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) Which of the following federal agencies is NOT engaged in economic regulation? A) the Federal Reserve B) Federal Aviation Administration C) Food and Drug Administration D) Federal Deposit Insurance Corporation Answer: C Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) Which type of regulation applies to all firms in the economy, as opposed to only covering specific industries? A) economic regulation B) social regulation C) rate regulation D) statutory regulation Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

10) Commonwealth Edison is the only provider of electricity to many households in the Chicago area. Commonwealth Edison is regulated by the government. This type of regulation is known as A) the Federal Register. B) social regulation. C) the market share test. D) economic regulation. Answer: D Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) The regulation of the prices charged by insurance companies is known as A) fiscal policy. B) social regulation. C) the market share test. D) economic regulation. Answer: D Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) The Federal Trade Commission (FTC) is a regulatory agency that is responsible for preventing firms from engaging in misleading advertising. This type of regulation is known as A) extortion. B) social regulation. C) the market share test. D) economic regulation. Answer: B Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

13) Which of the following protects people from incompetent or unscrupulous producers? A) the Federal Register B) social regulation C) antitrust policy D) economic regulation Answer: B Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) According to OSHA standards, the air in the building that a person works in is unsafe. The type of regulation that OSHA engages in is known as A) command and control. B) social regulation. C) the market share test. D) economic regulation. Answer: B Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) One of the basic differences between social and economic regulations is that A) economic regulations only apply to financial institutions while social regulations apply to a greater variety of institutions. B) social regulations only apply to non-profit organizations while economic regulations apply only to for-profit organizations. C) economic regulations cover only particular industries while social regulations apply to all firms in the economy. D) economic regulations focus on the banking industry while social regulations focus on monopolies. Answer: C Diff: 3 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

16) One key purpose of economic regulation is A) to force a firm to produce at the point at which marginal cost equals marginal revenue. B) to control the quality of service provided by a monopolist. C) to control the price that regulated enterprises are allowed to charge. D) to focus on the impact of production on the environment and society, the working conditions under which goods and services are produced, and sometimes the physical attributes of goods. Answer: C Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) Which of the following federal agencies is engaged in social regulation? A) Equal Employment Opportunity Commission B) Office of the Comptroller of the Currency C) the Securities and Exchange Commission D) Federal Deposit Insurance Corporation Answer: A Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 18) Which of the following federal agencies is engaged in economic regulation? A) Occupational Safety and Health Administration B) Federal Motor Carrier Safety Administration C) Food and Drug Administration D) Consumer Product Safety Commission Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

19) Cab drivers operating from JFK Airport to the City of New York legally must charge a specific fare. This is an example of A) social regulation. B) economic regulation. C) the market share test. D) the rate of return test. Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 20) The goals of rate regulation have included the prevention of A) monopoly profits. B) oligopolistic pricing. C) marginal cost pricing. D) average cost pricing. Answer: A Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 21) A difference between economic regulation and social regulation is that A) the former tends to affect the prices at which products are sold and the latter does not. B) the former tends to affect the profits of firms and the latter does not. C) the former tends to be specific to an industry and the latter tends to affect firms in all industries. D) the former tends to be done at the state level and the latter at the federal level. Answer: C Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

22) The purpose of social regulation is A) to force a firm to produce at the point where marginal cost equals marginal revenue. B) to control the quality of service provided by a monopolist. C) to control the price that regulated enterprises are allowed to charge. D) to focus on the impact of production on the environment and society, the working conditions under which goods and services are produced, and sometimes the physical attributes of goods. Answer: D Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 23) The major goal of social regulation is A) a better quality of life through a less polluted environment, better working conditions, and safer and better products. B) to make sure that firms are not earning monopoly profits. C) to make sure that prices are kept low enough so that every person can purchase the good. D) to make sure that the firm produces at the socially optimal point of production. Answer: A Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 24) All of the following are regulatory agencies EXCEPT A) the National Rifle Association. B) the Environmental Protection Agency. C) the Food and Drug Administration. D) the Occupational Safety and Health Administration. Answer: A Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

25) This agency is responsible for preventing businesses from engaging in misleading advertising, unfair trade practices, and monopolistic actions, as well as for protecting consumer rights. A) Environmental Protection Agency B) Food and Drug Administration C) Equal Employment Opportunity Commission D) Federal Trade Commission Answer: D Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 26) This agency is responsible for regulating the quality and safety of foods, health and medical products, pharmaceuticals, cosmetics, and animal feed. A) Environmental Protection Agency B) Food and Drug Administration C) Equal Employment Opportunity Commission D) Federal Trade Commission Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27) This agency is responsible for investigating complaints of discrimination based on race, religion, sex or age in hiring, promotion, firing, wages, testing, and all other conditions of employment. A) Environmental Protection Agency B) Food and Drug Administration C) Equal Employment Opportunity Commission D) Federal Trade Commission Answer: C Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

28) This agency develops and enforces environmental standards for air, water, toxic waste, and noise. A) Environmental Protection Agency B) Consumer Product Safety Commission C) Equal Employment Opportunity Commission D) Occupational Safety and Health Administration Answer: A Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 29) This agency regulates workplace safety and health conditions. A) Environmental Protection Agency B) Consumer Product Safety Commission C) Equal Employment Opportunity Commission D) Occupational Safety and Health Administration Answer: D Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 30) This agency is responsible for protecting consumers from products posing fire, electrical, chemical, or mechanical hazards or dangers to children. A) Environmental Protection Agency B) Consumer Product Safety Commission C) Equal Employment Opportunity Commission D) Occupational Safety and Health Administration Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

31) The two basic types of government regulation are A) monopoly and oligopoly regulation. B) labor and environmental regulation. C) federal and state industrial regulation. D) economic and social regulation. Answer: D Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 32) While economic regulation applies to ________ industries, social regulation applies to ________ firms. A) particular; individual B) particular; all C) all; individual D) utility; healthcare Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33) Which of the statements best describes the difference between economic regulation and social regulation? A) There are no significant differences between economic and social regulation, social regulation is a more modern way of regulating an economy. B) Economic regulation focuses on output and price; social regulation focuses on improving the quality of life. C) Social regulation focuses on output and price; economic regulation focuses on quality of life issues. D) Social regulation targets industries like transportation, while economic regulation targets utilities. Answer: B Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

34) Since 1970, federal expenditures by regulatory agencies have A) remained constant. B) decreased slightly. C) increased dramatically. D) increased slightly. Answer: C Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 35) All of the following are forms of social regulation EXCEPT A) the Food and Drug Administration regulating the quality of drugs. B) the Public Utility Commission regulating the price of telephone service. C) the Environmental Protection Association regulating automobile emissions. D) the Occupational Safety and Health Administration regulating workplace safety. Answer: B Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 36) Regulation imposed by such organizations as the Food and Drug Administration or the Environmental Protection Agency seeking to protect the welfare of people in our nation is referred to as A) moral regulation. B) natural regulation. C) rate-of-return regulation. D) social regulation. Answer: D Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

37) The federal regulatory agency whose mission is to regulate workplace health and safety is the A) AFL-CIO. B) FTC. C) OSHA. D) SEC. Answer: C Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 38) Which of the following is concerned with social regulation? A) Federal Reserve Board B) Sherman Commission C) Food and Drug Administration D) Better Business Bureau Answer: C Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 39) An agency that regulates product markets is the A) Equal Employment Opportunity Commission. B) Environmental Protection Agency. C) Federal Trade Commission. D) Occupational Safety and Health Administration. Answer: C Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

40) An agency that regulates labor markets is the A) Equal Employment Opportunity Commission. B) Better Business Bureau. C) Federal Trade Commission. D) Consumer Product Safety Commission. Answer: A Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) Social regulation is focused on all of the following EXCEPT A) the impact of production on the environment and society. B) better working conditions, and safer and better products. C) a better quality of life through a less polluted environment. D) ensuring costs are minimized and benefits are maximized. Answer: D Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 42) The Federal Register A) itemizes state and local government spending. B) is used to track immigration. C) publishes all the new federal regulatory rules. D) has decreased in size. Answer: C Diff: 1 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 43) Financial markets are regulated by A) the Securities and Exchange Commission. B) the Stock and Bond Exchange Commission. C) the Security and Protection Commission. D) the Stock and Exchange Commission. Answer: A Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

44) What is the main difference between economic regulation and social regulation? Answer: Economic regulation involves only particular industries, including policies aiming at controlling prices or influencing the characteristics of specific products. In contrast, social regulation applies to all firms in the economy and aims at improving the quality of life by, for example, regulating product safety, advertising and environmental effects. Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 45) How does social regulation differ from economic regulation? Answer: Social regulation focuses on the impact of production on the environment, working conditions, and the safety of goods. Economic regulation is concerned with the prices and outputs of specific goods or services. Social regulation covers firms in all industries while economic regulation usually involves particular industries. Social regulation can have a much broader impact on the economy as a whole than economic regulation. Diff: 2 Topic: 27.1 Forms of Industry Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

27.2 Regulating Natural Monopolies

1) In the above figure, if this natural monopolist were forced to use marginal cost pricing, it would produce A) at Q1 output rate. B) at Q2 output rate. C) at Q3 output rate. D) past the Q3 output rate. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Application of knowledge 2) In the above figure, if this natural monopolist were unregulated, the profit maximizing firm would produce A) at Q1 output rate. B) at Q2 output rate. C) at Q3 output rate. D) past the Q3 output rate. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Application of knowledge

3) In the above figure, if this natural monopolist were regulated and allowed to earn a "fair" rate of return, it would produce A) at Q1 output rate. B) at Q2 output rate. C) at Q3 output rate. D) past the Q3 output rate. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Application of knowledge 4) In the above figure, if this natural monopolist were forced to use marginal cost pricing, it would sell the product at the price A) A. B) C. C) E. D) F. Answer: D Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Application of knowledge 5) In the above figure, if this natural monopolist were unregulated, the profit maximizing firm would sell the product at the price A) A. B) B. C) C. D) F. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Application of knowledge

6) In the above figure, if this natural monopolist were regulated and allowed to earn a "fair" rate of return, it would sell the product at the price A) A. B) B. C) C. D) F. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 7) If regulators force a natural monopoly to price as a perfectly competitive firm would, the natural monopolist A) will experience a lower marginal cost. B) will earn an economic loss. C) will expand its output. D) will experience a rise in long-term average costs. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) If a public service commission requires a natural monopoly to set its price equal to the longrun marginal cost, this will result in A) excessive economic profits to the monopoly. B) normal economic profits to the monopoly. C) losses to the monopoly. D) either economic profits or losses, depending on the efficiency of the monopoly. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

9) Suppose that a regulatory agency has imposed marginal cost pricing on a natural monopolist. We expect that A) the firm will earn only a normal profit. B) the firm's average total cost of production is rising over the relevant range of production. C) the firm will rise its price above marginal cost. D) the firm will earn economic losses. Answer: D Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 10) Regulators usually encourage natural monopolists to engage in A) marginal cost pricing. B) average cost pricing. C) marginal cost pricing, with subsidies from the government offsetting the losses. D) inefficient pricing. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) In a natural monopoly situation A) there are large economies of scale relative to demand. B) the firm has an upward-sloping average cost curve. C) producers try to differentiate their product with advertising. D) there is no need for government regulation. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

12) In average cost pricing, the natural monopoly would have to set price equal to A) average fixed cost. B) average variable cost. C) average total cost. D) marginal cost. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 13) In marginal cost pricing, the natural monopoly would have to set price equal to A) average fixed cost. B) average variable cost. C) average total cost. D) marginal cost. Answer: D Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 14) A natural monopoly owes its existence to A) control of a key input. B) persistently declining long-run average costs as scale increases. C) patents. D) increasing marginal returns and the ability to obtain quantity discounts from suppliers. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

15) A firm that has taken advantage of economies of scale and expanded to become the only producer in the market is A) a cartel. B) a natural monopoly. C) a monopolistic competitor. D) an oligopolist. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 16) For a natural monopoly, long-run average costs A) fall as output rises. B) rise as output rises. C) stay the same as output rises. D) stay the same as output falls. Answer: A Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 17) The price charged by a monopolist is socially inefficient because the price A) exceeds the true marginal cost of the resources used. B) is less than the opportunity cost of the resources used. C) puts the monopolist into a higher tax bracket. D) is too low. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

18) An unregulated natural monopolist would produce to the point at which A) P = ATC. B) MR = ATC. C) MR = MC. D) P = MR. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 19) A regulated natural monopolist allowed to earn a "fair" rate of return would produce to the point at which A) the price per unit equals the long-run average cost. B) the marginal revenue curve meets the long-run average cost curve. C) the marginal revenue curve meets the long-run marginal cost curve. D) the price per unit equals its marginal revenue. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 20) Without any regulation, the natural monopolist will A) not produce any output. B) produce to the point at which P = ATC. C) produce less output than it would if the industry was purely competitive. D) have an upward-shifting average cost curve. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

21) A natural monopoly that is NOT regulated will choose to produce at the A) minimum point of the long-run average cost curve. B) point at which marginal cost is above average total cost. C) point at which the demand curve intersects the long-run average cost curve. D) point at which marginal revenue equals marginal cost. Answer: D Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

22) In the above figure, which of the following statements is FALSE if the firm is operating at output level Q2? A) The output is equivalent to an unregulated monopolist. B) Economic profits are positive. C) The price is lower than at an equivalent firm forced by regulators to charge ATC pricing. D) Average costs would be lowered by expanding output. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking

23) One goal of rate-of-return regulation is the prevention of A) free market entry. B) positive economic profits. C) poor quality service. D) environmental degradation. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 24) The primary purpose of economic regulation of an industry is to A) control the prices charged by the regulated industry. B) increase taxes across the board. C) reduce output. D) control hiring and firing within the industry. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 25) If regulators disallow price increases requested by a natural monopoly that is currently earning an economic loss, quality of service will A) increase rapidly. B) likely fall. C) remain unchanged. D) none of these Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

26) Which of the following statements regarding economic regulation is TRUE? A) Economic regulation has failed by insisting that firms must be allowed to earn a normal rate of return. B) Rate-of-return regulation has been much more effective than cost-of-service regulation. C) Economic regulation deals only with rates of return, and not with prices. D) Economic regulation deals mainly with prices firms charge, but firms can alter their return by altering quality of service, effectively raising the price per constant-quality-unit. Answer: D Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27) With average cost pricing, the monopolist A) earns no accounting profit. B) produces where P = MC. C) earns a normal rate of return for its shareholders. D) does not cover opportunity costs. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 28) When promoting average cost pricing, regulators A) include what they consider to be a normal rate of return on investment. B) encourage firms to produce at the output level where price equals marginal cost. C) fail to consider a return to investors, so regulated firms often have a hard time raising investment funds. D) inflate costs so much that price ends up as large as would prevail under unregulated monopoly. Answer: A Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

29) Regulators employ average cost pricing instead of marginal cost pricing because A) average cost pricing is more efficient than marginal cost pricing. B) price must be high enough to cover all opportunity costs if the firm is to stay in business. C) the price is lower with average cost pricing. D) average cost pricing is simpler to compute than marginal cost pricing. Answer: B Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 30) A natural monopoly exists when A) control of a key input leads to a single-firm industry. B) increasing marginal returns and the ability to obtain quantity discounts from suppliers leads to a single-firm industry. C) economies of large-scale production are substantial, leading to a single-firm industry. D) the government restricts entry that leads to a single-firm industry. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 31) When production is characterized by persistently declining long-run average costs as output increases, A) the costs of production are greater when competition exists than when a single firm produces a good. B) it is impossible for two firms to compete in the market. C) the costs are lower if a single firm exists, and even if the firm is unregulated, price will still be lower with a single firm. D) there is no need for the government to limit competition by licensing requirements. Answer: A Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

32) An unregulated natural monopolist will produce the quantity at which A) average total costs are minimized. B) marginal cost equals marginal revenue. C) marginal cost equals the long run average cost curve. D) the long-run average cost curve intersects the demand curve. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33) Which of the following statements about natural monopoly is correct? A) Governments regulate natural monopolies in order to ensure that costs of production are minimized. B) Governments regulate natural monopolies in order to ensure that the firm earns a normal profit. C) Governments regulate natural monopolies in order to prevent them from making profits. D) Governments regulate natural monopolies in order to keep their workers from earning wages that are too high. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 34) If a natural monopolist is unregulated, then A) the monopoly will produce efficiently from society's point of view. B) the monopoly will produce inefficiently from society's point of view. C) the monopolist will be earning just a normal rate of return on investment. D) the monopolist will determine the profit maximizing quantity by equating marginal cost to the demand curve. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

35) The reason an unregulated natural monopolist will produce at an economically inefficient quantity is A) due to the fact that the monopolist will equate marginal cost with price to determine the output level. B) due to the fact that the monopolist will equate average total cost with price to determine the output level. C) that the price does not equal the true marginal cost of producing the good. D) that the monopolist will produce a quantity greater than the minimum of the average total cost curve. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 36) For a firm to be economically efficient from society's point of view, it should produce to the point at which A) marginal cost equals marginal revenue. B) marginal cost equals average total cost. C) marginal cost equals price. D) average total cost equals price. Answer: C Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

37) Refer to the above figure. An unregulated natural monopolist would choose A) output rate of Q1 and price P2. B) output rate Q1 and price P5. C) output rate Q3 and price P3. D) output rate Q4 and price P1. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 38) Refer to the above figure. If the government requires the natural monopolist to charge the efficient price, it will charge price A) P5 and sell Q1 units. B) P2 and sell Q1 units. C) P3 and sell Q3 units. D) P1 and sell Q4 units. Answer: D Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 29 Copyright © 2021 Pearson Education, Inc.

39) Refer to the above figure. If the government uses rate-of-return regulation for the natural monopolist, the firm will charge price A) P5 and sell Q1 units. B) P2 and sell Q1 units. C) P3 and sell Q3 units. D) P1 and sell Q4 units. Answer: C Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 40) Refer to the above figure. Suppose the government requires the natural monopolist to charge the efficient price. Then profits for the firm will be A) zero. B) losses equal to Q4 times distance f-g. C) losses equal to Q3 times distance d-e. D) profits equal to Q1 times distance a-b. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) Refer to the above figure. An unregulated natural monopolist's profits will be A) profits equal to Q1 times distance a-c. B) losses equal to Q4 times distance f-g. C) losses equal to Q3 times distance d-e. D) profits equal to Q1 times distance a-b. Answer: D Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

42) Refer to the above figure. Regulators cannot force natural monopolies to operate in the long run at a loss. Therefore, they usually require the firms to charge a price equal to A) marginal cost, which is P1. B) marginal cost, which is P2. C) average cost, which is P3. D) average cost, which is P4. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 43) Refer to the above figure. What are the price and quantity if this monopolist is required to use average cost pricing? A) P5, Q1 B) P3, Q3 C) P2, Q1 D) P1, Q4 Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 44) Refer to the above figure. From the standpoint of society, the optimal output is A) Q1 B) Q2 C) Q3 D) Q4 Answer: D Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

45) Refer to the above figure. From the standpoint of society, the optimal price is A) P1 B) P2 C) P3 D) P5 Answer: A Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 46) If government regulators make the natural monopolist set price equal to marginal cost, A) the natural monopolist will make zero economic profits. B) the natural monopolist will make normal profits. C) the natural monopolist will make losses and go out of business. D) the natural monopolist will make positive economic profits larger than if it wasn't regulated at all. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 47) When regulating a natural monopoly, average cost pricing is usually used rather than marginal cost pricing because A) average cost pricing allows the firm to earn a normal rate of return on investment, while marginal cost pricing leads to economic losses. B) average cost pricing is more economically efficient than marginal cost pricing. C) average cost pricing leads to lower profits than marginal cost pricing. D) average cost pricing leads to a lower market price than marginal cost pricing. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

48) Under rate-of-return regulation, natural monopolies must use A) marginal cost pricing. B) average cost pricing. C) efficient pricing. D) pricing that takes only marginal revenue into consideration. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 49) Under rate-of-return regulation, average cost pricing A) is inflated so the firm can make economic profits. B) includes variable costs but not a cost for capital. C) includes what they consider to be a fair rate of return on investment. D) includes a cost for capital that generates an above normal rate of return. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 50) Cost-of-service-regulation sets prices by considering A) the actual variable cost of providing the service to the customer. B) the actual total cost of providing the service to the customer. C) the actual average cost of providing the service to the customer. D) the actual marginal cost of providing the service to the customer. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 51) Under rate-of-return regulation, the price is set so that A) price equals the marginal cost of production. B) the firm earns a positive economic profit. C) the firm earns a monopoly profit. D) the firm earns a normal rate of return on investment. Answer: D Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33 Copyright © 2021 Pearson Education, Inc.

52) Which of the following best describes the difference between cost-of-service regulation and rate-of-return regulation? A) Costs determine prices in cost-of-service regulation and prices determine costs in rate-ofreturn regulation. B) Costs determine prices in cost-of-service regulation and prices are set in rate-of-return regulation so the firm can make a normal rate of return. C) Variable costs determine prices in cost-of-service regulation and prices are set in rate-ofreturn regulation so the firm can make an economic profit. D) Regulators determine prices in cost-of-service regulation and market forces determine prices in rate-of-return regulation. Answer: B Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

53) Use the above figure. A regulatory commission sets the maximum price this monopolist can charge at P1. If this monopolist were to produce, it A) would produce Q4 output and generate losses. B) would produce Q4 output and generate profits. C) would produce Q2 output and generate losses. D) would produce Q2 output and generate profits. Answer: A Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

54) Use the above figure. If a commission regulates the above monopoly using fair-return (average cost pricing), then the industry's output will be ________ and the product's price will be ________. A) Q1; P1 B) Q2; P3 C) Q3; P2 D) Q4; P1 Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 55) Use the above figure. If a commission regulates the above monopoly using marginal cost pricing, then the industry's output will be ________ and the product's price will be ________. A) Q2; P1 B) Q2; P3 C) Q3; P2 D) Q4; P1 Answer: D Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 56) Use the above figure. If this monopolist was not regulated, the profit-maximizing quantity and price would be A) Q2 and P1. B) Q2 and P3. C) Q3 and P2. D) Q4 and P1. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

57) Use the above figure. Suppose that a regulatory agency requires this natural monopolist to engage in marginal cost pricing. This would lead to A) losses, which would drive the monopolist out of business in the long run. B) profits, which would encourage new producers to enter the industry in the long run. C) profits, but new firms cannot enter the industry in the long run due to high barriers to entry. D) losses, which would encourage the monopolist to lower costs in the long run. Answer: A Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

58) In the above figure, what would be the profit-maximizing output and price for this natural monopolist? A) 1,200; $3 B) 900; $7 C) 700; $7 D) 700; $10 Answer: D Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

59) In the above figure, what would be the profit or loss at the profit-maximizing output for this natural monopolist? A) -$300 B) $2,700 C) $2,100 D) -$1,200 Answer: C Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 60) In the above figure, if the monopolist engages in marginal cost pricing, what are its output and price? A) 1,200, $3 B) 900, $7 C) 700, $7 D) 700, $10 Answer: A Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 61) In the above figure, what would be the profit or loss at the marginal cost pricing point for this natural monopolist? A) -$300 B) $2,700 C) $2,100 D) -$1,200 Answer: D Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

62) In the above figure, what will be the output level produced if average cost pricing is used? A) 1,200 B) 900 C) 700 D) somewhere between 900 and 1,200 Answer: D Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 63) A natural monopoly A) has one lowest-cost producer in the industry. B) exists only when it is regulated. C) has no market demand in the long run. D) always experiences diseconomies of scale. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 64) Which of the following is the BEST example of a natural monopoly? A) wheat farm B) electric utility C) coffee shop D) airline Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Analytical thinking 65) If a regulator forced a natural monopolist to set P = MC A) the monopolist would earn economic profits. B) the monopolist would suffer economic losses. C) the monopolist would break even. D) the monopolist would earn monopolistic profits. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 38 Copyright © 2021 Pearson Education, Inc.

66) When a regulator allows a monopolist to set its price equal to long-run average cost, the regulator is practicing A) marginal cost pricing. B) operating cost pricing. C) average cost pricing. D) optimal cost pricing. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 67) The following table depicts the cost and demand structure a natural monopoly faces. Provided that the firm operates as a monopolist, what is the price charged and quantity produced in order to maximize profits?

A) price charged of $900 and quantity produced of 1 B) price charged of $800 and quantity produced of 2 C) price charged of $700 and quantity produced of 3 D) price charged of $600 and quantity produced of 4 Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-14: Discuss production and pricing decisions within monopolies and how public policies affect monopolies AACSB: Application of knowledge

68) Regulation of a natural monopoly that forces it to price and produce as if it were a competitive firm results in A) the market being instantly competitive. B) higher profits for the monopoly. C) economic losses for the monopoly. D) a highly unstable marketplace. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 69) Using the figure as a guide, which of the following is FALSE with respect to profit maximization and the monopolist?

A) A monopolist (like any other firm) will select an output rate at which marginal revenue is equal to marginal cost, at the intersection of the marginal revenue curve and the marginal cost curve. B) The monopolist will produce quantity Qm and charge a price of Pm. C) When compared to a competitive situation, consumers pay a higher price to the monopolist, and consequently are forced to purchase more of a product as price varies directly with quantity demanded. D) Profits are the positive difference between total revenues and total costs. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

70) Regulation of monopolies that allows prices to reflect only the actual cost of production and no monopoly profits is referred to as A) cost-of-service regulation. B) rate-of-return regulation. C) service-opportunity regulation. D) natural regulation. Answer: A Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 71) The type of regulation that attempts to keep prices and the rate of return in an industry at a competitive level is referred to as A) cost-of-service regulation. B) rate-of-return regulation. C) service-opportunity regulation. D) natural regulation. Answer: B Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 72) Regulation that is based on allowing prices to reflect only the actual operating cost of production is known as A) average cost regulation. B) marginal cost regulation. C) rate-of-return regulation. D) cost-of-service regulation. Answer: D Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

73) Regulation that is based upon the cost of providing the good or service is known as A) rate-of-return regulation. B) cost-of-service regulation. C) social regulation. D) deregulation. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 74) Regulation that keeps the rate of return in the industry competitive is known as A) rate-of-return regulation. B) cost-of-service regulation. C) social regulation. D) deregulation. Answer: A Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

75) In the above figure, a regulation requiring average cost pricing would force the firm to produce at output level A) Q1. B) Q2. C) Q3. D) Q4. Answer: D Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge 76) In the above figure, an unregulated natural monopolist will produce output level A) Q1. B) Q2. C) Q3. D) Q4. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Application of knowledge

77) Cost-of-service regulation allows regulated companies to charge prices that A) reflect the cost of regulating the industry, plus the marginal cost of the product. B) allow monopoly profits to the producer. C) reflect the actual average cost of providing the services to the customer. D) are determined by competition in other geographic markets. Answer: C Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 78) The difference between cost-of-service regulation and rate-of-return regulation is that A) the former sets prices based on actual costs, and the latter focuses on setting prices such that the firm earns a normal rate of return. B) the latter sets prices first, and then the firm must keep costs in line if it wants to earn a profit, and the former sets price high enough to cover costs. C) the former uses marginal cost pricing and the latter uses average cost pricing. D) the former uses average cost pricing and the latter uses marginal cost pricing. Answer: A Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 79) One type of economic regulation often used in the United States by various public utility commissions allows prices to reflect only the actual cost of production and no monopoly profits. This type of economic regulation is known as A) rate-of-return regulation. B) cost-of-service regulation. C) price per constant-quality-unit regulation. D) creative response regulation. Answer: B Diff: 1 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

80) What is the problem with marginal cost pricing in the natural monopoly situation? How do regulatory agencies in the United States usually handle the problem? Answer: If the firm is a natural monopoly, then long-run average costs are downward sloping over the entire range of demand, which implies marginal cost lies below average cost. If price equals marginal cost, price will be below average cost and the firm will earn economic losses. In the long run, it will go out of business, so marginal cost pricing is not feasible. Most regulatory agencies strive for average cost pricing so that the owners receive a normal rate of return on investment. Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 81) Why do government regulators not enforce marginal cost pricing for natural monopolies? What are the common regulatory solutions? Answer: If government regulators enforce marginal cost pricing for natural monopolies, then the firms will face losses and eventually go out of business. Instead, the common regulatory solutions include allowing firms to charge a price that covers the average cost of production or to set a price that ensure a normal return on investment. Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

82) Using a graph, show the price-output combination of a natural monopoly without regulation and the price-output combination if the government requires the monopoly to earn a normal rate of return. What are economic profits in each situation? Answer:

In the above figure, the profit-maximizing price is Pm and the output is Qm. Profits are PmABc. Under rate-of-return regulation, price is equal to average total cost, H, and Qr is the output at this price. The firm earns zero economic profits. Diff: 3 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 83) Distinguish between cost-of-service regulation and rate-of return regulation. What problem is inherent in both types of regulation? Answer: Cost-of-service regulation allows the regulated companies to charge only prices that reflect the actual average cost of providing the services to the customers. Rate-of-return regulation allows regulated companies to set prices that ensure a normal rate of return on investment. A problem with both types is quality of service. Firms charge a regulated price but if quality deteriorates the price per constant-quality increases. Quality is hard to measure so it is hard for the regulators to control. Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

84) "Today the U.S. telecommunications industry remains heavily regulated by the government as it was some 30 years ago." Do you agree or disagree? Why? Answer: Disagree. The telecommunications industry today is far from a natural monopoly as it was some 30 years ago, because consumers have increasingly substituted cellular and Web-based phone services for the traditional wired phone services. In addition, multiple wired-service operators compete today in many locales. All these factors make the U.S. telecommunications industry more competitive today. Diff: 2 Topic: 27.2 Regulating Natural Monopolies Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27.3 Regulating Nonmonopolistic Industries 1) Which of the following is a possible market solution to the lemons problem? A) Producers might offer product guarantees and warranties. B) Producers might be required to meet certain legal standards to obtain licenses granting the right to sell their products. C) Government agencies might be charged with directly overseeing production and distribution of certain products. D) Liability laws might be established to ensure that firms selling certain products must face penalties in the event the products function poorly. Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 2) One problem that might occur as a result of economic regulation is A) the firm may be earning more than a normal rate of return on investment. B) the quality of service might be lowered. C) that social regulation may follow. D) the demand for the good may be greater than the supply. Answer: B Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

3) The potential for asymmetric information to bring about a general decline in product quality in an industry is known as the ________ problem. A) moral hazard B) liability C) capture D) lemons Answer: D Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 4) When consumers have less information about a product than do sellers, then this is the situation of A) asymmetric information. B) rationality. C) caveat emptor. D) a market failure. Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 5) Which of the following is the outcome of the lemons problem in the used-car market? A) Only low-quality cars will be traded in the market. B) Only high-quality cars will be traded in the market. C) Both low-quality and high-quality cars will be traded in the market. D) No cars will be traded in the market. Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

6) The lemons problem is a situation of A) perfect competition. B) asymmetric information. C) price discrimination. D) a natural monopoly. Answer: B Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 7) Which of the following is NOT a likely market solution to the lemons problem? A) average cost pricing B) product warranty C) industry standard D) product certification Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) Credence goods are particularly susceptible to the lemons problem because A) they have qualities that are difficult for producers to fully assess. B) they have qualities that are difficult for consumers to fully assess. C) creative responses among producers create volatility in market supply. D) creative responses among consumers create volatility in market demand. Answer: B Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) The main rationale for government regulatory functions is A) to regulate for-profit institutions. B) to make sure that firms are maximizing profits. C) to expand the scope of the government. D) to protect consumer interests. Answer: D Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 49 Copyright © 2021 Pearson Education, Inc.

10) Which of the following is NOT a reason for the government to regulate a nonmonopolistic industry? A) to allow firms to achieve the profit maximizing output B) asymmetric information C) to protect consumer interests D) market failures Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) During the production process Ajax Corporation releases pollution into the air. Ajax Corporation operates in a monopolistically competitive industry. Which of the following statements addresses the pollution situation? A) Ajax is taking advantage of asymmetric information. B) This is an example of a market failure and is a reason for the government to regulate the industry. C) The quality of the product could be improved if the amount of pollution can be reduced. D) This is known as the lemons problem. Answer: B Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) Asymmetric information is A) when a market failure occurs. B) an externality. C) when the producer has information on the product that the consumer lacks. D) the regulatory price for a natural monopoly. Answer: C Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

13) The lemons problem occurs mainly because of A) asymmetric information. B) a market failure. C) negative externality. D) positive externality. Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) The problem of excess pollution mainly occurs because of A) asymmetric information. B) a positive externality. C) a negative externality. D) a monopoly. Answer: C Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) The problem of asymmetric information that brings about a general decline in product quality in an industry is A) a market failure. B) the result of government regulation. C) creative response. D) the lemons problem. Answer: D Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

16) A possible market solution that a reputable firm can engage in when faced with the lemons problem is A) to offer a warranty. B) to engage in externalities. C) to create asymmetric information. D) to use average cost pricing. Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) Which of the following is NOT a government response to asymmetric information? A) liability laws B) social regulation C) manufacturer's warranties D) government licensing Answer: C Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 18) Which of the following is a government response to asymmetric information? A) product guarantees B) external product certification C) manufacturer's warranties D) government licensing Answer: D Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

19) Which of the following is most subject to the lemons problem? A) credence goods B) homogeneous goods C) search goods D) inferior goods Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 20) The two most important rationales for government intervention in non-monopolistic markets are A) market failure and asymmetric information. B) substandard products and job creation for public employees. C) job creation and income maintenance. D) unfair pricing and usury. Answer: A Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 21) The potential for a decline in product quality due to asymmetric information is commonly referred to as A) the lemons problem. B) planned obsolescence. C) diminishing marginal product. D) the externality problem. Answer: A Diff: 2 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

22) An automobile manufacturer voluntarily recalls certain models to fix a defective part at no cost to the owners. This action has the effect of A) the lemon problem. B) a manufacturer's warranty. C) a market failure. D) none of these. Answer: B Diff: 1 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 23) What are the major rationales for consumer protection in nonmonopolistic industries? Answer: The main rationales for consumer protection in nonmonopolistic industries are: (1) the presence of market failures, which induce governments to correct the externalities; and (2) the presence of asymmetric information for certain products so that the government can ensure consumers are protected. Diff: 2 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 24) What is the lemons problem? How do firms try to address this problem? Answer: The lemons problem occurs when asymmetric information leads to a general decline in product quality in an industry. Firms try to address this problem by offering product guarantees and warranties, providing industry standards and offering product certification, all of which help consumers separate high-quality products from low-quality products. Diff: 2 Topic: 27.3 Regulating Nonmonopolistic Industries Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

27.4 Incentives and Costs of Regulation 1) The benefits of social regulation usually are A) always a zero sum. B) obvious to people while the costs are hidden. C) less than the costs of social regulation, reducing overall welfare. D) difficult to measure. Answer: D Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 2) All of the following are possible criticisms of social regulation EXCEPT A) that the costs may outweigh the benefits. B) that social regulation may create anticompetitive effects. C) that the regulations have not resulted in safer working conditions. D) that the regulations lead to higher production costs. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 3) A firm that responds to a regulatory rule in a way that permits technical compliance while allowing the firm to violate the spirit of the regulation has. A) reduced the scope of the lemons problem. B) shared the gains and pains of regulation. C) engaged in a creative response to regulation. D) become a captured regulator. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

4) According to the text, the federal government spends the most taxpayer-provided funds regulating which area of the economy? A) the environment B) finance and banking C) consumer safety and health D) transportation Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 5) A potential benefit that comes from social regulations would be A) higher costs. B) a cleaner environment. C) higher tax collections. D) more layoffs. Answer: B Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) According to the text, critics point out that the costs incurred by firms due to regulations A) increase production costs. B) lower production costs to the shutdown point. C) reduce taxes too far. D) none of these Answer: A Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

7) The benefits of social regulation are A) easy to measure by the marginal value method. B) often difficult to measure. C) obvious to almost everyone, but the costs are usually hidden. D) greater than the costs of social regulation in every example in the country today. Answer: B Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) Regulation focused on the impact of production on the environment and society, the working conditions under which production occurs, or the physical attributes of goods, is known as A) cost-of-service regulation. B) rate-of-return regulation. C) social regulation. D) economic regulation. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) Which of the following is an example of an agency concerned with social regulation? A) Federal Communications Commission B) Securities and Exchange Commission C) Consumer Product Safety Commission D) Federal Energy Regulatory Commission Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

10) Which of the following statements can correctly be made about social regulation? I. Extensive social regulation may have an anticompetitive effect. II. The benefits of social regulation are easier to measure than are the costs of social regulation. A) I only B) II only C) both I and II D) neither I nor II Answer: A Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) A creative response to regulations can be described as A) conforming to the letter of the law but undermining its spirit. B) totally conforming to the law. C) completely ignoring the law. D) none of these. Answer: A Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) In some cases, social regulation may alter individuals' behavior. For example, there is evidence to indicate that as more automobile safety regulations have been introduced, more individuals have begun to drive recklessly. This phenomenon is known as A) the feedback effect. B) the share-the-gains effect. C) the share-the-pains effect. D) the capture effect. Answer: A Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

13) Which of the following refers to the capture hypothesis of regulation? A) the ability of the government to capture monopoly profits B) the control of regulatory agencies by firms in an industry C) consumer cost savings captured through regulation D) horizontal mergers Answer: B Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 14) The notion that regulated industry members themselves, sooner or later, are able to control regulatory bodies is referred to as A) consumerism. B) cartelization. C) the capture hypothesis. D) the control theory. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) The capture hypothesis suggests that A) marginal cost regulation is superior to average cost regulation. B) the well-focused interests of consumers will lead to the over-regulation of most industries. C) the firms being regulated will unduly influence the regulators. D) regulation will lead to over-entry and eventual losses for firms in the industry. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

16) The "capture" in the capture hypothesis occurs because A) regulators try to promote everyone's best interest. B) society doesn't care for regulatory agencies. C) regulators always know what is in society's best interest. D) regulators usually have been or will be associated with the industries they regulate. Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 17) According to the capture hypothesis, A) regulators eventually support the views of consumers instead of the firms or the taxpayers, regardless of the reasons why the regulatory agency was established. B) regulators support the view of the regulated firms all along because that is the reason the regulatory agency was established. C) regulators eventually support the views of the regulated firms instead of the consumers or taxpayers, regardless of why the regulatory agency was established. D) regulators eventually support the views of either the firms or the consumers, but at the expense of the taxpayers, regardless of the reasons why the regulatory agency was established. Answer: C Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 18) According to the capture hypothesis, it appears that regulators eventually end up A) adopting policies that benefit the firms being regulated. B) adopting policies that benefit consumers at the expense of the regulated firms. C) adopting policies that benefit no one. D) satisfying neither producers nor consumers, but striving to control as much as possible. Answer: A Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

19) The hypothesis that regulators eventually are controlled by the regulated firms and their special interests is the A) share-the-gains, share-the-pains hypothesis. B) capture hypothesis. C) public interest theory. D) control-group hypothesis. Answer: B Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 20) The behavior of regulators when trying to win approval for their actions from their entire constituency is best described by the A) capture hypothesis. B) law of increasing social well-being. C) share-the-gains, share-the-pains hypothesis. D) marginal benefit pricing hypothesis. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 21) The argument that suggests that regulators balance the interests of firms, consumers, and legislators is called A) the capture hypothesis. B) the creative response theory. C) the share-the-gains, share-the-pains theory. D) the theory of optimal regulation. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

22) A theory of regulatory behavior, which states that regulators must take into account the preferences of legislators, producers, and consumers, is the A) capture theory. B) share-the-gains, share-the-pains theory. C) public interest theory. D) general interests theory. Answer: B Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 23) According to your text, the total annual social cost of regulation (federal, state and local) in the United States is estimated to exceed ________ per year. A) $500 million B) $900 million C) $50 billion D) $1 trillion Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 24) The feedback effect can be thought of as a type of A) social regulation. B) economic regulation. C) creative response. D) regulatory lag. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

25) Suppose a dangerous workplace is made safer through the installation of guards and other equipment that reduce the physical hazards of the work environment. If we observe no reduction in injuries, we might conclude that A) the safety equipment isn't adequate and better equipment should be installed. B) the firm has responded by lowering wages and hiring less capable people who are more likely to be injured. C) the injury rate before installation of the safety equipment had been underreported. D) workers responded to the safer environment by not exercising as much care themselves, generating more injuries than if they had not changed their behavior. Answer: D Diff: 3 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 26) Regulators often adopt policies that benefit A) consumers and injure producers. B) the firms regulated rather than consumers. C) only the government. D) no one. Answer: B Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27) The hypothesis that regulators eventually adopt policies that benefit the producers in the industry is known as the A) capture hypothesis. B) producers' hypothesis. C) share-the-gains, share-the-pains hypothesis. D) it's-a-rip-off hypothesis. Answer: A Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

28) Under the U.S. system of regulation, most regulars are selected from A) politicians and their friends. B) the industry that is to be regulated. C) consumer advocacy groups. D) university professors who understand the nature of the industry and who understand the true interests of consumers. Answer: B Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 29) According to the capture hypothesis of regulation, A) regulation favors producers over consumers because the producers were able to pay off the regulators. B) regulation eventually favors producers over consumers because the producers have more at stake than individual consumers. C) regulation benefits the regulators and the legislators who support the regulation by enabling them to obtain favors from both producers and consumers. D) regulation benefits the consumers over producers because the number of consumers is greater than the number of producers, giving the consumers more political clout. Answer: B Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 30) Economists who think the capture hypothesis explains regulatory behavior will support their claims by noting that A) regulation as carried out in this country generates larger profits for the firms and does not generate lower prices for consumers. B) consumers actually dominate regulatory hearings through the influence of consumer advocacy groups. C) Congress ensured that consumers have more influence on the decisions of regulators by setting up the agencies in ways that insulated the regulators from the regulated firms. D) the firms that are regulated have greater incentive to try to influence regulators than do consumers. Answer: D Diff: 3 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

31) According to the ________ theory of regulation, regulators must take into account the preferences of legislators, consumers, and producers. A) capture B) general interest C) public interest D) share-the-gains, share-the-pains Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 32) The "primary motive" of regulators, according to the share-the-gains, share-the-pains theory, is to A) maximize their income through accepting monetary payoffs from groups. B) ensure that every group gets what it wants. C) ensure that all customers share the benefits of regulation, and not just the wealthiest consumers. D) keep their jobs. Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 33) Suppose technical change makes it cheaper for cable television suppliers to supply their service. The capture theory would predict that the regulators would A) allow the firms to capture the savings and would lower price only if the firms asked them to. B) force the firms to pass the savings on to consumers in the form of lower prices. C) force the firms to pass the savings on to consumers in the form of better service. D) force the firms to pass some of the savings on to consumers and permit them to keep some of the savings for themselves. Answer: A Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

34) Suppose technical change permits cable television companies to provide their services at lower rates. The share-the-gains, share-the-pains theory would predict that the regulators would A) permit the firms to keep the savings and would lower prices only if the firms were pressured to do so. B) force the firms to pass all the savings on to consumers in the form of lower prices. C) force the firms to pass the savings on to consumers in the form of better service. D) force the firms to pass some of the savings on to consumers and to permit the firms to keep some of the savings themselves. Answer: D Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 35) Suppose that a regulated industry experiences an increase in the price of inputs used to produce the good. According to the capture theory, we would expect A) prices to increase by a little immediately and profits to decrease by a lot. B) there will be some increase in price but not immediately. C) no increase in price. D) a quick increase in price maintains profits in the industry. Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 36) Suppose that a regulated industry experiences an increase in the price of inputs used to produce the good. According to the share-the-gains, share-the-pain theory, we would expect A) prices to increase by a little immediately and profits to decrease by a lot. B) there will be some increase in price but not immediately. C) no increase in price. D) a quick increase in price maintains profits in the industry. Answer: B Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

37) Suppose that a regulated industry experiences an increase in the price of inputs used to produce the good. Which of the following statements is TRUE? A) Under both the capture hypothesis and the share-the-gains, share-the-pain theory profits will decrease. B) An increase in price will occur quicker in the share-the gains, share-the-pain theory than the capture hypothesis. C) An increase in price will occur quicker in the capture hypothesis than the share-the-gains, share-the-pain theory. D) In the capture hypothesis there will be an increase in price but not in the share-the-gains, share-the-pain theory. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 38) The costs of regulation A) include increased taxes and increased prices of the products being regulated. B) are paid entirely by the regulated industries. C) are more than covered by the benefits gained from the regulation. D) are relatively small. Answer: A Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 39) The total costs of regulation A) include increased taxes and increased prices of the products being regulated. B) are paid entirely by the regulated industries. C) are much higher than just the explicit government outlays to fund the administration of various regulations. D) are paid entirely by the consumers of regulated industries. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

40) The total costs of federal regulation A) encompass only explicit costs of satisfying regulatory demands. B) also include the explicit costs associated with regulations issued by 50 different state governments. C) encompass only opportunity costs of satisfying regulatory demands. D) encompass both explicit and opportunity costs of satisfying regulatory demands.. Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) One undesirable effect of social regulation is that it A) affects smaller firms disproportionately, creating anticompetitive effects. B) destroys incentives for firms to engage in marginal cost pricing. C) raises prices of goods to consumers, while lowering prices to business and special interest groups. D) reduces the effectiveness of economic regulation. Answer: A Diff: 3 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 42) The Interstate Commerce Commission (ICC) regulates railroads, barges and trucks. Suppose technical change lowers the costs of railroads. As a result, the ICC permits railroads to lower prices some but also alters the rates of barges and trucks so they get additional business. The ICC would be acting consistently with A) the capture hypothesis of regulation. B) the public interest theory of regulation. C) the share-the-gains, share-the-pains theory of regulation. D) None of the theories presented in the text since economic regulation is specific to a single industry and not to agencies that cover more than one industry. That is the province of social regulation. Answer: C Diff: 3 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

43) Behavior on the part of the firm that allows it to comply with the law but violate the spirit, reducing the law's effect is A) a dominant strategy. B) a creative response. C) the lemons problem. D) a positive-sum effect. Answer: B Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 44) Which of the following is FALSE with respect to regulation? A) Regulated firms commonly try to avoid the effects of regulation whenever they can. B) Firms engage in creative responses which conform to the letter of the law but undermine its spirit. C) Regulation has resulted in state laws that have made creative response illegal in many states. D) Recent regulations have generated feedback effects that undermined the key aim of the rules. Answer: C Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 45) The theory of regulatory behavior that predicts that the "regulators" eventually will become controlled by the "regulated" is called A) the capture hypothesis. B) the share-the-gains, share-the-pains hypothesis. C) the asymmetric information hypothesis. D) the market failure hypothesis. Answer: A Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

46) U.S. securities firms recently agreed to pay a record amount of $1.4 billion in settlement charges brought by government regulators. Regulators claimed that firms had abused investors during the market boom of the 1990s. Abuses included analysts tailoring their research reports and ratings on the stocks they covered in order to win more business for their firm. If this settlement caused Wall Street firms to comply with the letter of the law but they violate the spirit of the law, the firms are engaging in A) elimination of conflicts of interest. B) creative response. C) the capture hypothesis. D) deregulation. Answer: B Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 47) Acme Inc. found a tricky way to conform to the letter of the law with respect to new EPA regulations, even though they violated the spirit of the law. This is called A) the capture theory. B) collusive response. C) share-the-gains, share-the-pains theory. D) creative response. Answer: D Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 48) The theory of regulatory behavior that suggests that regulators must consider the demands of legislators, consumers, and members of the regulated agency is called A) the capture theory. B) share-the-gains, share-the-pains theory. C) the natural theory. D) the creative theory. Answer: B Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

49) When regulators identify with the special interests of the industry they regulate, this behavior conforms with the A) share-the-gains, share-the-pains hypothesis. B) rate-of-return hypothesis. C) lemon market hypothesis. D) capture hypothesis. Answer: D Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 50) The theory that regulators' behavior will eventually be compromised by the special interests they regulate is known as the A) capitulation hypothesis. B) creative hypothesis. C) captive hypothesis. D) capture hypothesis. Answer: D Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 51) When a dog is guarding the henhouse, that is an example of the A) share-the-gains, share-the-pains theory. B) regulatory hypothesis. C) capture hypothesis. D) creative theory. Answer: C Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

52) When a regulator is concerned about pleasing different groups in order to keep employed, this is known as the A) share-the-gains, share-the-pains theory. B) regulatory hypothesis. C) capture hypothesis. D) creative theory. Answer: A Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 53) The cost of complying with regulation A) shifts the ATC curve upward. B) shifts the MC curve downward. C) shifts the demand curve to the right. D) increases the products' price elasticity of demand. Answer: A Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 54) Regarding the costs of regulation, which is a FALSE statement? A) Airline safety standards have increased the price of air travel. B) Automobile safety standards raise the price of cars. C) Regulatory spending by federal agencies has decreased since 1970. D) Pharmaceutical manufacturing safety standards raise the price of drugs. Answer: C Diff: 1 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

55) The total cost of federal regulation includes A) the funding of government agencies overseeing compliance, the compliance cost for the regulated firms, and the opportunity cost of regulation for the firms. B) the funding of government agencies overseeing compliance less the compliance cost for the regulated firms and the opportunity cost of regulation for the firms. C) only the cost of compliance by the regulated firms. D) only the funding of the regulatory agencies. Answer: A Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 56) Explain the share-the-gains, share-the-pains theory. How does it differ from the capture hypothesis? Answer: The share-the-gains, share-the-pains theory differs from the capture hypothesis in that it argues consumers are taken into consideration, at least to some extent, by the regulators. If their actions harm consumers too much, regulators know they will complain to legislators, and the regulators may be out of a job. So, they try to balance the interests of the producers and the consumers, and not give all the benefits to one group or make one group bear all the costs. The regulatory agency is not completely captured by the industry, but also takes into account consumers and legislators. Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 57) Explain the capture hypothesis. Answer: The capture hypothesis is a theory of regulatory behavior that predicts that the regulators eventually will be captured by the special interests of the industry being regulated. It is observed that many times regulators come from the regulated industry. Further, the firms have more at stake than consumers and are more likely to organize and lobby for favors than are the consumers. Hence, over time, the regulators will tend to do what the regulated firms want rather than what the consumers want. Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

58) A common feature of regulated industries is cross-subsidization, which is a situation when one group of customers pays prices above costs while another group of customers pays prices below costs. The one group is subsidizing the other group. Is this practice more consistent with the capture hypothesis or the share-the-gains, share-the-pains theory? Explain. Answer: Cross-subsidization is more consistent with the share-the-gains, share-the-pains theory. The capture hypothesis can explain why the firms would be able to charge prices above costs to the one group but not why they have to charge prices below costs to another group. But the share-the-gains, share-the pains theory explains this by saying the subsidized group of customers has been able to influence the regulators so that their costs are not so great to themselves. Diff: 3 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 59) "Regulations do not always have the intended result." Do you agree or disagree? Why? Answer: Agree. Firms often try to avoid the effects of regulation. Firms engage in creative response, which is a response to a regulation that conforms to the letter of the law but undermines its spirit. Further, individuals may alter their behavior in ways that run counter to the goals of the regulation. For example, people may drive less carefully in safer cars, causing as many injuries as when the cars were less safe. Diff: 3 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 60) "As compared to the benefits of economic and social regulation, the costs are minimal." Do you agree or disagree? Why? Answer: Disagree. The total costs of regulation are substantial. First, the direct costs of regulation, which are ultimately paid for by taxpayers, include the costs to staff regulatory agencies and to fund their various activities. Second, there are social costs, which include the explicit costs and the opportunity costs of complying with the regulations. Also, the benefits of economic and social regulation are difficult to estimate, so it is hard to say if the costs are minimal as compared to the benefits. Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

61) Suppose OSHA requires a factory to install specific safety equipment to reduce the number of injuries in the factory. Would the number of accidents necessarily decline? Why or why not? Answer: No. If the feedback effect is that workers who feel safer take fewer precautions or are more careless, the number of injuries could stay the same or even increase. Diff: 2 Topic: 27.4 Incentives and Costs of Regulation Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 27.5 Antitrust Policy 1) Government policy that attempts to prevent collusion among the sellers of a product and attempts to prevent restraint of trade is known as A) social policy. B) antitrust policy. C) inherent policy. D) goodwill policy. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 2) The first major law created to control the growth of monopoly power was the A) Sherman Act. B) Clayton Act. C) FTC Act. D) Robinson-Patman Act. Answer: A Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

3) Which of the following is NOT an antitrust law? A) the Robinson-Patman Act B) the Smoot-Hawley Act C) the FTC Act D) the Sherman Act Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 4) One weakness of the Sherman Act is that A) it fails to clearly define restraint of trade. B) it applies only to foreign monopolies. C) it applies only to the steel and railroad industries. D) none of these Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 5) The U.S. Justice Department prosecuted Microsoft under the terms of A) the Sherman Act. B) the Kefauver amendment. C) the 1933 amendment to the Federal Trade Commission Act. D) none of these Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 6) A major shortcoming of the Sherman Act was that A) when it was passed, there were no violations, so the Supreme Court ruled it unnecessary. B) it failed to explicitly state which specific activities were illegal. C) violators of the Act were forced out of business. D) it was not enforced by the courts. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 76 Copyright © 2021 Pearson Education, Inc.

7) The first antitrust law in the United States was the A) FTC Act. B) Clayton Act. C) Sherman Act. D) Robinson-Patman Act. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 8) The primary antitrust statute in the United States is the A) NLRA of 1935. B) SEC Act of 1933. C) Sherman Antitrust Act of 1890. D) Federal Reserve Act of 1913. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 9) Which of the following would most likely promote competitive pricing of products? A) Robinson-Patman Act B) Wheeler-Lea Act C) Federal Trade Commission Act D) Clayton Act Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

10) The Federal Trade Commission regulates which of the following? A) unfair trade practices by businesses B) financial markets C) trade with foreign nations D) the banking industry Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 11) The Federal Trade Commission Act was designed to A) prohibit bundling. B) increase foreign trade. C) prohibit cutthroat pricing. D) protect domestic companies from foreign competition. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 12) The Federal Trade Commission Act, as amended, prohibits A) horizontal mergers. B) price-fixing agreements. C) unfair competitive practices and deceptive acts. D) price discrimination. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 13) The Federal Trade Commission was established in 1914 to A) regulate trade of public goods. B) promote competition in interstate commerce. C) investigate unfair competitive practices. D) prevent non-price competition. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 78 Copyright © 2021 Pearson Education, Inc.

14) The regulatory agency most concerned with false advertising is the A) Antitrust Division of the Justice Department. B) National Labor Relations Board. C) Federal Deposit Insurance Corp. D) Federal Trade Commission. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 15) Which antitrust act was passed to protect independent retailers from "unfair discrimination" by chain stores? A) Federal Trade Commission Act B) Robinson-Patman Act C) Sherman Act D) Wheeler-Lea Act Answer: B Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 16) Which antitrust law is sometimes called the "Chain Store Act"? A) Sherman Act B) Clayton Act C) Robinson-Patman Act D) Federal Trade Act Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

17) All of the following are exempt from antitrust laws EXCEPT A) labor unions. B) professional baseball. C) oil companies. D) public utilities. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 18) Which of the following is NOT exempt from antitrust laws? A) professional baseball B) labor unions C) airlines D) public transit systems Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 19) Which of the following is exempt from antitrust laws? A) professional football B) petroleum companies C) airlines D) hospitals Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 20) Which of the following is exempt from antitrust laws? A) professional basketball B) suppliers of military equipment C) telephone companies D) automobile companies Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 80 Copyright © 2021 Pearson Education, Inc.

21) The first antitrust law in the United States was the A) Clayton Act. B) Contestable Markets Act. C) Federal Trade Commission Act. D) Sherman Antitrust Act. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 22) The idea behind antitrust legislation is to A) promote competition in the market. B) justify deregulation of industries. C) implement contestable markets. D) create larger firms. Answer: A Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 23) If antitrust legislation is successful, then A) firms will produce the quantity at which marginal cost equals marginal revenue. B) most firms will be earning a positive economic profit. C) the price of each item will equal its marginal social opportunity costs. D) natural monopoly will be eliminated. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

24) If antitrust legislation is successful, then the monopolistic firm will A) decrease output and charge a lower price than before. B) increase output and charge a higher price than before. C) increase output and charge a lower price than before. D) decrease output and charge a higher price than before. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 25) Why is antitrust legislation necessary? A) Monopolies tend to misallocate resources. B) All monopolies are unlawful in the United States. C) Monopolies tend to allocate resources in a socially optimal manner. D) Monopolies will always make a profit in the long run. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 26) Which of the following will NOT be true if the antitrust laws are successful? A) Producers will earn zero economic profits in the long-run. B) Firms will not restrict output. C) Firms will produce the competitive output. D) Firms will produce the quantity at which marginal cost equals marginal revenue and charge a price that is greater than marginal cost. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

27) The Sherman Antitrust Act was passed to A) protect companies from foreign competition. B) protect the monopoly profits of firms. C) control the growth of monopolies in the U.S. D) prevent market price from equaling marginal cost. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 28) Section 1 of the Sherman Antitrust Act makes it illegal to A) form a monopolistically competitive firm. B) restrain trade. C) price discriminate. D) have an oligopoly. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 29) As a result of a conviction under the Sherman Antitrust Act, Standard Oil of New Jersey A) was fined for its extensive price discriminating activity. B) was restrained from oil exploration for twenty-five years, which enabled other oil firms to assume leadership in the industry. C) was broken up into many smaller companies. D) went bankrupt and no longer is in existence. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

30) What is the relationship between the Sherman Antitrust Act and the Clayton Act? A) The Clayton Act was the first act passed and the Sherman Antitrust Act was the second. B) The Sherman Antitrust Act encouraged competition among firms in the U.S. while the Clayton Act encouraged competition among foreign firms. C) The Clayton Act strengthened the Sherman Antitrust Act by limiting some very specific business practices. D) Both Acts deal with issues of setting price and quantity for regulated industries. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 31) It is illegal to price discriminate EXCEPT in cases in which the price differences are due to actual cost differences. This situation is due to which antitrust act? A) Clayton Act B) Contestable Market Act C) Federal Trade Commission Act D) Sherman Antitrust Act Answer: A Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 32) The "Chain Store Act" is a name given to the A) Clayton Act. B) Federal Trade Commission Act. C) Robinson-Patman Act. D) Sherman Antitrust Act. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

33) "Unfair or deceptive acts or practices in commerce" were prohibited by the A) Clayton Act. B) Clayton Act as amended by the Robinson-Patman Act. C) Federal Trade Commission Act. D) 1938 amendment to the Federal Trade Commission Act. Answer: D Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 34) The FTC is A) the act that prevents producers from driving out smaller competitors by means of selected discriminatory price cuts. B) the commission that investigates unfair competitive practices such as misleading advertising. C) an agency which has been set up to regulate the federal government. D) the agency set up to regulate hospitals. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 35) Ajax Corporation has just started advertising that there are 16 ounces in every package. In reality the packages contain only 14 ounces. This misleading advertising A) is in violation of the Robinson-Patman Act. B) is exempt from the antitrust laws. C) could be subject to an investigation by the Federal Trade Commission. D) could be subject to an investigation by the Sherman Commission. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

36) Which of the following are exempt from the antitrust laws? A) colleges and universities B) all professional athletes C) labor unions D) deregulated industries Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 37) All of the following are exempt from antitrust enforcement EXCEPT A) professional baseball. B) labor unions. C) hospitals. D) television and radio stations. Answer: D Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 38) The first antitrust law in the United States was the A) Glass-Steagall Act. B) Robinson-Patman Act. C) Clayton Act. D) Sherman Act. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

39) There are many exemptions from antitrust laws. Which of the following is NOT one of them? A) labor unions B) public utilities C) hospitals D) Internet service providers Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 40) The statement "Every contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce . . ." is found in the A) Sherman Antitrust Act. B) Clayton Antitrust Act. C) Robinson-Patman Act. D) Interstate Commerce Commission Act. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 41) In a court decision in June 2001, the Federal District Court of Appeals in Washington, D.C. found that Microsoft had violated the A) Clayton Act. B) Robinson-Patman Act. C) Sherman Act. D) Celler-Kefauver Act. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

42) The antitrust legislation that forbids a company from selling goods on the condition that the purchaser must deal exclusively with that company is the A) Sherman Act. B) Robinson-Patman Act. C) Fair Trade Commission Act. D) Clayton Act. Answer: D Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 43) The agency that deals with issues of "unfair and deceptive acts or practices in commerce" is the A) Federal Trade Commission. B) Federal Products Commission. C) Federal Consumer Protection Agency. D) Federal Advertising Commission. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 44) One organization in the United States today that is exempt from antitrust laws is A) the automobile industry. B) professional baseball. C) the oil industry. D) the steel industry. Answer: B Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

45) The Sherman Antitrust Act of 1890 prohibited A) issuance of money by private banks. B) attempts to restrain trade. C) all existing monopolies. D) interstate commerce. Answer: B Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 46) The Sherman Antitrust Act was enforced in 1906 by a ruling of the Supreme Court regarding the monopolization of the oil industry by A) Getty Oil of Oklahoma. B) Texaco Oil of Texas. C) Gulf Oil of Pennsylvania. D) Standard Oil of New Jersey. Answer: D Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 47) The law passed by Congress in 1914 that was designed to sharpen or define further the vagueness of the Sherman Act is called A) the Robinson-Patman Act. B) the Wheeler-Lea Act. C) the Clayton Act. D) the Federal Trade Commission Act. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

48) The act of Congress which prohibited "unfair or deceptive acts or practices in commerce" is called A) the Federal Trade Commission Act of 1914. B) the Clayton Act. C) the Sherman Act. D) the Robinson-Patman Act. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 49) Another name for the "Chain Store Act" is A) the Sherman Antitrust Act of 1890. B) the Clayton Act of 1914. C) the Federal Trade Commission Act of 1914. D) the Robinson-Patman Act of 1936. Answer: D Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 50) Which of the following organizations is exempt from prosecution under the Sherman Antitrust Act (1890)? A) retailers B) book publishers C) labor unions D) television stations Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

51) The Sherman Act A) prohibited banks from crossing states lines. B) prohibited railroads from transporting explosives. C) provided for the regulation of natural monopolies. D) declared that monopolization and restraint of trade were illegal. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 52) Which of the following is illegal according to the antitrust laws? A) output restrictions B) price discrimination based on cost differences C) vertical mergers D) price fixing Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 53) The Supreme Court's decision in the Standard Oil of New Jersey case was A) to force the company to send refund checks to customers. B) to force the company to pay $10 billion in fines. C) to increase the fine imposed by a lower court. D) to break up the company. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

54) Suppose that smart phone producers meet secretly and agree to issue the smart phones of their most successful models sequentially and at the same price that maximizes their profits. After hearing about the secret meeting the U.S. Justice Department is most likely to file charges under the A) Sherman Act. B) Wheeler-Lea Act. C) Robinson-Patman Act. D) FTC Act. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 55) Which of the following acts outlawed selling products at "unreasonably low prices" with the intent of reducing competition? A) Sherman Act B) FTC Act C) Robinson-Patman Act D) Wheeler-Lea Act Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 56) All of the following are exempted from antitrust laws EXCEPT A) labor unions. B) Microsoft Windows. C) professional baseball. D) hospitals. Answer: B Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

57) All of the following are exempt from antitrust lawsuits EXCEPT A) labor unions. B) professional baseball. C) public transportation. D) software developers. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 58) The first antitrust law that the U.S. Congress enacted was A) the Clayton Antitrust Act. B) the Sherman Antitrust Act. C) the Robinson-Patman Act. D) the Federal Trade Commission Act. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 59) A retail store cuts the prices of the products it sells to force its competitor to leave the market. This is prohibited by the A) Sherman Act. B) Robinson-Patman Act. C) Aldrich Act. D) FTC Act. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

60) Antitrust laws in the United States A) are an attempt to foster competition. B) are not necessary in the twenty-first century. C) have not been used in the past twenty-five years. D) are the same as the laws in the European Union. Answer: A Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 61) The Supreme Court has defined the offense of monopolization as involving all of the following elements EXCEPT A) the possession of monopoly power in the relevant market. B) the willful acquisition of monopoly power. C) the ability to grow a business as a consequence of a superior product. D) the maintenance of monopoly power. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 62) Which of the following defines monopoly? A) Sherman Act B) Clayton Act C) Federal Trade Commission Act D) none of these Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

63) Which of the following defines monopolization? A) the Securities and Exchange Commission B) the Federal Reserve C) U.S. Supreme Court D) Federal Trade Commission Act Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 64) The act of selling an item in slightly altered forms at different prices and to different groups of consumers is known as A) bundling. B) versioning. C) tie-in sales. D) lemons marketing. Answer: B Diff: 3 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 65) The act of offering two or more products for sale as a set is called A) bundling. B) versioning. C) tie-in sales. D) branding. Answer: A Diff: 3 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

66) According to the Justice Department and the Federal Trade Commission, a merger would likely be challenged if A) the post-merger industry has an HHI above 1,500 and the HHI rises by more than 100. B) the post-merger industry has an HHI above 500 and the HHI rises by more than 50. C) the number of firms in the post-merger industry is very large. D) the firms' markets are very large. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 67) According to U.S. antitrust enforcement guidelines, a merger is likely to be challenged if A) the HHI decreases after the merger. B) the industry after the merger has an HHI above 1,800 and the HHI rises by more than 100. C) the industry after the merger has an HHI above 1,800 and the HHI falls by more than 100. D) the industry after the merger has an HHI above 1,000 and the HHI rises by more than 10. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 68) The U.S. antitrust enforcers determine whether a merger violates antitrust laws by examining A) both the resulting change in the HHI and the level of post-merger HHI. B) only the resulting change in the HHI but not the level of HHI after the merger. C) both the size of the market after the merger and the profits of the mergers. D) whether the mergers are monopolies before they merge. Answer: A Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

69) Defining the "relevant market" involves looking at two components. They are A) the competitive market and the dominant market. B) the local market and the national market. C) the geographic market and the product market. D) the goods market and the services market. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 70) The Sudsy Soda Company will not sell its soft drinks to a restaurant unless that business also buys paper cups from Sudsy. This requirement is an example of A) product versioning. B) tie-in sales. C) price differentiation. D) complementary pricing. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 71) One of the elements of monopolization is A) having a monopoly. B) wanting to be a monopoly and wanting to earn monopoly profits. C) monopoly pricing. D) the willful acquisition of monopoly power. Answer: D Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

72) One of the elements of monopolization is A) having a superior product or having a superior business acumen.. B) the possession of monopoly power in the relevant market. C) when only one firm exists in an industry. D) having a significant pricing power due to an accident in the relevant market. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 73) The possession of monopoly power and the willful acquisition of that power is A) defined in the Sherman Antitrust Act as monopolization. B) defined by the Supreme Court as monopolization. C) not defined as monopolization until a statement about profits is included. D) not the definition of monopolization. Answer: B Diff: 3 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 74) The Supreme Court has defined the offense of monopolization to A) be when only one firm exists in an industry. B) occur when asymmetric information exists. C) include the possession of monopoly power and the willful maintenance of that power. D) be unfair acts in the practice of commerce. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

75) Suppose that in an industry, firm X has 50 percent market share, firm Y has 35 percent market share, and firm Z has 10 percent market share. Which of the following mergers is NOT likely to be challenged by the Federal Trade Commission? A) a merger between firms X and Y B) a merger between firms Y and Z C) a merger between firms X and Z D) Any merger of two firms among those firms is likely to be challenged. Answer: D Diff: 3 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 76) The type of mergers that the Federal Trade Commission will most likely challenge are A) mergers of firms within a relevant market. B) mergers of firms in different markets. C) mergers of firms that will generate economies of scale. D) mergers of firms in different geographical locations. Answer: A Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 77) In the United States, antitrust enforcement focuses on A) the profitability of the leading firms in an industry. B) the degree of market concentration within a market. C) the average level of prices charged by firms. D) the price-cost margin of an industry. Answer: B Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

78) The key issue in determining the relevant product market is A) the degree of interchangeability between products. B) the specific geographic area in which competing products overlap. C) the production processes used to produce the goods. D) the market share test. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 79) Offering two or more products for sale as a set is known as A) bundling. B) versioning. C) monopolizing. D) product sharing. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 80) The United States as a whole would be inappropriate as the relevant geographic market when an antitrust case involved A) ABC and NBC. B) two auto producers. C) two steel producers. D) two concrete producers. Answer: D Diff: 3 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

81) If bottled water, soft drinks and juices are included in the definition of the beverage market, then the relevant definition of the market is defined by A) the locations of products that are produced. B) the low degrees of substitution between products in the market. C) the high degrees of substitution between products in the market. D) a low level of competition among firms producing those products. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 82) The main goal of antitrust policy is to A) induce firms to produce at the MR = MC level. B) regulate natural monopolies. C) prevent the monopolization of industries. D) prevent the nationalization of industries. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 83) The first step in enforcing any antitrust policy is to A) win the support of the public. B) win congressional approval. C) win the approval of the state senators from the state where the company is headquartered. D) define the market. Answer: D Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

84) Elmo's gas station in El Paso only sells gasoline if customers also purchase its car wash service. A) This is called a tie-in sale and is in violation of antitrust laws. B) This is not in violation of antitrust laws, as cars need both gasoline and car wash. C) This is not in violation of antitrust laws, as consumers get the gasoline below market prices. D) This is in violation of the Robinson-Patman Act. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 85) When companies sell slightly different forms of a product to different groups of customers, this is known as A) market testing. B) editions. C) adaptations. D) versioning. Answer: D Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 86) The U.S. antitrust enforcers will likely block a merger if A) the merging firms already earn excessive profits. B) the merging firms are in different markets. C) the merger will substantially increase market power. D) the degree of concentration declines as a result of the merger. Answer: C Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

87) Which of the following mergers would most likely be challenged by the Federal Trade Commission? A) two restaurants in a large metro area B) two largest wireless service providers in the U.S. wireless communication industry C) an automaker and an insurance company D) one oil refinery in the U.S. and another oil refinery in Canada Answer: B Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 88) One of the agencies responsible for enforcement of antitrust policy is A) the Trust Division of Congress. B) the Federal Trade Commission. C) the World Trade Organization. D) the Food and Drug Administration. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 89) Enforcement of antitrust policy is the responsibility of A) the Trust Division of Congress and the World Trade Organization. B) the Federal Trade Commission and the Antitrust Division of the Department of Justice. C) the World Trade Organization and the FDA. D) the Food and Drug Administration and Congress. Answer: B Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

90) A measure of monopoly power used by the government is the A) percentage share of the relevant market or market share test. B) profit of the firm compared to other firms in the industry. C) price charged by the firm for goods and services. D) percentage difference between price and marginal cost. Answer: A Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 91) When Apple put together a set of digital apps that ran within its own operating system, it was practicing A) bundling. B) tie-in sales. C) versioning. D) compacting. Answer: A Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 92) When Samsung put together a set of mobile apps with its smartphones, it was practicing A) a loss leader. B) tie-in sales. C) bundling. D) compacting. Answer: C Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

93) Discuss the Clayton Act and the Federal Trade Commission Act, and relevant amendments to them. Answer: The Clayton Act was passed to prohibit or limit a number of specific business practices that were felt to be unreasonable attempts at restraining trade. Included are price discrimination, exclusive dealing contracts, and mergers. The Robinson-Patman Act amended the Clayton Act to prohibit price cuts aimed at putting competitors out of business. The Federal Trade Commission Act established the Federal Trade Commission (FTC), and authorized the FTC to control unfair methods of commerce, including deceptive advertising. Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 94) Discuss the important provisions of the Sherman Antitrust Act of 1890. Answer: The Sherman Antitrust Act prohibits contracts and combinations in restraint of trade and prohibits monopolization. Neither restraint of trade nor monopolization are defined in the Act. The Act would appear to prohibit collusion and certain methods of obtaining a monopoly position. Diff: 1 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking 95) What is the difference between product versioning and product bundling? Which of these two business practices have antitrust authorities been more likely to regard to be the form of price discrimination called tie-in sales? Why? Answer: Versioning entails selling a product in slightly altered forms to different groups of consumers. From one standpoint, versioning might be seen as a means of engaging in price discrimination by charging different prices to different consumers for very nearly the same product. From another point of view, however, versioning can be regarded as imperfectly substitutable products sold in separate markets, in which case there is no price discrimination associated with this business practice. Product bundling entails offering two or more products for sale as a set. If a bundling arrangement limits a consumer's ability to buy one product to the simultaneous purchase of another product, then this is a form of tie-in sale that antitrust authorities sometimes regard as a means of practicing price discrimination. Diff: 2 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

96) What is the difference between holding a monopoly and monopolization? Which is illegal? Explain. Answer: Monopolization involves having a monopoly plus showing a willful acquisition or maintenance of the power that goes beyond growth that results from superior product, business acumen, or historical accident. Monopolization is illegal while holding a monopoly is not. Not all monopolies can be stopped. For example, a small rural town may have only one gas station, giving the gas station some monopoly power. But, if the town is too small to support a second station, nothing can be done about the monopoly. Further, patents provide legal monopolies. Diff: 3 Topic: 27.5 Antitrust Policy Learning Outcome: Micro-5: List ways in which governments intervene in markets and explain the consequences of such intervention AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 28 The Labor Market 28.1 The Labor Demand for a Perfectly Competitive Firm 1) For a perfectly competitive firm, the value of the marginal product of labor falls as more workers are hired because of the diminishing A) output price. B) marginal physical product of labor. C) price of labor. D) marginal cost of production. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 2) The additional revenue earned from hiring one more worker is known as the A) marginal physical product of labor. B) marginal revenue product of labor. C) marginal factor cost of labor. D) marginal utility of labor. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 3) The additional cost associated with the hiring of one more unit of labor is known as the A) marginal physical product of labor. B) marginal revenue product of labor. C) marginal factor cost of labor. D) marginal utility of labor. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

4) Suppose at the current level of labor used, MRP = $100 and MFC = $50. To maximize profits, the firm should A) hire more labor. B) reduce the level of labor. C) maintain the current level of labor. D) shut down. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 5) Suppose at the current level of labor used, MRP = $20 and MFC = $25. To maximize profits, the firm should A) hire more labor. B) reduce the level of labor. C) maintain the current level of labor. D) expand production. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 6) Suppose at the current level of labor used, MRP = $10 and MFC = $10. To maximize profits, the firm should A) hire more labor. B) reduce the level of labor. C) maintain the current level of labor. D) shut down. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

7) Derived demand means A) the labor demand curve will be upward sloping. B) labor demand is derived from demand for the product it produces. C) labor demand will shift about in a random fashion. D) labor demand is determined by the supply of labor. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 8) The additional production resulting from hiring one more worker is A) marginal physical product. B) marginal cost. C) marginal production. D) marginal opportunity cost. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 9) Holding other things constant, an increase in the use of capital in production would A) increase the marginal productivity of labor. B) decrease, but not proportionately, the marginal productivity of labor. C) not change the marginal productivity of labor. D) decrease proportionately the marginal productivity of labor. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

10) If a firm employs an extra unit of labor, the additional product generated by employing the extra unit of labor is A) the marginal physical product of labor. B) the diminished marginal product. C) marginal revenue. D) total product. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 11) The change in total output due to the change in one variable input, while holding all other inputs constant, is the A) marginal revenue product. B) derived demand for labor. C) marginal physical product. D) market demand curve for labor. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 12) The marginal physical product of labor is the A) total output divided by the number of labor employed. B) wage that must be paid to labor. C) value of sales divided by additional labor used. D) change in output generated by a unit change in labor. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

13) We assume that when a firm hires additional workers, the marginal physical product of labor will A) increase because more workers can always get more work done. B) decrease because the new workers are likely to be less able than the previously hired ones. C) decrease because each worker now has less capital and other resources to work with. D) increase because large firms are more efficient. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 14) As more workers are hired, the marginal physical product of labor eventually declines because A) less efficient workers are hired as the number of workers increases. B) workers do not work well together when the number of workers increases. C) the amount of capital each worker has to work with declines as the number of workers increases. D) of diseconomies of scale. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 15) Marginal revenue product is A) marginal physical product multiplied by marginal revenue. B) marginal physical product multiplied by average variable cost of the product. C) the price of the product. D) the total revenue from the sale of the product sales. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

16) The contribution to total revenues coming from the next worker hired is A) marginal product. B) marginal revenue product. C) total product. D) total revenues. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 17) A firm's marginal factor cost describes A) the increase in the firm's total revenue as one more unit of output is sold. B) the change in total fixed cost that results from hiring one more unit of input. C) the change in total variable cost that results from the production of an extra unit of output. D) the change in total cost that results from using one more unit of an input. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 18) If a firm is a perfectly competitive purchaser of factor inputs and the wage rate is $1, the marginal factor cost for labor is A) greater than $1. B) less than $1. C) $1. D) indeterminate. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

19) When market wages increase in a perfectly competitive market, then A) the marginal factor cost increases. B) the marginal product increases. C) the marginal factor cost decreases. D) the marginal product decreases. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 20) The marginal revenue product is A) the change in total output resulting from a one-unit change in variable output. B) the change in marginal output resulting from a one-unit change in variable input. C) the change in total revenue resulting from a one-unit change in variable input. D) the change in marginal revenue resulting from a one-unit change in variable input. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 21) The marginal revenue product of labor is A) the marginal physical product multiplied by marginal revenue. B) the marginal revenue of output multiplied by the price of the input. C) total sales divided by total labor employed. D) total labor employed divided by total sales. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

22) When 4 units of labor are employed, total product is 7 units; when 5 units of labor are employed, total product is 9 units of output. If the price of output is $5 per unit, what is the marginal revenue product of the 5th unit of labor? A) $2 B) $5 C) $10 D) $40 Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 23) When 5 units of labor are employed, total product is 10 units; when 6 units of labor are employed, total product is 11 units of output. If the price of output is $5 per unit, what is the marginal revenue product of the 6th unit of labor? A) $5 B) $10 C) $15 D) $55 Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 24) Marginal factor cost is A) the change in the value of output from using an additional unit of the factor. B) the cost of an additional unit of output. C) the total value of factor cost divided by the one cost that is being held constant. D) the cost of using an additional unit of an input. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

25) The marginal revenue product represents A) the marginal physical product of labor divided by the price of the good produced. B) the worker's contribution to the firm's total revenues. C) the worker's contribution to the firm's output. D) the value of each additional unit of output. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 26) The firm's demand curve for labor is A) the marginal revenue product curve for labor. B) the demand curve for the good produced divided by the price of the good. C) the marginal physical product curve for labor divided by the price of the good. D) the marginal physical product curve for labor multiplied by the price of labor. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 27) A firm will not hire additional workers once A) it earns accounting profits. B) the additional cost of a worker equals the additional revenue from the worker. C) total product is rising. D) the company reaches its break-even output level. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 28) When MFC = MRP, a firm in a competitive market will A) stop hiring more workers. B) hire more workers. C) earn additional profits. D) lay off workers. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 9 Copyright © 2021 Pearson Education, Inc.

29) When MFC < MRP, a firm in a competitive market will A) stop hiring more workers. B) hire more workers. C) earn fewer profits. D) lay off workers. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 30) When MFC > MRP, a firm in a competitive market will A) stop hiring additional workers. B) hire more workers. C) earn additional profits. D) lay off workers. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 31) A profit-maximizing firm in a competitive market will continue to hire more workers when A) the marginal factor cost exceeds the marginal revenue product of the additional workers. B) the marginal factor cost equals the marginal revenue product of the additional workers. C) the marginal factor cost is less than the marginal revenue product of the additional workers. D) the marginal factor cost is less than zero. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

32) Which of the following statements about a perfectly competitive market are TRUE? I. The perfectly competitive industry faces an upward-sloping labor supply curve. II. The individual firm in a perfectly competitive industry faces a perfectly elastic labor supply curve. A) I only B) II only C) both I and II D) neither I nor II Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 33) The market demand curve for labor A) slopes downward. B) slopes upward. C) is vertical at the existing supply of labor. D) is horizontal at the going wage rate. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 34) A firm's marginal revenue product of labor curve is also A) its labor demand curve. B) its marginal cost curve. C) its total revenue line. D) its long-run input cost function. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

35) The demand for labor is A) derived from the satisfaction that hiring the inputs provides the owner or manager of the firm more money. B) derived from the demand for the final product being produced. C) derived from a utility maximizing process similar to that used to derive the demand curve for goods and services. D) totally unrelated to the demand curve for the final product. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 36) When the price of a product increases, the marginal revenue product curve in a perfectly competitive market A) does not change. B) becomes flatter. C) shifts to the right. D) shifts to the left. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 37) When the price of a product decreases, the marginal revenue product curve in a perfectly competitive market A) does not change. B) becomes steeper. C) shifts to the right. D) shifts to the left. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

38) When the marginal productivity of labor decreases, the demand curve for labor in a perfectly competitive market A) does not change. B) becomes steeper. C) shifts to the right. D) shifts to the left. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 39) When increased demand raises the price of the product, the A) marginal revenue product will also increase. B) marginal revenue product will fall. C) marginal revenue product will remain unchanged. D) sales will fall. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 40) The marginal revenue product curve shifts when A) wages fall. B) there is a change in the product price workers are producing. C) wages rise. D) the wages paid exceed the price. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

41) A perfectly competitive firm will hire workers up to the quantity at which the wage rate equals the A) marginal revenue product of labor. B) marginal factor cost of labor. C) price of the extra output produced. D) average physical product of labor. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 42) A decrease in demand for a product, holding other things constant, will A) increase the marginal revenue product of labor. B) decrease the marginal revenue product of labor. C) not change the marginal revenue product of labor. D) have an undetermined effect upon the marginal revenue product of labor. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 43) The demand for labor is considered a derived demand since it depends on A) the supply of labor. B) the market for capital. C) the consumer demand for the output produced. D) competitive markets. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

44) An outward shift in the consumer demand for wheat will A) raise the price of wheat and shift inward the marginal revenue product of labor producing wheat. B) lead to more capital and less labor used in producing wheat. C) raise the price of wheat and shift out the marginal revenue product of labor producing wheat. D) lead to downward pressure on the wages of those producing wheat. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 45) A firm is a price taker in the labor market if A) the skills of available workers do not match the requirements for the job. B) there is a scarcity of labor in the market. C) the hiring of more workers will drive the existing wage rate up. D) the hiring of more workers will leave the existing wage rate unchanged. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 46) If the supply of labor to a firm is perfectly elastic at the going wage rate established by the forces of supply and demand, then A) the firm is price taker. B) the firm can only hire additional units of labor by driving the wage rate up. C) the wage rate has been decreasing. D) full employment exists in the labor market. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

47) For a firm in a perfectly competitive labor market, the supply curve of labor is A) elastic. B) inelastic. C) perfectly elastic. D) perfectly inelastic. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 48) A firm in a competitive input market can A) hire workers at the going wage. B) hire additional workers only by raising wages. C) hire additional workers at lower wages because those who are still unemployed are anxious to work. D) hire additional workers only after a long search process. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 49) For a worker to be potentially available, he or she must A) know about the jobs available at a particular firm. B) be in the relevant geographic market and be willing to work for minimum wage. C) have most of the skills required by the firm only. D) have the skills required by the firm and be in the relevant geographic market. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

50) The increase in output that results when one more unit of a variable input is hired is called A) total physical product. B) marginal physical product. C) average physical product. D) marginal revenue. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 51) The marginal physical product of labor is A) the output of the firm divided by the number of workers. B) the change in total revenues resulting from the addition of one more worker, while increasing one other factor of production. C) the change in output resulting from the addition of one more worker, holding other factors of production constant. D) the change in output resulting from the addition of one more worker, adjusting the level of the capital stock accordingly. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 52) As a firm hires more workers, holding the amounts of capital and other inputs constant, A) output increases at a decreasing rate. B) output increases at a constant rate. C) output increases at an increasing rate. D) output increases, but we can't be certain whether output increases at an increasing or a decreasing rate. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

53) Other things held constant, after some point, hiring additional units of labor will cause the marginal physical product of labor to decline because A) the firm is a price taker. B) the wage rate increases when additional workers are hired. C) of the law of diminishing marginal product. D) the supply of labor is perfectly elastic. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 54) As a firm hires more workers, holding capital and other factors constant, the marginal physical product of labor declines because A) there are diseconomies of scale. B) less efficient workers are hired as the number of workers increase. C) workers don't perform well in teams. D) the amount of other inputs each worker has to work with declines as the number of workers increases. Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 55) The marginal physical product of labor for the most recent worker hired by a company is 100. If this company were to hire an additional worker we would expect the marginal physical product of labor to A) remain at 100. B) be below 100. C) be above 100 by a small amount. D) be infinity. Answer: B Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

56) Refer to the above table. What does the marginal physical product equal when the amount of labor goes from 10 to 11 units? A) 60 B) 50 C) 10 D) 5 Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 57) Refer to the above table. If the price of the good produced is $6, the marginal revenue product of the 11th worker is A) $60. B) $66. C) $350. D) $360. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 58) Refer to the above table. What does the marginal physical product equal when the amount of labor goes from 11 to 12 units? A) 60 B) 9 C) 10 D) 69 Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 19 Copyright © 2021 Pearson Education, Inc.

59) Refer to the above table. If the price of the good produced is $8, the marginal revenue product of the 12th worker is A) $72. B) $80. C) $552. D) $56. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 60) Refer to the above table. What does the marginal physical product equal when the amount of labor goes from 12 to 13 units? A) 10 B) 7 C) 69 D) 76 Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 61) Refer to the above table. If the price of the good produced is $9, the marginal revenue product of the 13th worker is A) $81. B) $36. C) $684. D) $63. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge

62) Refer to the above table. Suppose the price of the good sold is $10 and the marginal factor cost of labor is $70, how many units of labor will the firm hire? A) 10 B) 11 C) 12 D) 13 Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 63) Refer to the above table. For each level of employment of labor shown, A) marginal product rises for all employees beyond the 10th unit of labor. B) marginal product holds constant. C) marginal product rises. D) marginal product falls for all employees beyond the 10th unit of labor. Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 64) Refer to the above table. Which of the following statements is correct? A) The table follows economic principles because in an increasing cost industry, increases in a variable input will lead to increase in output. B) The table does not follow economic principles because in an increasing cost industry, increases in a variable input will lead to decrease in output. C) The table follows economic principles because the law of diminishing marginal product predicts that increase in a variable input will eventually lead to a decrease in the marginal physical product. D) The table does not follow economic principles because the law of diminishing marginal product predicts that increase in a variable input will eventually lead to an increase in the marginal physical product. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

65) Refer to the above table. If the price of the product is $1.50, what is the marginal revenue product of the 11th worker? A) $1.50 B) $13.64 C) $150 D) $900 Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 66) Refer to the above table. If the price of the product is $1.50, what is the marginal revenue product of the 12th worker? A) $1035 B) $135 C) $90 D) $1.50 Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 67) Refer to the above table. If the price of the product is $1.50, and the marginal factor cost of an additional unit of an input is $135, how many units of labor should be hired? A) 11 B) 12 C) 13 D) 14 Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 22 Copyright © 2021 Pearson Education, Inc.

68) Refer to the above table. If the price of the product is $1.50, and the marginal factor cost of an additional unit of an input is $105, how many units of labor should be hired? A) 11 B) 12 C) 13 D) 14 Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 69) If a firm hires 215 workers, it will produce 3,016 units of output. If it hires 216 workers, it will produce 3,128 units of output. The marginal physical product of labor equals A) 1. B) 112. C) 216. D) 3,128. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 70) If a firm hires 312 workers, it will produce 4,522 units of output. If it hires 313 workers, it will produce 4,786 units of output. The marginal physical product of labor equals A) 4,786. B) 313. C) 264. D) 1. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge

71) If a firm hires 200 workers, it produces 5,000 computers. If the firm hires one more worker, it produces 5,050 computers. If computers sell at a constant price of $100 and labor is hired at a constant wage rate of $4,000 per worker, A) the firm should hire and retain the additional worker. B) the marginal factor cost of labor is $4,000. C) the marginal revenue product of the added worker is $5,000. D) all of these. Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 72) The additional revenue obtained by a firm when it hires an additional worker, holding other inputs constant, is A) the marginal physical product of labor. B) the marginal revenue product of labor. C) the marginal cost of labor. D) equal to total revenue divided by the number of workers. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 73) The marginal revenue product gives A) the change in total product for an additional unit of a variable input. B) the amount that other inputs must increase by when labor increase by one unit. C) the additions to total cost when an additional unit of a variable input is hired. D) the additional revenue obtained when an additional unit of a variable input is hired. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

74) The marginal revenue product A) represents the incremental contribution to the firm's total revenues obtained from an increase in a variable input. B) always increases when there is an increase in a variable input. C) gives the increase in cost when there is an increase in a variable input. D) gives the change in total product when an additional unit of a good is hired. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 75) The addition to revenue obtained from hiring an additional unit of labor is A) total product. B) marginal revenue product. C) marginal factor cost. D) marginal physical product of labor. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 76) The marginal revenue product of labor declines as the number of workers increases because A) firms hire the most efficient workers first and the least efficient workers last. B) firms must lower prices for the final product when they want to sell more units. C) of the law of diminishing marginal product. D) of diseconomies of scale. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

77) For a perfectly competitive firm, the value of the marginal revenue product is A) the same thing as marginal factor cost. B) the same thing as marginal physical product. C) marginal physical product times the product price. D) marginal physical product times the wage rate. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

78) Refer to the above table. If the price of the good produced is $5, the marginal revenue product of the 5th worker is A) $3350. B) $670. C) $500. D) $100. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 79) Refer to the above table. If the price of the good produced is $5, the marginal revenue product of the 7th worker is A) $125. B) $275. C) $5000. D) $55. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 26 Copyright © 2021 Pearson Education, Inc.

80) Refer to the above table. Suppose the marginal revenue product of the 7th worker is $1100. This implies that A) the price of the good is $1. B) the price of the good is $8. C) the price of the good is $20. D) We cannot tell what the price of the good is without more information. Answer: C Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 81) Refer to the above table. Suppose the marginal revenue product of the 5th worker is $800. This implies that A) the price of the good is $5.33. B) the price of the good is $8. C) the price of the good is $70. D) We cannot tell what the price of the good is without more information. Answer: B Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 82) Refer to the above table. The marginal factor cost of labor is $200. To get the firm to hire 8 workers, the A) firm must be able to reduce wages below the marginal factor cost. B) price of the good must be $8. C) eighth worker must be at least as productive as the seventh worker was. D) wage rate must be a fraction of the marginal factor cost of labor. Answer: B Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

83) Refer to the above table. Suppose the firm hires 5 workers and the price of the good sold is $3. The marginal factor cost of labor must be A) $3. B) $100. C) $300. D) $900. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 84) Refer to the above table. Suppose the price of the good sold is $3 and the marginal factor cost of labor is $300. How many units of labor will the firm hire? A) 4 B) 5 C) 6 D) 3 Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 85) Refer to the above table. Suppose the firm hires 4 workers and the price of the good sold is $4. The marginal factor cost of labor must be A) $4. B) $150. C) $3080. D) $600. Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

86) Refer to the above table. Suppose the price of the good sold is $4 and the marginal factor cost of labor is $600. How many units of labor will the firm hire? A) 4 B) 5 C) 6 D) 3 Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 87) The cost of using an additional unit of an input is called the A) marginal revenue product. B) marginal physical product cost. C) marginal factor cost. D) marginal product of labor. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 88) The marginal factor cost is the A) additional revenue obtained from a one-unit change in labor input. B) additional revenue obtained from a one-unit change in output. C) change in output resulting from the addition of one more worker. D) cost of using an additional unit of an input. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

89) When the supply of labor to a firm is perfectly elastic, the marginal factor cost will equal the A) market price of the product. B) wage rate. C) marginal physical product. D) wage rate times the number of workers. Answer: B Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 90) A profit-maximizing firm will hire additional units of labor until A) the additional cost of hiring the last worker equals the additional revenue generated by that worker. B) the additional cost of hiring the last worker equals the marginal factor cost of the worker. C) the extra revenue from hiring the last worker equals the marginal physical product of labor. D) the extra cost from hiring the last worker equals the cost of the product. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 91) Bogo has just discovered that the marginal revenue product generated by the last worker hired was $125 while the marginal factor cost was $110. What should Bogo do? A) Leave the level of production unchanged. B) Increase the amount produced. C) Reduce the amount produced. D) Collect more information before making a decision. Answer: B Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

92) Company A has just discovered that the marginal revenue product generated by the last worker hired was $80 while the marginal factor cost was $85. What should Company A do? A) Leave the level of production unchanged. B) Increase the amount produced. C) Reduce the amount produced. D) Collect more information before making a decision. Answer: C Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 93) Company B has just discovered that the marginal revenue product generated by the last worker hired was $125 while the marginal factor cost was $125. What should Company B do? A) Leave the level of production unchanged. B) Increase the amount produced. C) Reduce the amount produced. D) Collect more information before making a decision. Answer: A Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 94) If the marginal revenue product of the last worker hired exceeds the marginal factor cost of the worker, the firm would be better served if it A) hires additional workers. B) maintains its current level of workers already hired. C) lays off the last worker hired. D) None of these is a good option for a profit-seeking firm. Answer: A Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

95) If MFC > MRPL, the firm should A) hire more workers. B) lower wages. C) get rid of some capital. D) reduce the number of workers. Answer: D Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 96) A firm should hire workers up to the point where A) MP = P. B) MFC = P. C) MFC = MRP. D) MP = MRP. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 97) If MFC < MRPL, the firm should A) hire more workers. B) lower wages. C) get rid of some capital. D) reduce the number of workers. Answer: A Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

98) If the additional revenue from hiring an additional worker equals the additional costs from hiring the extra worker, then we know that A) MFC = MPPL. B) MFC/MPPL = wage. C) MFC = MRPL. D) MRPL/P = MFC. Answer: C Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 99) The demand curve for labor is the A) marginal factor cost curve for labor. B) marginal physical product curve for labor. C) marginal physical product curve for labor times the wage rate. D) marginal revenue product curve for labor. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 100) The demand curve for labor slopes down because A) firms value less efficient workers less than they value more efficient workers. B) firms must lower prices to sell the additional units of its product that the extra workers produce. C) of the law of diminishing marginal product. D) of profit maximizing behavior. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

101) An increase in the marginal factor cost of labor will A) lead to an increase in the quantity demanded of labor. B) induce a firm to hire fewer workers. C) lead to an increase in the value of an additional worker. D) cause the value of the marginal product of labor to increase. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 102) A decrease in the marginal factor cost of labor will A) lead to a decrease in the quantity demanded of labor. B) induce a firm to hire fewer workers. C) induce a firm to hire more workers. D) cause the value of the marginal product of labor to decrease. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 103) The wage rate for widget makers is currently $25 per hour and Ajax hires 20 widget makers. If the wage rate were decreased to $20, what would happen to the marginal revenue product for labor at Ajax? A) It would remain the same. B) It would increase since Ajax's demand for labor curve will shift. C) It would increase since the price of widgets would decrease. D) It would decrease since Ajax will hire more workers. Answer: D Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

104) When the demand curve for an input is a derived demand this means that A) the demand curve is derived from the demand for the final product being produced. B) the demand curve depends upon the MFC. C) the law of diminishing marginal product does not hold. D) the demand curve slopes upward. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 105) The demand for labor is A) derived from the demand for the final product of the firm. B) derived from the satisfaction that hiring labor provides the owner of the firm. C) derived from the satisfaction workers get for being employed. D) derived from a utility-maximizing process similar to that used to derive the demand curve for all workers in a given industry. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 106) The demand curve for labor will shift whenever A) the wage rate changes. B) the marginal factor cost changes. C) demand for the final product changes. D) the supply of labor changes. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

107) Which of the following will not cause the marginal revenue product of labor curve for a firm to shift? A) an increase in the productivity of workers B) an increase in demand for the product C) a decrease in the price of the product D) an increase in the wage rate Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 108) An increase in product price implies that A) the firm's marginal factor cost will increase. B) the wage rate the firm pays will increase. C) the firm's demand for labor increases. D) the firm's demand for labor decreases. Answer: C Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 109) An increase in the productivity of labor induces A) an increase in the demand for labor. B) an increase in the cost of labor. C) a firm to hire fewer workers since fewer workers are needed with the increase in productivity. D) a firm to offer a higher wage for workers since the workers are now more productive. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

110) If the wage rate doesn't change but a profit-maximizing competitive firm hires fewer workers, we know that A) the price of the product increased. B) technical change occurred that increased labor productivity, reducing the firm's demand for labor. C) demand for the product fell or there has been a reduction in labor productivity. D) marginal factor cost increased. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

111) Refer to the above figure. MRP0 represents A) the supply curve for the product. B) the supply curve for labor. C) the demand curve for the product. D) the demand curve for labor. Answer: D Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

112) Refer to the above figure. The firm is operating using MRP0. An increase in demand for the product has occurred. The relevant curve for the firm after the increase in price A) is MRP0. B) is MRP1. C) is MRP2. D) could be MRP1 or MRP2 depending upon whether the firm was earning a positive profit. Answer: C Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 113) Refer to the above figure. The firm is operating using MRP0. An increase in productivity has occurred. The relevant curve for the firm after the increase in productivity A) is MRP0. B) is MRP1. C) is MRP2. D) could be MRP1 or MRP2 depending upon whether the firm was earning a positive profit. Answer: C Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 114) Sam, who owns a carpentry shop, discovered that with 4 laborers he could produce 18 cabinets per day. With 5 laborers he produced 25 cabinets and with 6 laborers he produced 36 cabinets. What was the MPP of the 5th laborer? A) 8 cabinets B) 7 cabinets C) 6 cabinets D) 4 cabinets Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge

115) Sam, who owns a carpentry shop, discovered that with 4 laborers he could produce 18 cabinets per day. With 5 laborers he produced 25 cabinets and with 6 laborers he produced 36 cabinets. What was the MPP of the 6th laborer? A) 11 cabinets B) 7 cabinets C) 36 cabinets D) 9 cabinets Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 116) The change in output resulting from the addition of one more worker is A) marginal physical product. B) marginal revenue product. C) average physical product. D) average revenue product. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 117) The marginal physical product (MPP) is calculated by A) dividing total physical product by labor. B) dividing the change in total physical product by the change in the input. C) dividing the change in total cost by the change in labor. D) the difference between the output of skilled and unskilled workers. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

118) The downward-sloping marginal revenue product of labor is A) the firm's supply of labor. B) the firm's short-run demand for labor. C) the firm's marginal cost of labor. D) another term for the marginal revenue product of labor. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 119) A firm's demand curve for labor is equal to the A) total revenue product. B) marginal revenue product. C) marginal factor cost. D) marginal wage. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 120) Marginal revenue product is A) marginal physical product times marginal factor cost. B) marginal physical product times marginal revenue. C) average physical product times marginal revenue. D) marginal physical product times the wage rate. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 121) If the price of a product being sold in a perfectly competitive market decreases, A) the MRP curve shifts to the left. B) the MRP curve shifts to the right. C) the MFC curve shifts to the right. D) the MFC curve shifts to the left. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 40 Copyright © 2021 Pearson Education, Inc.

122) The additional revenue associated with hiring one additional unit of some factor input, such as labor, is called A) marginal cost. B) marginal revenue product. C) marginal factor cost. D) marginal physical product. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 123) Marginal factor cost is computed as A) total cost of the resource/total amount of the resource being used. B) change in the total cost of the resource/total amount of the resource being used. C) total cost of the resource/change in the amount of the resource being used. D) change in the total cost of the resource/change in the amount of the resource being used. Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 124) The cost of hiring one more worker, ceteris paribus, is known as A) marginal revenue product. B) marginal physical product. C) marginal factor cost. D) marginal wage. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

125) The additional cost associated with hiring one additional unit of some factor input, such as labor, is referred to as A) marginal physical product of labor. B) marginal revenue cost. C) marginal factor cost. D) marginal revenue product. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 126) The firm's demand for labor curve is its A) average product of labor curve. B) marginal product of labor curve. C) marginal revenue product of labor curve. D) average revenue product of labor curve. Answer: C Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 127) The MRP of labor will shift to the right if A) labor productivity increases. B) labor productivity decreases. C) wages increase. D) wages decrease. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

128) The MRP of labor will shift to the left if A) labor productivity increases. B) labor productivity decreases. C) wages increase. D) wages decrease. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 129) The additional revenue a firm obtains when it hires an additional worker (holding other inputs constant) is the A) marginal revenue product (MRP) of labor. B) total factor cost (TFC) per worker. C) general rule for hiring. D) marginal physical product (MPP) of labor. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 130) The additional output from one more worker is known as A) marginal revenue product. B) marginal physical product. C) marginal factor cost. D) marginal wage. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

131) All of the following statements regarding the marginal revenue product (MRP) curve and the demand for labor are true EXCEPT A) an individual firm's demand for labor is its MRP curve. B) under conditions of perfect competition, MRP equals marginal physical product multiplied by the product's price. C) an increase in the market demand for a given product decreases the product's price. D) the demand for labor is a derived demand. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 132) The MRP is A) the supply curve of labor for an individual firm. B) the demand curve for labor for an individual firm. C) the demand curve for labor for the entire market. D) the supply curve of labor for the entire market. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 133) Which of the following represents the general rule of hiring for a firm? A) Total physical product equals marginal factor cost. B) Average revenue product equals the wage rate. C) Marginal cost equals marginal revenue. D) Marginal revenue product equals marginal factor cost. Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

134) If the marginal factor cost of hiring an additional worker is $10 while the marginal revenue product is $15, then the firm should A) hire more workers. B) stop hiring more workers. C) fire some workers. D) none of these: insufficient information to answer the question. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 135) Derived demand is A) a derivative of the demand curve. B) the demand for goods and services produced by companies using scarce resources. C) the demand for advertising to increase the sales of the product. D) the demand for the factors of production that are used to produce goods and services. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 136) Since the demand for labor depends upon the demand for the final product, we say that labor is A) a derived demand. B) an "inverse" demand. C) a positive demand. D) a reverse demand. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

137) The demands for labor and other input factors are called A) derived demands, because the demand for these inputs depends on the demand for goods and services they are employed to produce. B) developed demands, because the demand for these inputs is developed from an analysis of the costs of advertising products. C) indirect demands, because the demand for these inputs is indirectly related to the costs of advertising products. D) reverse demands, because the demand for these inputs varies inversely with the demand for goods and services they are employed to produce. Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

138) In the above table, what is the marginal physical product of worker 5? A) 8 B) 10 C) 11 D) 7 Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 139) In the above table, what is the marginal physical product of worker 2? A) 10 B) 18 C) 11 D) 9 Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 46 Copyright © 2021 Pearson Education, Inc.

140) In the above table, if this is a perfectly competitive firm and the market price of the product is $10, what is the marginal revenue product of worker 4? A) $210 B) $100 C) $411 D) $120 Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 141) In the above table, if this is a perfectly competitive firm and the market price of the product is $8, what is the marginal revenue product of worker 3? A) $96 B) $88 C) $80 D) $240 Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 142) In the above table, if this is a perfectly competitive firm and the market price of the product is $5 and the marginal factor cost of labor is $60, how many units of labor will the firm hire? A) 2 B) 3 C) 4 D) 6 Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

143) The above table depicts the output of a firm that manufactures computers. The computers sell for $1,000 each. What is the marginal physical product (MPP) of the eleventh worker per week? A) 90 units B) 80 units C) $7,000 D) $6,000 Answer: A Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 144) The above table depicts output from a firm that manufactures computers. The computers sell for $1,000 each. What is the marginal revenue product (MRP) for the fourteenth worker per week? A) 90 units B) 80 units C) $70,000 D) $60,000 Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 145) An increase in the price of a product A) automatically increases wages. B) raises the firm's demand for labor. C) would probably decrease total revenues. D) increases productivity. Answer: B Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 48 Copyright © 2021 Pearson Education, Inc.

146) If labor productivity increases, A) labor costs rise by equal increments. B) the demand for labor increases. C) some workers will be laid off. D) jobs will relocate. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 147) An increase in labor productivity will shift A) MRP curve to the left. B) MFC curve to the right. C) MRP curve to the right. D) MFC curve to the left. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 148) At a perfectly competitive firm, all of the following is true of the MRP curve EXCEPT A) the MRP curve is the derived supply of labor. B) the MRP curve shifts leftward when labor productivity falls. C) the MRP curve shifts rightward when the product price rises. D) the MRP curve shifts leftward when the demand for the final product falls. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 149) If the demand for online banking decreases, we would expect to see the A) supply of workers that produce online-banking services to increase. B) supply of workers that produce online-banking services to decrease. C) demand for workers that produce online-banking services to increase. D) demand for workers that produce online-banking services to decrease. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 49 Copyright © 2021 Pearson Education, Inc.

150) If workers in an industry become less productive, we would expect the A) supply of workers to increase. B) supply of workers to decrease. C) demand for workers to decrease. D) demand for workers to increase. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 151) If laborers become more efficient over time, and if Company X would want to expand production, it would A) substitute capital for labor. B) hire more laborers. C) hire fewer laborers. D) produce less product. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

152) In the above figure, the marginal revenue product is represented by line A) "a." B) "b." C) "c." D) "d." Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 153) The individual demand curve for an input such as labor to a firm would be the downwardsloping portion of the firm's A) marginal physical product curve. B) marginal revenue product curve. C) marginal revenue curve. D) total revenue curve. Answer: B Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

154) Suppose that in a computer factory, if there is 1 worker, 80 computers are produced per week. If there are 2 workers, 150 computers are produced per week. If there are 3 workers, 210 computers are produced per week. Given this information, there A) is diminishing marginal product. B) are too many workers. C) are not enough workers. D) is increasing marginal product. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 155) Suppose that in a computer factory, if there is 1 worker, 80 computers are produced per week. If there are 2 workers, 150 computers are produced per week. If there are 3 workers, 200 computers are produced per week. Given this information, the marginal product of the third worker is A) 210 computers per week. B) 70 computers per week. C) 60 computers per week. D) 50 computers per week. Answer: D Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 156) Suppose that in a computer factory, if there is 1 worker, 80 computers are produced per week. If there are 2 workers, 150 computers are produced per week. If there are 3 workers, 210 computers are produced per week. Given this information and the fact that the firm receives $200 per computer, the marginal revenue product of the third worker is A) $4,200. B) $12,000. C) $10,000. D) $14,000. Answer: B Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge

157) Refer to the above table. If the price of the good produced is $10 and the wage rate is $500, then the marginal revenue product of the 5th worker is A) $10. B) $50. C) $750. D) $4,750. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 158) According to the above table, if the price of the good produced is $5 and the wage rate is $400, then the marginal revenue product of the 7th worker is A) $300. B) $60. C) $12. D) $400. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 159) According to the above table, if the wage rate is $400 a week and the price of the good produced is $5, the perfectly competitive firm should hire A) 3 workers. B) 4 workers. C) 5 workers. D) 6 workers. Answer: B Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

160) If the demand for hamburgers increases, it is likely that the demand for fast-food employees will A) increase. B) decrease. C) stay the same. D) increase at first but then fall rapidly. Answer: A Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 161) Suppose the MRP of the 49th worker at a firm is $25 and that the market wage rate is $15. We know that if this firm operates in perfectly competitive product and labor markets, A) the firm is paying wages above the minimum wages. B) the firm's profits would increase if it fired some workers. C) the firm would be more profitable if it hired more workers. D) the firm should use more capital. Answer: C Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 162) Which of the following is FALSE regarding the general rule for hiring? A) Virtually every optimizing rule in economics involves comparing marginal benefits with marginal cost. B) The benefit from added workers is extra output and consequently more revenues. C) The firm hires workers up to the point at which the additional cost associated with hiring the last worker is equal to the additional revenue generated by that worker. D) If any firm hired fewer workers over time, profits would definitely increase at that firm. Answer: D Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

163) Which of the following statements is TRUE? A) A firm cannot increase quantity demand for labor when the wage rate falls without causing the product price to decline. B) A movement along the market demand curve for labor does not require a change in the product price. C) A firm can increase quantity demanded for labor when the wage rate falls without affecting the product price but the industry cannot hire more workers without causing the product price to fall. D) Both a firm and the industry can move down their demand curves for labor without causing product price to change. Answer: C Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 164) Which of the following will cause a shift in the demand curve of labor? A) an increase or decrease in the productivity of labor B) an increase or decrease in the demand for the product labor produces C) a decline in the price of a complementary input D) all of these Answer: D Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 165) Which of the following statements is TRUE about the market demand curve for labor? A) The market demand curve is the sum of the individual firm's demand curve. B) The market demand curve will be perfectly inelastic since firms need labor. C) The market demand curve shows the quantities of labor demanded by all firms in the industry at various marginal products. D) The market demand curve depends upon labor productivity, the wage rate and the price of the final product. Answer: D Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

166) Suppose there are 100 firms in a market and all are identical. Firm A will hire 20 workers when the wage rate is $10, 25 workers when the wage rate is $9, and 30 workers when the wage rate is $8. The equilibrium wage rate for a number of years has been $9. If the wage rate falls to $8, we know that A) the quantity demanded for the market will increase to 3,000 workers. B) the quantity demanded for the market will increase to more than 3,000 workers. C) the quantity demanded for the market will increase to less than 3,000 workers. D) the quantity demanded for the market will increase, but we can't tell which of these answers is correct. Answer: A Diff: 3 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 167) "A firm should continue to hire more workers as long as wages are low." Do you agree or disagree? Why? Answer: Disagree. The firm should hire workers up to the point at which the additional cost associated with hiring the last worker is equal to the additional revenue generated by hiring that worker. What is ignored in the statement is the revenue associated with hiring an additional worker: Even if wages are low, the additional revenue associated with the additional worker may not be enough to cover the additional costs associated with the wages. Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 168) What is the marginal revenue product of labor (MRP)? What shape does the MRP curve have? Why? Answer: Marginal revenue product of labor is the marginal physical product of labor times marginal revenue of selling the good produced. It gives the additional revenue from hiring one more unit of labor. The curve slopes down because of the law of diminishing marginal product. Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

169) What is marginal factor cost? How is it related to the supply curve of an input? Answer: Marginal factor cost is the cost of using an additional unit of an input. In the case of labor, this equals the wage. For a price taker in input markets, the marginal factor cost equals the price of the input and is the supply curve of the input too. Diff: 1 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 170) "The market demand curve for labor is the horizontal summation of the labor demand curves of all firms." Do you agree or disagree? Why? Answer: Disagree. A reduction in the wage rate causes each firm to move down their demand curves for labor and hire more workers. Industry output increases, which means product price falls. The fall in the product price causes the individual firm's demand curve for labor to shift to the left. The market demand curve for labor reflects not only the shape of the individual demand curves, but also this shift in the MRP curve. Diff: 2 Topic: 28.1 Demand for Labor in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 28.2 Wage Determination in a Perfectly Competitive Labor Market 1) In a perfectly competitive labor market, the labor supply curve facing the firm will be A) upward sloping. B) downward sloping. C) horizontal. D) vertical. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

2) Which of the following would cause the labor demand curve to shift to the right? A) a decrease in demand for the product the labor is used to produce B) an increase in labor productivity C) an increase in the price of a complimentary resource D) a decrease in output price Answer: B Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 3) In a perfectly competitive labor market, the industry demand curve is ________ and the industry supply curve is ________. A) perfectly elastic; upward sloping B) downward sloping; upward sloping C) upward sloping; downward sloping D) vertical; perfectly elastic Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 4) An industry's equilibrium wage rate is established A) by the industry supply curve for labor alone. B) by the slope of the industry demand curve for labor alone. C) by the Labor Department and based on the cost of living in the area. D) by the intersection of the industry supply and demand curves for labor. Answer: D Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

5) When there is an increase in the wages the banking industry offers accountants, what happens to the supply of accountants available to other industries? A) The supply to other industries increases. B) The supply to other industries falls. C) The supply curve for other industries shifts to the right. D) no change Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 6) In a perfectly competitive industry, an individual firm faces A) a perfectly inelastic labor supply curve. B) a perfectly vertical labor supply curve. C) a perfectly elastic labor supply curve. D) none of these. Answer: C Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 7) The supply of labor to the individual firm in a perfectly competitive market is A) perfectly inelastic at the current equilibrium employment level. B) perfectly elastic at the current market clearing wage rate. C) downward sloping. D) equal to the marginal revenue of output. Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

8) The individual firm operating in a perfectly competitive labor market A) can hire more labor only by offering a higher wage. B) faces an inelastic demand for labor. C) will pay less to the additional labor employed. D) can buy all the labor it wants at the going market wage rate. Answer: D Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

9) In the above figure, the competitive firm will employ the quantity of labor A) equal to Lc. B) equal to Lb. C) less than Lb. D) greater than Lc. Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

10) In the above figure, the line labeled "MRPL" also represents the firm's A) supply curve. B) marginal physical product curve. C) total physical product curve. D) demand curve for labor. Answer: D Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 11) In the above figure, if the wage rate fell below Wb, in the short run the firm would A) hire more workers. B) fire several workers. C) reduce its level of output. D) keep all its input levels the same as they were before. Answer: A Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 12) The labor supply curve faced by an individual firm in a perfectly competitive market is A) upward sloping. B) horizontal. C) vertical. D) downward sloping. Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

13) When hiring additional workers, a firm operating in a perfectly competitive labor market will A) have to offer higher wages to hire additional workers, but the old workers do not get the higher wage. B) have to offer higher wages to hire additional workers, and the old workers will also receive the new, higher wage. C) be able to hire additional workers without offering higher wages. D) be able to hire additional workers at lower wages because the new workers have been unemployed. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 14) The equilibrium wage rate in an industry is determined by A) finding where the market supply curve indicates that the substitution effect and income effect of a wage increase are offsetting. B) the intersection of the market demand curve for labor and the market supply curve for labor. C) the strength of the substitution effect relative to the elasticity of demand for labor. D) whether workers or management are better at negotiating. Answer: B Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 15) As the wage rate falls, other things constant, perfectly competitive firms will employ A) fewer workers. B) more capital. C) the same number of workers. D) more workers. Answer: D Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

16) If the price of labor increases, the typical perfectly competitive firm in the short run will A) produce more output. B) hire less labor. C) hire the same labor and produce the same output. D) hire more labor. Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 17) A short-run decrease in the price of a firm's output will typically A) lead to a movement along the firm's demand for labor curve. B) lead to lower employment of labor in the competitive firm. C) not impact the hiring of labor. D) make the demand for labor more inelastic. Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 18) Which of the following will lead to an outward shift in the firm's short-run demand for labor? A) an increase in the price of output B) less capital per unit of labor C) a decline in labor productivity D) a reduction in average consumer income Answer: A Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 19) Which of the following will lead to an increase in the firm's short-run demand for labor? A) a decrease in the price of the final product B) a decrease in price of the final product's substitute good C) an improvement in labor productivity D) a decrease in the number of buyers for the final product Answer: C Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 63 Copyright © 2021 Pearson Education, Inc.

20) Goods A and B are substitutes. If the price of good A falls, the marginal revenue product (MRP) curve of good B A) will not change. B) will shift out. C) will become more inelastic. D) will shift in. Answer: D Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 21) The demand curve for labor will shift whenever A) the demand for the final product changes. B) the wage rate changes. C) the supply curve of labor shifts. D) the marginal factor cost changes. Answer: A Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 22) A fall in the price of the final product produced by a firm will cause A) a decline in the price of an input used to produce the good. B) a movement down the demand curve for an input used to produce the final product. C) a reduction in demand for an input used to produce the final product. D) a reduction in the supply of an input used to produce the final product. Answer: C Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

23) Assume that the labor market is perfectly competitive. An increase in the productivity of labor A) causes the marginal factor cost of labor to decrease. B) generates a lower wage rate. C) causes an increase in the demand for labor. D) causes a reduction in the demand for labor since each worker is now more productive. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 24) An industry utilizes capital and two types of labor. Unskilled labor is a substitute for capital while the skilled labor is complementary to capital. An increase in the price of capital will A) cause the demand for labor to increase, raising wages of both skilled and unskilled labor. B) cause the wage of unskilled labor to rise relative to the price of skilled labor. C) induce the firms in the industry to cut back on all levels—capital, unskilled and skilled labor. D) cause the demand for skilled labor to rise and the demand for unskilled labor to fall. Answer: B Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 25) If the marginal productivity of labor decreases, then A) the quantity of labor demanded at every possible wage rate will be less. B) the quantity of labor demanded at every possible wage rate will be higher. C) the quantity of labor demanded will not be affected. D) the demand curve for labor will shift upward and to the right. Answer: A Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

26) In labor markets, the substitution effect occurs when A) a substitute good also functions as a complement. B) the cost of production falls enough that the firm will produce a larger amount of output. C) a change in the price of a substitute input causes the demand for labor to change in the same direction. D) a change in the price of a substitute input reduces the cost of capital. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 27) Which of the following would NOT shift an industry's supply of labor curve? A) The wage rate in the particular industry falls. B) Wage rates in industries using similar labor rise. C) Working conditions within the industry become less desirable. D) Wage rates in other industries fall. Answer: A Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 28) An increase in the supply of labor generates A) increased unemployment. B) lower wages. C) an offsetting increase in the demand for labor. D) a decrease in the quantity demanded of labor. Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

29) The supply of labor to one industry will decrease when A) the price of leisure activities falls. B) the income effect dominates the substitution effect. C) the demand for labor falls in the industry. D) workers receive better employment opportunities in other industries. Answer: D Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 30) The demand for computers increases. As a result A) the quantity demanded of workers increases, the wage rate rises, and the supply of labor increases. B) the demand for workers increases, hiring increases, but wages stay the same since each firm faces a horizontal supply curve of labor. C) the wage rate increases in the industry and the quantity demanded of workers falls. D) the wage rate increases in the industry and the quantity supplied of workers increases. Answer: D Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 31) The equilibrium wage rate in an industry is found by A) the intersection of the market demand curve for labor and the marginal revenue product curve of labor. B) the intersection of the firm's demand curve for labor and the firm's supply curve of labor. C) the intersection of the market demand curve for labor and the market supply curve of labor. D) negotiations between the union leadership and the managers of the firms. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

32) The wage rate found by the intersection of the market demand and supply curves for labor then determines the A) firm's demand curve for labor. B) firm's supply curve for labor. C) labor's supply curve of labor. D) labor's demand curve for jobs. Answer: B Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 33) Which of the following statements is TRUE about the market and individual firm's supply curve for labor? A) The market supply curve is perfectly elastic and the individual firm's supply curve is perfectly inelastic. B) The market supply curve is perfectly inelastic and the individual firm's supply curve is perfectly elastic. C) The market supply curve is more elastic than the firm's supply curve. D) The market supply curve is more inelastic than the firm's supply curve. Answer: D Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 34) A firm purchases more capital equipment, which is a substitute for labor. We would expect to observe A) a rightward shift in the supply curve of labor to this firm. B) a decrease in the supply of labor for this firm. C) a decrease in the demand for labor by this firm. D) an increase in the wage rate paid for labor by this firm. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

35) Which of the following will NOT lead to a change in the demand for labor? A) a change in demand for the final good B) a change in the supply of labor C) a change in the price of a substitute input D) a change in labor productivity Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 36) An increase in demand for mobile device apps occurs. Which of the following statements is TRUE for individual firms that produce mobile device apps? A) The price of mobile device apps will decrease, leading to an increase in the demand for labor by the firm. B) The price of mobile device apps will increase, leading to an increase in the demand for labor by the firm. C) The price of mobile device apps will increase, leading to a decrease in demand by customers leading to a decrease in the demand for labor by the firm. D) A change in demand at the industry level does not influence an individual firm's demand curve for labor. Answer: B Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 37) Suppose the market for autoworkers is initially in equilibrium, but then the automakers purchase capital goods that are a substitute for workers. What happens in the market for autoworkers? A) The equilibrium wage rate will increase and the equilibrium quantity of labor will decrease. B) The equilibrium wage rate and the equilibrium quantity of labor will both increase. C) The equilibrium wage rate and the equilibrium quantity of labor will both decrease. D) The equilibrium wage rate will decrease and the equilibrium quantity of labor will increase. Answer: C Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

38) Suppose the market for autoworkers is initially in equilibrium, but then suppose the automakers improve working conditions at the plants. What happens in the market for autoworkers? A) The equilibrium wage rate will increase and the equilibrium quantity of labor will decrease. B) The equilibrium wage rate and the equilibrium quantity of labor will both increase. C) The equilibrium wage rate and the equilibrium quantity of labor will both decrease. D) The equilibrium wage rate will decrease and the equilibrium quantity of labor will increase. Answer: D Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 39) Suppose the market for autoworkers is initially in equilibrium, but then the demand for automobiles increases and simultaneously the automakers allow autoworkers less flexibility working at the plants. What happens in the market for autoworkers? A) The equilibrium wage rate will increase and the equilibrium quantity of labor will increase, decrease or stay the same. B) The equilibrium wage rate will increase, decrease or stay the same and the equilibrium quantity of labor will increase. C) The equilibrium wage rate and the equilibrium quantity of labor will both decrease. D) The equilibrium wage rate will decrease and the equilibrium quantity of labor will increase. Answer: A Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 40) Suppose the market for tortillas is initially in equilibrium, but then the equilibrium wage rate and the equilibrium quantity of labor both increased. What happened in the market for tortillas? A) The demand for tortillas increased. B) The demand for tortillas decreased. C) The supply for tortillas increased. D) The supply for tortillas decreased. Answer: A Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

41) Suppose the market for pizza makers is initially in equilibrium, but then the equilibrium wage rate increased and the equilibrium quantity of labor will decreased. What happened in the market for pizza makers? A) The demand for pizza makers increased. B) The demand for pizza makers decreased. C) The supply for pizza makers decreased. D) The supply for pizza makers increased. Answer: C Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 42) The demand for LED TVs increases. As a result A) the wage rate in the LED TV industry increases and the quantity demanded of workers increases. B) the wage rate in the LED TV industry decreases and the quantity supplied of workers decreases. C) the demand for labor increases and the supply of labor also increases, leaving wages unchanged. D) the demand for labor increases, but since the supply curve of labor is perfectly elastic, the wage rate does not change. Answer: A Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 43) When manufacturing an iPhone, parts must be soldered together. This work can be done by labor or by a robot (capital). More robots will be hired when the price of labor increases. This is known as A) the effect of changing labor productivity. B) marginal revenue product. C) the complementary effect. D) the substitution effect. Answer: D Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

44) Coal and iron ore are complements in the manufacture of steel. An increase in the price of coal would lead to A) an increase in the demand for iron ore as producers substitute more iron ore for coal in the production process. B) a decrease in the demand for iron ore as steel manufacturers reduce production of steel. C) an increase in the supply of iron ore as iron ore producers see an opportunity to expand their markets. D) no change in the demand for iron ore since the steel makers must use both iron ore and coal if they are to make steel. Answer: B Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 45) Suppose firms in an industry hire unskilled labor and skilled labor. Unskilled labor is a substitute for capital and skilled labor is a complement with capital. A decrease in the real price of capital would A) cause the demand for labor to increase, raising wages of both skilled and unskilled labor. B) cause the demand for unskilled labor to increase and the demand for skilled labor to decrease. The wage of unskilled labor would rise relative to the wage of skilled labor. C) cause the demand for unskilled labor to decrease and the demand for skilled labor to increase. The wage of unskilled labor would decrease relative to the wage of skilled labor. D) cause the demand for both kinds of labor to decrease. Wages rates of both kinds of labor would decrease too. Answer: C Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 46) Robots and labor are substitutes in the automobile industry. Which of the following will not lead to an increase in the demand for labor for a firm producing automobiles? A) a decrease in labor productivity B) an increase in the price of robots that are used to solder parts of the car together C) an increase in the demand for automobiles D) an increase in the price of automobiles Answer: A Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

47) A decrease in the supply of labor could be caused by A) wage rates falling in another industry. B) better working conditions. C) more job flexibility. D) increased wage rates in another industry. Answer: D Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 48) Which of the following will NOT cause the supply of labor curve to shift in the economics professor industry? A) a decrease in the wage rate for Ph.D. economists in the banking industry B) a decrease in the number of courses a professor must teach C) Universities have discovered a way to make professors more productive. D) University professors are going to be required to spend more time in their offices. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 49) An increase in the supply of labor to an industry could be caused by A) higher wages. B) increased productivity of labor. C) an increase in job flexibility in the industry. D) an increase of wages in another industry. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

50) Ajax Corporation has just decided to let managers work from home one day a week. This decision will make working conditions better and will A) cause the demand curve for labor for managers to increase. B) increase the elasticity of demand for labor for managers. C) lead to an increase in the supply curve of labor for managers. D) leave the supply curve of labor unchanged. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 51) In the perfectly competitive market, the labor supply curve faced by the individual firm is ________, while that of the market is ________. A) perfectly elastic; perfectly inelastic B) perfectly inelastic; perfectly elastic C) perfectly elastic; upward sloping D) perfectly inelastic; upward sloping Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 52) A single firm in a competitive labor market has a labor supply curve that is A) upward sloping. B) perfectly inelastic. C) perfectly elastic. D) downward sloping. Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

53) In a perfectly competitive labor market, the wage rate paid by the individual firm is A) the equilibrium market wage rate. B) dependent on the demand for the product. C) below the equilibrium market wage rate. D) a function of the tax system. Answer: A Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 54) Absent government interference, the wage rate for labor in a competitive market is established A) solely by the firm's demand for labor. B) solely by the market supply of labor. C) by both the demand for and supply of labor at each individual firm. D) by the market supply and market demand for labor. Answer: D Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 55) A change in a price of a substitute input for labor will cause A) a change in the demand for labor in the opposite direction of the price change. B) no change in the demand for labor. C) a change in the supply of labor in the opposite direction of the price change. D) a change in the demand for labor in the same direction of the price change. Answer: D Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

56) If an increase in the price of one input causes an increase in demand for labor, the two inputs are A) complementary. B) substitutes. C) interchangeable. D) flexible. Answer: B Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 57) Which of the following would NOT be a reason for a shift in the labor demand curve? A) a change in demand for the final product B) a change in labor productivity C) a change in the market wage rate D) a change in the price of a related input Answer: C Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 58) There are a number of reasons why labor supply curves will shift in a particular industry. Which one of the following is NOT one of them? A) Changes in working conditions in an industry affect the labor supply curve. B) job flexibility that determines the position of the labor supply curve C) There is a change in the market wage rate. D) Taxes on labor affect the labor supply curve. Answer: C Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

59) If the price of golf balls increases, what will likely happen to the demand for golf club manufacturing employees? A) It will increase. B) It will decrease. C) It will stay the same. D) Nothing, the two are not related. Answer: A Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 60) When the price of labor increases, the substitution effect will ________ the quantity of labor demanded and the output effect will ________ it. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease Answer: D Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 61) Which of the following will NOT shift the MRP curve for labor? A) a change in the productivity of labor B) a change in the price of the product being sold C) a change in the wage rate in the market D) a change in the demand for the product being produced Answer: C Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

62) All of the following shift the labor demand curve EXCEPT changes in A) fringe benefits offered to employees. B) the demand for the final product. C) labor productivity. D) prices of related factors. Answer: A Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 63) All of the following shift an industry's labor supply curve EXCEPT changes in A) market wages offered in other industries. B) the demand for the final product. C) job flexibility. D) working conditions. Answer: B Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 64) Suppose the market price of zinc doubles. Which of the following scenarios is most likely? A) The demand for zinc miners will increase, raising the market wage rate. B) The demand for zinc miners will decrease, reducing the market wage rate. C) The demand for zinc will increase, raising the market price further. D) The demand for zinc miners will decrease, reducing the market price back to its original price. Answer: A Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 65) What does it mean for a firm to be a price taker in the labor market? Answer: A price taker in the labor market can hire as many workers as it wants without having to offer a higher wage. The supply curve of labor faced by the individual firm is horizontal at the market wage. Diff: 1 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 78 Copyright © 2021 Pearson Education, Inc.

66) What is the general rule for hiring for a perfectly competitive firm? Show it on a graph. What is the demand curve for labor on the graph? Explain. Answer:

The firm hires workers up to the point at which the additional cost of hiring the last worker is equal to the additional revenue generated by that worker. In the above figure, the supply curve of labor is horizontal at the market wage W, so the additional cost of hiring a worker is W. The additional revenue is the MRP, so the firm hires L workers. The MRP curve is the firm's demand curve for labor since it indicates the maximum wage that the firm is willing to pay for each worker it wishes to hire. Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 67) Suppose the market for autoworkers is initially in equilibrium, but then the automakers purchase capital goods that are a substitute for workers. What happens in the market for autoworkers? Explain. Now, suppose the automakers improve working conditions at the plants. What are the effects? Explain. Answer: The purchase of capital that is a substitute for labor causes the demand for autoworkers to fall. Fewer workers are hired and the wage rate falls. When the firms make the workplace better, the supply of autoworkers increases, causing an increase in quantity demanded and a further lowering of the wage rate. Whether more or less workers are hired than before both changes occur depends on which effect was greater. Diff: 3 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

68) What can cause the demand curve for labor to shift? Explain. Answer: The demand curve for labor is the marginal revenue product curve, which is marginal physical product multiplied by marginal revenue. For a perfectly competitive firm, marginal revenue equals price. Whenever the product price changes, the demand curve for labor shifts. Whenever marginal physical product changes due to changes in productivity, the demand curve for labor shifts. The changes in the prices of related factors (substitutes and complements) will also shift demand. The demand for labor is a derived demand, so an increase in the demand for the product produced causes the demand for labor and other variables inputs to change. Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 69) Explain how the equilibrium wage rate is determined for a perfectly competitive industry and how a firm in that industry determines its profit maximizing employment level. Answer:

In the above figure, the right-hand figure shows industry's labor market. The market wage is at the intersection of market labor supply and labor demand. The market wage is W, and equilibrium employment by all firms is L1 workers. The wage determines the supply curve that the perfectly competitive firm faces. The firm's demand curve for labor is the marginal revenue product curve, and the firm hires l1 workers, where the marginal revenue product equals the marginal factor cost of labor (the market wage rate). Diff: 2 Topic: 28.2 Wage Determination in a Perfectly Competitive Labor Market Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

28.3 Labor Demand of a Monopolist and Overall Input Utilization 1) Other things being equal, the behavior of a monopolist differs from that of a competitive industry in that A) the monopolist does not attempt to maximize economic profit. B) the monopolist hires more labor. C) the monopolist restricts output and hires less labor. D) the monopolist must consider fixed costs in deciding the optimal level of output to produce in the short run. Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 2) Which of the following would be the most likely outcome if all perfectly competitive firms in a product market join together to form a monopoly? A) Both the rate of output and the quantity of labor input employed will decrease. B) Both the rate of output and the quantity of labor input employed will increase. C) The rate of output in the market will increase but the quantity of labor input will decrease. D) The rate of output in the market will decrease but the quantity of labor input will increase. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 3) The monopolist's input demand curve is equal to its A) variable cost curve. B) marginal cost curve. C) average cost curve. D) marginal revenue product curve. Answer: D Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

4) Other things being equal, the monopolist will A) hire more workers than if the industry were perfectly competitive. B) hire the same number of workers as a perfectly competitive industry would. C) hire fewer workers than if the industry were perfectly competitive. D) have lower profits than if the industry were perfectly competitive. Answer: C Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 5) A monopolist hires fewer workers than a perfectly competitive industry, other things being equal, because A) a monopolist has to pay higher wages in order to attract additional workers. B) the monopolist substitutes more capital for labor when compared to a competitive industry. C) the monopolist producer has to deal with unions and face higher wages than do competitive industries. D) the monopolist produces less output than a competitive industry. Answer: D Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 6) A monopolist will hire fewer workers than a competitive firm, other things being equal, because A) the monopolist exploits labor and other types of producers do not. B) the monopolist must take account of the declining product price that must be charged in order to sell more units of the product. C) the monopolist is more efficient. D) diminishing marginal productivity of labor is more severe for a monopolist. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

7) If a firm sells its product in a monopolistic market, even though the firm operates in a perfectly competitive labor market, the firm will employ workers up to the point where A) TR = TC. B) the MRP = the wage rate. C) the MRP = the marginal physical product of labor. D) the MRP = the output price. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 8) A firm wanting to maximize profits should operate in such a way that A) the MRP of each input is equal to its MFC. B) MRP equal MFC in the input market but MC must exceed MR in the output market. C) marginal revenue must be equal to the marginal revenue product. D) none of these Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 9) If a monopolist has an output price of $10, marginal revenue equal to $4, and faces a fixed wage rate of $8, then the monopolist should hire labor until the marginal revenue product is equal to A) $10. B) $4. C) $8. D) $14. Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

10) The demand curve for labor of a monopolist A) is horizontal even though the demand curve for labor for a competitive firm is downward sloping. B) slopes down for the same reason as the demand curve for labor of a perfectly competitive firm. C) slopes down because of the law of diminishing marginal product and because the monopolist must lower prices to sell additional units of the good. D) slopes upward because monopolists use more capital than do perfectly competitive firms. Answer: C Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 11) The monopolist's input demand curve is the A) marginal revenue curve. B) marginal revenue product curve. C) marginal physical product curve. D) marginal factor cost. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 12) Compared to the perfectly competitive firm, the monopolist's input demand curve is A) more elastic. B) more inelastic. C) due to a constant per-unit price of the product. D) marginal factor cost. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

13) A monopolist will hire an additional unit of labor as long as A) the additional cost of the worker is outweighed by the additional revenues made from selling the output of these workers. B) the marginal revenue curve is above the demand curve. C) the marginal revenue product is equal to the marginal factor cost. D) the marginal revenue product is less than the marginal factor cost. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 14) A profit maximizing monopolist will hire labor up to the point where A) marginal revenue product equals the price of the product. B) marginal revenue product is greater than the wage rate. C) marginal revenue product equals than the wage rate. D) marginal revenue product is less than the wage rate. Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 15) A rule of thumb in the employment of resources is to set A) marginal revenue product (MRP) equal to marginal factor cost (MFC). B) marginal revenue (MR) equal to marginal cost (MC). C) marginal physical product equal to marginal resource cost. D) none of these. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

16) Other things equal, a monopolist will hire A) the same amount of workers as a perfectly competitive industry. B) fewer workers than a perfectly competitive industry. C) more workers than a perfectly competitive industry. D) the same number of workers as a perfectly competitive industry would. Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 17) A monopolist will hire fewer workers than a perfectly competitive industry because A) the marginal product curve decreases as additional units of labor are hired for a monopoly but not for a competitive firm. B) there is a variety of employers in a competitive market and only one in a monopoly. C) marginal revenue is greater than price for a monopoly while marginal revenue is equal to price for a competitive firm. D) to sell an additional unit of the good the competitive firm will keep the price the same while the monopolist must lower it on all units sold. Answer: D Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

18) Refer to the above table. What does the marginal revenue product equal when 26 workers are hired a week? A) $8.50 B) $26 C) $221 D) $1190 Answer: D Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 86 Copyright © 2021 Pearson Education, Inc.

19) Refer to the above table. What does the marginal revenue product equal when 27 workers are hired a week? A) $1040 B) $216 C) $16.25 D) $8 Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 20) Refer to the above table. What does the marginal revenue product equal when 28 workers are hired a week? A) $1040 B) $900 C) $210 D) $7.50 Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 21) Refer to the above table. How many worker will this firm hire if the weekly wage rate is $1350? A) 28 B) 25 C) 26 D) 27 Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge

22) Refer to the above table. How many workers will this firm hire if the weekly wage rate is $770? A) 26 B) 27 C) 28 D) 29 Answer: D Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 23) Refer to the above table. How many workers will this firm hire if the weekly wage rate is $900? A) 26 B) 27 C) 28 D) 29 Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 24) Refer to the above table. How do we know that this is NOT a competitive firm? A) The marginal physical product decreases as the amount of labor hired increases. B) The marginal revenue changes as output changes. C) The marginal revenue product decreases as the amount of labor increases. D) Marginal physical product cannot be computed for competitive firms. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

25) If we assume competitive labor markets, the supply curve of labor when the firm is a monopoly is A) upward sloping. B) vertical. C) horizontal. D) downward sloping. Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 26) In an imperfectly competitive output market, the firm is faced with a(n) ________ MPP curve and a(n) ________ MR curve. A) downward-sloping; upward-sloping B) downward-sloping; downward-sloping C) upward-sloping; downward-sloping D) downward-sloping; horizontal Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

27) In the above table, what is the marginal revenue product of the 4th worker? A) $920 B) $700 C) $400 D) $80 Answer: B Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 89 Copyright © 2021 Pearson Education, Inc.

28) In the above table, what is the marginal revenue product of the 1st worker? A) $920 B) $700 C) $400 D) $80 Answer: B Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 29) In the above table, what is the marginal revenue product of the 2nd worker? A) $990 B) $700 C) $1100 D) $90 Answer: A Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 30) In the above table, if the marginal factor cost is $200, how many workers would be hired? A) 3 B) 4 C) 5 D) 6 Answer: D Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 31) In the above table, if the marginal factor cost is $480, how many workers would be hired? A) 3 B) 4 C) 5 D) 6 Answer: C Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 90 Copyright © 2021 Pearson Education, Inc.

32) In the above table, if the marginal factor cost is $960, how many workers would be hired? A) 3 B) 4 C) 5 D) 2 Answer: A Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 33) In constructing the monopolist's input demand curve, which of the statements is FALSE? A) The demand curve has a negative slope due to the law of diminishing marginal product. B) Marginal revenue is always positive. C) A monopoly restricts output and hires fewer units of labor than a perfectly competitive industry. D) The supply curve a monopoly faces is horizontal because the monopoly is a price taker. Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 34) The MRP curve for a monopolist in the product market is A) the same as the MRP curve for a perfectly competitive firm in the product market. B) to the left and below the MRP curve for a perfectly competitive firm in the product market. C) to the right and above the MRP curve for a perfectly competitive firm in the product market. D) upward sloping and below the MFC curve for a perfectly competitive firm in the product market. Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

35) When a firm has monopoly power, it A) hires fewer workers because its marginal revenue lies below the demand curve. B) hires more workers because its marginal revenue lies below the demand curve. C) hires fewer workers because its marginal revenue lies above the demand curve. D) hires more workers because its marginal revenue lies above the demand curve. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 36) If the demand for a monopolist's product increases, its A) marginal revenue increases, making it more profitable to hire more workers. B) marginal revenue increases, making it more profitable to hire fewer workers. C) marginal revenue decreases, making it more profitable to hire more workers. D) marginal revenue decreases, making it more profitable to hire fewer workers. Answer: A Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 37) In a perfectly competitive labor market, the least-cost combination rule for resource use A) requires that resources be used in combinations such that marginal products are equal. B) requires that the marginal physical product per dollar spent for each resource is equalized. C) assures the firm an economic profit. D) assures the firm a normal profit. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 38) In the employment of any resource, a firm should A) equate marginal revenue product with the cost of the additional resource. B) hire each input unit that adds more to revenue than it adds to costs. C) hire until MRP equals MFC. D) All of these are correct. Answer: D Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 92 Copyright © 2021 Pearson Education, Inc.

39) Assume that a perfectly competitive firm faces a fixed wage rate of $4 and a constant perunit cost of capital of $2. If the marginal product of labor and capital are 16 and 6, respectively, then to maximize profits the firm should A) use relatively more capital. B) use relatively less capital. C) increase all inputs proportionately. D) decrease all inputs proportionately. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 40) Assume that a perfectly competitive firm faces a fixed wage rate of $4 and a constant perunit cost of capital of $2. If the marginal product of labor and capital are 16 and 6, respectively, then to maximize profits the firm should A) use relatively more labor. B) use relatively less labor. C) increase all inputs proportionately. D) decrease all inputs proportionately. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 41) If a firm faces perfectly competitive product and factor markets and the marginal product of labor and capital are 4 and 9, respectively, while the wage rate is $2 and the rental rate on capital is $4, the firm should A) use relatively more capital. B) use relatively less capital. C) increase all inputs proportionately. D) decrease all inputs proportionately. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

42) If a firm faces perfectly competitive product and factor markets and the marginal product of labor and capital are 4 and 9, respectively, while the wage rate is $2 and the rental rate on capital is $4, the firm should A) use relatively more labor. B) use relatively less labor. C) increase all inputs proportionately. D) decrease all inputs proportionately. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 43) A firm will hire a unit of input up to the point where A) the marginal cost of the input equals the marginal cost of output. B) the marginal revenue product of the input is equal to the marginal factor cost of the input. C) the price of the input is equal to the price of output. D) the marginal physical product of the input is equal to the price of output. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 44) If the marginal revenue product of an input exceeds the marginal factor cost of the input, the firm A) should hire less of the input. B) is maximizing profit. C) is not on its marginal cost curve. D) should increase its use of the input. Answer: D Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

45) When a firm is hiring an input such that the marginal revenue product of the input is equal to the marginal factor cost of the input, the firm A) should be expanding output. B) is hiring too little of the input. C) is maximizing economic profit. D) is producing too much output. Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 46) A profit maximizing firm will hire additional workers until A) the additional cost associated with hiring the last worker equals the average wage rate of the workers. B) the additional cost associated with hiring the last worker equals the additional revenue generated by that worker. C) the extra revenue generated by the last worker hired equals zero. D) the extra cost associated with hiring the last worker equals the price of the good produced. Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 47) Profit maximization requires that A) the marginal factor cost of every input equals that input's marginal physical product. B) the marginal factor cost of every input equals that input's marginal revenue product. C) the amount of one input hired divided by the amount of another input hired equals the total costs of the first input hired divided by the total costs of the second input. D) equal amounts of each input are employed. Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

48) The profit maximizing combination of resources A) usually involves more of each input hired than the cost minimizing combination of resources. B) usually involves less of each input hired than the cost minimizing combination of resources. C) usually involves hiring more of some resources and less of other resources than the cost minimizing combination of resources. D) is also the cost minimizing combination of resources. Answer: D Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 49) Profit maximization occurs where A) each factor is used up to the point where its marginal revenue product is equal to its marginal factor cost. B) each factor is used up to the point where its marginal physical product is equal to its marginal factor cost. C) average variable cost equals marginal cost. D) average variable cost equals average total cost. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 50) If a perfectly competitive firm is currently employing workers to the point where the value of the last worker's marginal product is equal to the wage rate, and the government imposes a minimum wage higher than the value of the worker's marginal product, we can predict that A) the firm will pay the higher wage rate and not change the number of workers hired. B) the firm will no longer employ the marginal worker. C) the firm will increase its price. D) the firm will employ more workers. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

51) To minimize total costs for a particular rate of output, a firm will equate A) the average cost of each factor. B) the marginal revenue of each factor. C) the marginal product per dollar spent on each factor. D) the marginal revenue product and variable marginal revenue for each factor. Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 52) Cost minimization suggests that two inputs should be employed to the point where A) the marginal cost of each input is identical. B) the marginal revenue product of each input is identical. C) the marginal product per dollar spent on each input is identical. D) the extra contribution to physical output of the inputs is identical. Answer: C Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 53) If the marginal product (MP) of the last dollar spent on labor is only half as large as the MP from the last dollar spent on capital, this firm should A) increase its use of labor and employ less capital. B) employ more capital. C) increase its use of both labor and capital. D) maintain its current factor utilization pattern. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

54) If a firm uses only capital and labor as inputs, then what should the firm do at a given rate of production if the marginal product of labor per last dollar spent is higher than the marginal product of capital per last dollar spent? A) The firm should increase both the quantity of capital and the quantity of labor. B) The firm should decrease both the quantity of capital and the quantity of labor. C) The firm should increase the quantity of capital and reduce the quantity of labor. D) The firm should decrease the quantity of capital and increase the quantity of labor. Answer: D Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 55) If a firm uses only capital and labor as inputs, then what should the firm do at a given rate of production if the marginal product of labor per last dollar spent is lower than the marginal product of capital per last dollar spent? A) The firm should increase both the quantity of capital and the quantity of labor. B) The firm should decrease both the quantity of capital and the quantity of labor. C) The firm should increase the quantity of capital and reduce the quantity of labor. D) The firm should decrease the quantity of capital and increase the quantity of labor. Answer: C Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 56) A perfectly competitive firm discovers that its MRPL divided by the wage equals 1.5. The firm should A) check the MRP of the other inputs and divide them by their prices. If they are all equal to 1.5 it is maximizing profits. B) hire more labor. C) purchase more capital. D) try to pay a lower wage rate. Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

57) A firm that wants to maximize profits should hire each input to the point where A) its marginal revenue product divided by the price of the input equals one. B) its marginal revenue product divided by its marginal product equals the wage. C) its marginal revenue product divided by the product price equals one. D) its marginal product divided by the price of the input equals the product price. Answer: A Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 58) If a firm wants to maximize profits it should A) hire lots of capital and very little labor since labor needs to be trained. B) hire unskilled labor rather than skilled labor since unskilled labor is cheaper. C) equate the marginal product for each input to the price of the input. D) equate the marginal revenue product for each input to the price of the input. Answer: D Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 59) A firm that maximizes profits also A) is inefficient. B) cuts corners in production processes so that its products are made too cheaply. C) uses the least-cost combination of resources. D) pays input prices lower than other firms do. Answer: C Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

60) If a firm wants to maximize profits it should A) hire each factor of production up to the point at which the marginal product per last dollar spent is equalized. B) hire each factor of production up to the point at which the marginal revenue product per last dollar spent is equalized. C) hire each factor of production up to the point at which the marginal factor cost per last dollar spent is equalized. D) hire the same number of units of all inputs. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 61) The cost-minimizing rule is that a firm should utilize inputs such that the marginal product of an input divided by the price of the input is the same for all inputs. This is also the profitmaximizing rule because A) we obtain the profit-maximizing rule by multiplying each ratio by the marginal revenue produced. B) we obtain the profit-maximizing rule by multiplying each ratio by the product price, which is the same for each input. C) the profit-maximizing rule is just the inverse of the cost-minimizing rule. D) they are exactly the same. Answer: D Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 62) A profit-maximizing firm will hire workers up to the point at which A) MRP < MFC. B) MRP = MFC. C) MRP > MFC. D) MRP = MP. Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

63) For a firm in a perfectly competitive labor market A) W > MFC. B) W < MFC. C) W > MRP. D) W = MFC. Answer: D Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 64) If a firm wants to maximize profits, it should hire workers up to the point at which A) total factor cost = total revenue. B) marginal factor cost = marginal revenue product. C) marginal utility = marginal cost. D) total social benefit = total social costs. Answer: B Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 65) Profit-maximizing employment is the quantity of labor at which A) marginal revenue product is equal to marginal factor cost. B) marginal revenue product is equal to product price. C) marginal factor cost is equal to marginal revenue. D) marginal factor product is equal to product price. Answer: A Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

66) In a perfectly competitive situation, the profit-maximizing hiring situation for all inputs being used is where A) the MRP of each input is equal to the price of each input. B) the MRP of each input is greater than the price of each input. C) the MRP of each input is less than the price of each input. D) There is no relationship between MRP and the prices of the inputs. Answer: A Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 67) The profit-maximizing combination of resources in a perfectly competitive situation occurs at the point at which A) MRP of labor = price of labor (wage rate). B) MRP of land = price of land (rental rate per unit). C) MRP of capital = price of capital (cost per unit of service). D) All of these are correct. Answer: D Diff: 1 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 68) The following table depicts both the product and labor markets for imported coffee. What is the total revenue when 15 workers per day are hired?

A) $5,000 B) $6,750 C) $7,350 D) $7,500 Answer: B Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 102 Copyright © 2021 Pearson Education, Inc.

69) A perfectly competitive firm is hiring variable resources m and n. It will minimize total costs when A) MRPm/MFCm = MRPn/MFCn. B) MRPm ∗ MFCn = MRPn ∗ MFCm. C) Pm/MPm = Pn/MPn. D) MPm/Pm = MPn/Pn. Answer: D Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 70) When a firm has maximized profits, A) it has also minimized total costs. B) the marginal product of each input is also maximized. C) the marginal product is greater than the input price for all inputs. D) its marginal cost is zero. Answer: A Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 71) "Other things being equal, the monopolist hires fewer workers than would be hired than a perfectly competitive industry." Do you agree or disagree? Why? Answer: Agree. For competitive firms, marginal revenue product equals marginal physical product multiplied by product price. For a monopoly, marginal revenue product equals marginal physical product multiplied by marginal revenue. Since marginal revenue falls faster than price, MRP of a monopolist falls faster than the price in a competitive industry. Marginal factor cost is the same for both, so the equilibrium quantity of labor is less for monopoly than for perfect competition. Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

72) What does a monopolist's demand curve for labor look like? How does it compare to the market demand curve for a competitive industry? Assuming the monopoly purchases factors of production in a perfectly competitive market, what does the supply curve of labor to a monopolist look like? Explain. Answer: The demand curve for labor for a monopoly is downward sloping because of the law of diminishing marginal product. The marginal revenue product curve falls faster in the case of monopoly than in perfect competition because marginal revenue falls faster than price falls as more units are sold. So, the monopoly will tend to hire fewer workers than if the industry was competitive. This is consistent with the fact that monopolies restrict output. The supply curve facing a monopoly is horizontal because the monopoly is still a price taker in input markets. Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 73) For a firm that uses land, labor and capital as inputs, how should the inputs be utilized in order to minimize total costs? Answer: Given a particular rate of production, the firm can minimize total costs by hiring each of the three inputs up to the point at which the marginal physical product per last dollar spent on each input is equalized across the three inputs. Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 74) Show how the profit-maximizing rule for hiring resources is equivalent to the costminimizing rule. Answer: The cost-minimizing rule for hiring resources is to hire resources to the point at which the marginal physical product per last dollar spent on each input is equalized. That is: (MP of labor/price of labor) = (MP of capital/price of capital) = (MP of land/price of land), and so on. The profit-maximizing rule substitutes MRP for MP in the equations. However, since MRP is the MPP multiplied by the price of the product, which is the same for all the inputs, the two conditions are exactly the same. Diff: 3 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

75) Explain what the profit-maximizing combination of resources is for the perfectly competitive firm. Answer: The firm hires each input such that the marginal revenue product of the input equals the price of the input. This can also be expressed as: (MRP of labor/Price of labor) = (MRP of capital/Price of capital) = (MRP of land/Price of land), and so on. Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 76) Suppose a firm employs only capital and labor as inputs. Explain how the firm should allocate its inputs in order to maximize profits in a perfectly competitive market. Answer: To maximize profits, the firm should allocate the two inputs so that the marginal revenue product (MRP) of each of the two inputs equals its input price, i.e., the MRP of capital equals the price of capital (cost per unit of service), and the MRP of labor equals the price of labor (wage rates). Diff: 2 Topic: 28.3 Labor Demand of a Monopolist and Overall Input Utilization Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 28.4 Monopsony: A Buyer's Monopoly 1) A monopsony has an upward-sloping supply curve because A) diminishing marginal product to scale does not exist in a monopsony. B) each additional unit of labor costs less. C) when more units of labor are hired, all laborers must receive the higher wage. D) when more units of labor are hired, only the new workers receive the higher wage. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

2) A monopsonist is A) a single buyer. B) a single seller. C) a unionized labor market. D) a non-profit-maximizing firm. Answer: A Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 3) If the labor supply curve faced by a firm shifts to the right, the marginal factor cost curve of labor must be A) rising and below the supply curve. B) rising and above the supply curve. C) equal to the supply curve. D) horizontal. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 4) A monopsonist in the labor market has A) a perfectly elastic labor supply. B) a decreasing average variable cost. C) an upward-sloping labor supply curve. D) an upward-sloping marginal revenue product curve. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

5) For a monopsonist, marginal factor cost exceeds the wage rate since A) more workers have to be paid the prevailing wage rate. B) the supply of labor is perfectly elastic. C) when new workers are hired the wage rate must be increased for all workers and not just for the additional workers. D) the labor demand is downward sloping. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 6) The main difference between a monopsonist and a competitive buyer of labor is that A) the competitor can hire as many workers as it wants at the going wage while a monopsonist can force wages down when hiring additional workers. B) the competitor can hire as many workers as it wants at the going wage while a monopsonist must raise wages to hire additional workers. C) the competitor is a small firm while the monopsonist is a large firm. D) the competitor is also a competitor in product markets while the monopsonist is also a monopoly in product markets. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 7) Marginal factor cost is A) the change in total costs due to a one-unit change in the quantity of the good produced. B) the change in total costs due to a one-unit increase in the variable input. C) the change in the price of an input when an additional unit of the input is hired. D) the marginal cost of changing the rate of production in the long run. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

8) Under monopsony, marginal factor cost A) is downward sloping. B) is less than the wage rate, although it increases as more workers are hired. C) equals the wage rate. D) is greater than the going wage rate. Answer: D Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 9) Under monopsony, the marginal factor cost of a worker is equal to A) the additional worker's wage rate only. B) the additional worker's wage rate plus the increase in the wages of all other existing workers. C) the increase in the wages of all other existing workers. D) the difference between the worker's wage rate and the lower wage rate received by workers who have already been hired. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

10) According to the above table, the marginal factor cost of the fifth worker is A) $30.00. B) $45.00. C) $60.00. D) $90.00. Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 11) According to the above table, the marginal factor cost of the eighth worker is A) $27.00. B) $48.00. C) $168.00. D) $216.00. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 12) According to the above table, the marginal factor cost of the seventh worker is A) $24.00. B) $126.00. C) $42.00. D) $168.00. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Application of knowledge 109 Copyright © 2021 Pearson Education, Inc.

13) According to the above table, if the marginal revenue product is $48, how many workers will the profit maximizing monopsonist hire? A) 5 B) 6 C) 7 D) 8 Answer: D Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 14) According to the above table, if the marginal revenue product is $24, how many workers will the profit maximizing monopsonist hire? A) 4 B) 5 C) 6 D) 7 Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 15) From the information in the above table, calculate the marginal factor cost of the third worker. A) $24.00 B) $36.00 C) $18.00 D) $12.00 Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

16) Exploitation due to a single buyer in the input market is known as A) monopoly exploitation. B) monopsonistic exploitation. C) Marxian exploitation. D) the result of closed shops. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

17) In the above figure, the monopsonist will employ A) L2 at a wage of W2. B) L2 at a wage of W3. C) L1 at a wage of W1. D) L1 at a wage of W3. Answer: D Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

18) The monopsonist will employ labor to the point at which the A) marginal factor cost equals the marginal revenue product of labor. B) marginal revenue product equals the wage rate. C) marginal cost of output equals the marginal revenue. D) demand equals the supply of labor. Answer: A Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 19) Which statement best describes the behavior of the monopsonist in the labor market? A) It restricts its output to keep the product price high. B) It hires less labor but pays the perfectly competitive wage rate. C) It must pay different amounts to each unit of labor hired. D) It hires less labor and pays a lower wage rate than in the perfectly competitive case. Answer: D Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 20) The monopsonistic exploitation of labor refers to A) the reduction in total output from monopoly in the product market. B) the union wage differential. C) workers being paid a wage less than their marginal revenue product. D) the reduction in employment resulting from union wage setting. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 21) A monopsonist finds its profit maximizing quantity of labor employed at the point at which A) marginal revenue product is zero. B) marginal revenue product equals marginal factor cost. C) marginal factor cost is zero. D) total cost equals total revenue. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 112 Copyright © 2021 Pearson Education, Inc.

22) A firm that is a monopolist in the output market and a monopsonist in the input market A) will hire the same amount of labor as if perfect competition prevailed in both markets, but pay a lower wage. B) will restrict the level of output but not that of employment compared to the perfectly competitive case. C) will hire less labor but pay the same wage compared to the perfectly competitive case. D) will hire less labor and pay a lower wage compared to the perfectly competitive case. Answer: D Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 23) Bilateral monopoly exists when A) a single buyer confronts a single seller. B) there are two monopolistic buyers trying to buy resources. C) two labor unions are trying to represent the same group of workers. D) a firm is both a monopoly in its output market and a monopsonist in its input market. Answer: A Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 24) A monopsonist is A) a firm with monopoly power in the local area. B) a firm that has a unionized labor force. C) a single seller of an input. D) a single buyer of an input. Answer: D Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

25) When there is only one buyer in the market, A) a closed shop exists. B) a monopsony exists. C) then the market will be perfectly competitive. D) the supply curve for the good will be perfectly elastic. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 26) The supply curve of labor to a monopsonist is A) upward sloping. B) downward sloping because of the law of diminishing marginal returns. C) downward sloping, but not because of the law of diminishing marginal returns. D) horizontal. Answer: A Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 27) A monopsonist that wants to hire more labor must pay more for the new labor than it is currently paying and increase the wage rate of all existing employees because A) the demand curve for labor is inelastic. B) of labor unions. C) the supply of labor is upward sloping. D) of competition in the labor market. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

28) A monopsonist wants to purchase more labor. Which of the following statements is TRUE? A) The wage rate that the monopsonist has to pay future workers is lower than it pays current workers since there is no other place to work. B) The wage rate that the monopsonist has to pay future workers will be the same rate it pays current workers. C) The wage rate that the monopsonist has to pay future workers is higher than what it will continue to pay current workers. D) The monopsonist will have to raise the wage rate for current and additional employees. Answer: D Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 29) For a monopsonist, the marginal factor cost curve will be above the supply of labor curve. The marginal factor cost curve is above the supply curve because A) the monopsonist will take advantage of labor and offer them lower wages. B) in order for the monopsonist to sell an additional unit of the good, the price of the good must be lowered. C) in order for the monopsonist to hire more labor, the monopsonist must also purchase more capital. D) the monopsonist will have to pay all workers a higher wage rate than the current wage rate if it wants to hire more workers. Answer: D Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

30) Refer to the above table. What is the marginal factor cost when the firm employs the second unit of labor? A) $19 B) $21 C) $36 D) $38 Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 31) Refer to the above table. What is the marginal factor cost when the firm employs the third unit of labor? A) $62 B) $57 C) $25 D) $21 Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 32) Refer to the above table. If the marginal revenue product is $21, how many workers will the profit maximizing monopsonist hire and what wage will they pay each worker? A) 1; $17 B) 2; $19 C) 2; $21 D) 3; $21 Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

33) The marginal factor cost of a monopsonist is A) upward sloping and the same as the supply curve. B) downward sloping when the supply curve of labor is upward sloping. C) upward sloping and rises faster than the supply curve. D) horizontal. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 34) For a monopsonist the marginal cost of increasing its workforce will always be greater than the wage rate because A) there is not good factor substitution in a monopsony. B) the wage rate offered the newest employee must be paid to all workers. C) the industry will be a closed shop. D) a normal rate of return must be paid to the owner. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 35) The main difference between a monopsonist and a competitive buyer of labor is that A) the monopsonist can hire as many workers as it wants at the going wage while the competitive firm must raise wages to hire additional workers. B) the competitive firm can hire as many workers as it wants at the going wage while the monopsonist can hire more workers at lower wages. C) the competitor can hire as many workers as it wants at the going wage while the monopsonist must raise wages to hire additional workers. D) the monopsonist can force wages down and still hire as many workers as it wants while the competitive firm must increase the wage rate to hire additional workers. Answer: C Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

36) A monopsonist is currently employing 50 workers at $10 an hour. It wants to hire an additional worker, but will have to pay the worker $10.10. The marginal factor cost is A) ten cents. B) $10.00. C) $10.10. D) $15.10. Answer: D Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 37) Under monopsony, marginal factor cost is A) equal to the wage rate. B) below the wage rate but increases as more workers are hired. C) greater than the wage rate. D) downward sloping. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

38) Refer to the above figure. Under monopsony, the wage rate will be A) W1. B) W2. C) W3. D) W5. Answer: D Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 39) Refer to the above figure. The wage rate under perfect competition is A) W2. B) W3. C) W4. D) W5. Answer: C Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

40) Refer to the above figure. The monopsonistic exploitation is A) W1 - W5. B) W2 - W5. C) W2 - W4. D) W2 - W3. Answer: A Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 41) Monopsonistic exploitation is A) measured by the area above the supply curve but below the wage paid. B) the difference between the marginal revenue product of a worker and the wage received by the worker. C) measured by the height of the supply curve of labor. D) the cost to society from unions. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 42) What is it called when the price paid for a variable input is less than its marginal revenue product? A) bilateral monopoly B) monopsonistic exploitation C) monopolistic exploitation D) featherbedding Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

43) Bilateral monopoly exists when A) there is either a monopoly or a monopsony in the market. B) there are two competing labor unions in a labor market. C) there is a monopoly and a monopsony in a market. D) a firm is both a monopolist in its output market and a monopsonist in the input market. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 44) Which of the following is FALSE regarding a monopsonist? A) The monopsonist is the only buyer in a market. B) The monopsonist faces an upward-sloping labor supply curve. C) The monopsonist faces an upward-sloping labor demand curve. D) The monopsonist faces the entire market labor supply curve. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 45) Since the National Basketball Association is the only significant employer of professional basketball players, it might be referred to as a(n) A) oligopsony. B) monopoly. C) monopsony. D) oligopolist. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

46) When there is only one buyer in a market, there is a A) buyer's monopoly. B) monopoly. C) monopsony. D) buyer's cooperative. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 47) When there is only one buyer of labor in a community, we talk of a A) monopoly. B) monopsony. C) monopolistic market. D) labor cooperative. Answer: B Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 48) A company town in the lumber or mining industry is an example of a A) monopoly. B) bilateral monopoly. C) buyer's monopoly. D) monopsony. Answer: D Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 49) A profit-maximizing monopsonist will hire workers up to the point at which A) W = MRP. B) MRP = MFC. C) W = MFC. D) W = MRP = MFC. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 122 Copyright © 2021 Pearson Education, Inc.

50) At the profit-maximizing level of employment, the monopsonist A) pays a wage equal to MRP. B) pays a wage greater than MRP. C) pays a wage less than MRP. D) pays a wage equal to MFC. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 51) In a monopsonistic market A) employment is lower but wages are higher than in a comparable competitive market. B) employment is higher but wages are lower than in a comparable competitive market. C) both employment and wages are higher than in a comparable competitive market. D) both employment and wages are lower than in a comparable competitive market. Answer: D Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

52) The figure supports all of the following statements regarding the marginal factor cost curve for a monopsonist EXCEPT

A) the monopsonist firm looks at a marginal cost curve, MFC, which slopes upward and is above its labor supply curve. B) the marginal benefit of hiring additional workers is given by the firm's MRP curve. C) the intersection of MFC with MRP, at point E, determines the number of workers hired. D) a monopsonist cannot find the profit-maximizing quantity of labor demanded at E. Answer: D Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 53) In order to hire additional laborers, a monopsony must A) lower the supply of labor. B) raise the wage rate. C) advertise for the labor. D) do nothing. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

54) A monopsonistic employer faces a A) perfectly elastic labor supply curve. B) perfectly inelastic labor supply curve. C) MFC curve that is greater than the wage rate at each quantity of labor. D) MFC curve that is less than the wage rate at each quantity of labor. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 55) Paying a wage to an employee that is lower than the employee's marginal revenue product is sometimes referred to as A) illegal in most states. B) monopolistic exploitation. C) monopsonistic exploitation. D) total exploitation. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 56) Monopsonistic exploitation refers to A) the payment to the resource equal to MFC. B) the payment to a resource less than MRP. C) the payment to a resource equal to MRP. D) the payment to a resource above MRP. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

57) When workers are paid a wage that is less than their contribution to a monopsonist's revenues, A) this is sometimes referred to monopsonistic exploitation. B) this is sometimes referred to as an incentive. C) they seek part time employment. D) they file a grievance with their union representative. Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 58) If a single supplier of labor, such as a union, were supplying labor to a single monopsonistic employer, this is referred to as a A) bilateral monopoly. B) trilateral monopoly. C) total monopsony. D) collective monopoly. Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 59) Which of the following is FALSE regarding bilateral monopoly? A) Bilateral monopoly is a market structure consisting of a monopolist and a monopsonist. B) Bilateral monopoly is defined as a market structure in which a single buyer faces a single seller. C) An example of bilateral monopoly is a state education employer facing a single teachers' union in the labor market. D) The price outcome is easily determined. Answer: D Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

60) A bilateral monopoly means A) that a monopsonistic employer bargains with two unions. B) that a monopsonistic employer bargains with both an industrial and a craft union. C) that a monopsonistic employer bargains with a monopoly. D) that an industrial union bargains with a two-firm oligopoly. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 61) A bilateral monopoly exists when there is a A) single buyer and many sellers in the market. B) single seller and many buyers in the market. C) large number of buyers and sellers in the market. D) single buyer and a single seller in the market. Answer: D Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 62) The MFC can be calculated by the A) change in total wages/change in labor. B) total wages/total labor. C) change in labor/change in total wages. D) total wages/change in labor. Answer: A Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 63) The labor market in professional baseball is an example of A) a bilateral monopoly. B) a monopsonistic labor market. C) a monopolistic labor market. D) a perfectly competitive labor market. Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 127 Copyright © 2021 Pearson Education, Inc.

64) The MFC curve for a monopsonist A) lies below the labor supply curve, when the labor supply curve is upward sloping. B) lies above the labor supply curve, when the labor supply curve is upward sloping. C) is the labor supply curve. D) is parallel to the labor supply curve, when the labor supply curve is downward sloping. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 65) In a bilateral monopoly, the wage rate that is determined in the market A) is equal to MFC. B) is equal to MRP. C) is indeterminate. D) is the same as in a perfectly competitive market. Answer: C Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

66) In the above table, what is the marginal factor cost of the 4th worker? A) $16 B) $30 C) $64 D) $22 Answer: D Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 128 Copyright © 2021 Pearson Education, Inc.

67) In the above table, what is the marginal factor cost of the 2nd worker? A) $24 B) $14 C) $64 D) $12 Answer: B Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 68) In the above table, what is the marginal factor cost of the 5th worker? A) $22 B) $18 C) $90 D) $26 Answer: D Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 69) In the above table, what is the marginal factor cost of the 6th worker? A) $30 B) $18 C) $120 D) $20 Answer: A Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

70) In the above table, if the marginal revenue product is $18, how many workers will the profit maximizing monopsonist hire? A) 2 B) 3 C) 4 D) 5 Answer: B Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 71) In the above table, if the marginal revenue product is $14, how many workers will the profit maximizing monopsonist hire? A) 2 B) 3 C) 4 D) 5 Answer: A Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 72) In the above table, if the marginal revenue product is $18, how many workers will the profit maximizing monopsonist hire and what wage will they pay each worker? A) 5; $18 B) 3; $14 C) 3; $18 D) 4; $16 Answer: B Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

73) In the above table, if the marginal revenue product is $22, how many workers will the profit maximizing monopsonist hire and what wage will they pay each worker? A) 5; $18 B) 3; $14 C) 4; $22 D) 4; $16 Answer: D Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 74) In the above table, if the marginal revenue product is $26, how many workers will the profit maximizing monopsonist hire and what wage will they pay each worker? A) 5; $18 B) 5; $16 C) 4; $16 D) 6; $30 Answer: A Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 75) At any quantity, the marginal factor cost for a monopsonist is always A) parallel to the marginal revenue product. B) below the labor supply curve. C) above the labor supply curve. D) above the labor demand curve. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

76) A firm that is a monopsonist in the labor market and a monopolist in the product market will hire labor to the point at which A) MFC = MRPm. B) a perfectly elastic labor supply = MRP. C) a perfectly inelastic labor supply = perfectly inelastic labor demand. D) where supply of labor = demand for labor. Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

77) In the above figure, what is the wage rate the monopsonist will pay? A) W1 B) W2 C) W3 D) W4 Answer: B Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

78) In the above figure, what is the wage rate for the perfectly competitive market? A) W1 B) W2 C) W3 D) W4 Answer: C Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 79) In the above figure, what is the quantity of workers that would be hired by a monopsonist? A) Q1 B) Q2 C) Q3 D) Q4 Answer: B Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 80) In the above figure, what is the quantity of workers that would be hired in a perfectly competitive market? A) Q1 B) Q2 C) Q3 D) Q4 Answer: C Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

81) Which of the following is the BEST example of a monopsonist? A) a household hiring a gardener B) a turnip farmer hiring seasonal help C) Hershey's Chocolate Factory in Hershey, PA D) Vinaka Coffee Shop in Carlsbad, CA Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 82) A monopsonistic employer will pay a wage rate A) less than the labor's MRP. B) greater than the labor's MRP. C) equal to the labor's MRP. D) equal to MFC. Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

83) Use the above table. The MFC of the 3rd worker is A) $5. B) $30. C) $20. D) $6.7. Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

84) Use the above table. The MFC of the 4th worker is A) $5. B) $6.25. C) $25. D) $40. Answer: D Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 85) Use the above table. If the marginal revenue product is $10, how many workers will the profit maximizing monopsonist hire? A) 1 B) 2 C) 3 D) 4 Answer: A Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 86) Use the above table. If the marginal revenue product is $20, how many workers will the profit maximizing monopsonist hire? A) 1 B) 2 C) 3 D) 4 Answer: B Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

87) Use the above table. If the marginal revenue product is $30, how many workers will the profit maximizing monopsonist hire and what wage will they pay each worker? A) 1; $10 B) 2; $15 C) 3; $20 D) 4; $25 Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 88) Use the above table. The data shows that the firm A) is hiring in a perfectly competitive labor market. B) is selling its output in a perfectly competitive market. C) is a monopsonist. D) is selling its output in an imperfectly competitive market. Answer: C Diff: 1 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 89) If a minimum wage is established, a monopsonist faces A) an upward-sloping supply of labor at all quantities of labor. B) a downward-sloping supply of labor at all quantities of labor. C) a horizontal supply of labor at the minimum wage and the upward-sloping portion of the labor supply curve above minimum wage. D) a horizontal supply of labor at the minimum wage and the downward-sloping portion of the labor demand curve below minimum wage. Answer: C Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

90) What is a monopsony and how does a monopsonistic firm determine the wage rate to pay its employees? Answer: Monopsony is the situation when there is a single buyer of an input, such as labor, so that it alone faces the market input supply curve. For a monopsonist, hiring additional employees requires raising the wage rate for all workers, so its marginal factor cost curve lies above the labor supply curve. The monopsonist employs workers to the point at which marginal revenue product equals marginal factor cost and then pays the wage rate that those workers will accept for their labor services. As a consequence, the monopsonist's wage rate is lower than the marginal revenue product of labor. Diff: 2 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 91) Using a graph, compare the labor-market equilibrium under perfect competition and monopsony. Explain. Answer:

Refer to the above figure. Under perfect competition, the wage is Wc with Lc units of labor hired. A monopsony's marginal factor cost curve lies above the supply curve—the monopsony has to increase wages to hire more workers. The monopsonist hires Lm workers—MFC = MRP at this amount of labor. The wage rate is Wm and the monopsonist hires fewer workers and pays a lower wage than in a competitive situation. The difference between the workers' marginal revenue product and the wage is the monopsonistic exploitation of labor. Diff: 3 Topic: 28.4 Monopsony: A Buyer's Monopoly Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

28.5 Labor Unions 1) Labor unions are organizations that A) try to secure more opportunities for more workers in the economy. B) try to secure economic improvements for all workers. C) try to secure economic improvements for their members. D) try to make labor markets more competitive. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 2) A primary objective of labor unions is to A) secure equal pay for its members. B) have equal power with their employer. C) seek better pay and improved work conditions. D) all of these E) none of these Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 3) A labor union is likely to seek all of the following EXCEPT A) economic improvements for their members. B) safer working conditions. C) increased competitiveness in the labor market. D) increased job security for its members. Answer: C Diff: 3 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

4) Negotiations between the management of a company and the management of a union for the purpose of setting a mutually agreeable contract on wages, fringe benefits and working conditions for all employees in a union is known as A) a closed shop. B) a union shop. C) collective bargaining. D) an industrial union. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 5) Bargaining between the management of a company and the management of a union is A) a closed shop. B) a bilateral monopoly. C) an open shop. D) collective bargaining. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 6) Collective bargaining A) has nothing to do with fringe benefits. B) is bargaining between unions and management. C) is illegal in many states. D) is practiced in non-union related disputes. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

7) Collective bargaining in the United States typically involves negotiations between A) the government and management over the minimum wage law. B) the management of a company and the leaders of the union over the wages and fringe benefits to be offered. C) an individual and her boss over the appropriate salary level. D) union and nonunion employees regarding work rules. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 8) Unions face a trade-off between higher wages and A) fewer available positions. B) more available positions. C) equipment. D) none of these. Answer: A Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 9) If a union negotiates and obtains a wage rate above the competitive wage rate, A) it must find a way to make workers more productive. B) employment in the union sector will increase relative to employment in the nonunion sector. C) it must find a way to ration jobs among the excessive number of workers who wish to work in the union sector. D) unemployment will increase in the nonunion sector relative to the union sector. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

10) If a union establishes by collective bargaining a wage rate that is above a competitive market equilibrium wage rate, then A) an excess quantity of labor will be supplied. B) a shortage of labor will result. C) there will be an increase in total employment. D) management will want to substitute labor for machinery. Answer: A Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 11) A union can induce a rise in equilibrium wages in a unionized industry by A) reducing the marginal revenue product of labor to zero. B) successfully increasing the demand for union labor. C) successfully decreasing the demand for union labor. D) reducing the marginal revenue product of firms employing union labor. Answer: B Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 12) When a group of workers forms a union, they introduce an element of A) pure competition into the labor market. B) monopoly into the labor market. C) monopoly into the product market. D) monopsony into the product market. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

13) If a union succeeds in increasing the wage rate by restricting labor supply, then A) all of its members will be better off. B) some members may lose their jobs. C) all of its members will be worse off. D) more of its members will be employed. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 14) If a union wishes to maximize the number of union members employed, it will A) accept the competitive wage. B) set a wage below the competitive wage. C) set a wage where the elasticity of demand for labor equals one. D) set a wage above the competitive wage. Answer: A Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 15) Suppose a union successfully negotiates for its members a wage rate that is above the competitive wage rate, then A) there will be a surplus of jobs. B) antitrust laws become effective. C) there will be downward pressure on the wage rate until equilibrium is established. D) there will be an excess supply of labor. Answer: D Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

16) Unions can ration the excess supply of labor generated by the establishment of a wage that is above the competitive wage by A) lengthening the time period for apprenticeship programs. B) lowering union dues. C) encouraging older workers to take early retirement. D) having more intensive membership drives to ensure a larger proportion of workers are covered by the union contract. Answer: A Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 17) If a union is successful in negotiating a wage rate which is above the market clearing wage, then which of the following would not occur? A) The higher wages attract more workers leading to a shortage of jobs. B) Management may replace part of the workforce with machinery. C) To handle the surplus of labor the union will form a closed shop. D) The union may shift the supply of labor curve by developing methods to ration jobs. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 18) The leadership of unions must recognize that they face A) an economic system that is hostile to the interests of workers. B) a no-win situation whenever they think a strike is necessary. C) a fundamental trade-off between higher wages for members and higher taxes for members. D) a fundamental trade-off between higher wages for members and fewer jobs for members. Answer: D Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

19) A union that pursued a policy of restricting entry over time into the union would A) see real wages hold constant over time at whatever premium they could get initially. B) also have to negotiate to be sure that all the members were able to find jobs. C) generate rising real wages for its membership over time as long as demand for union workers increased over time. D) fail to obtain benefits for their workers in excess of what the workers would get under open markets. Answer: C Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 20) Which of the following is NOT a wage or employment strategy that a union would follow? A) Set a maximum wage rate such that a shortage of workers will result. B) Set a wage rate such that all workers that want to find a job can find a job. C) Set a wage rate that will maximize the income of its members. D) Set a wage rate that will maximize the income of only some of its members. Answer: A Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

21) The figure illustrates all of the following EXCEPT

A) if the union establishes by collective bargaining a wage rate that exceeds equilibrium at point Wu an excess quantity of labor will be supplied. B) if the union establishes by collective bargaining a wage rate that exceeds equilibrium, an excess quantity of labor will be demanded. C) there is a trade-off union leadership faces: Higher wages inevitably mean a reduction in total employment—a smaller number of positions. D) at higher wages, more workers will seek to enter the industry, thereby adding to the surplus of workers where QS is greater than QD. Answer: B Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 22) Which of the following is NOT a union wage and employment strategy? A) ensuring employment for all members of a union B) maximizing aggregate income of workers C) maximizing wage rates for some workers D) minimizing the adjusted gross income of non-members Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

23) Which of the following correctly describes the trend in U.S. union membership? A) Union membership has been decreasing steadily since the 1930s. B) Union membership decreased from 1930 - 1960, but has been increasing steadily since. C) Union membership peaked in the 1960s and has been decreasing steadily since. D) Union membership declined until the 1980s, but has been increasing steadily since. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 24) Which of the following is a correct statement about unions in the United States? A) The trend away from manufacturing and the deregulation of certain industries has promoted unionization of the U.S. workforce. B) Half of the top ten U.S. unions now have members who work in service and government occupations. C) Since the 1960s, there has been a gradual increase in the proportion of U.S. workers who are members of unions. D) Half of all U.S. workers are union members. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 25) If a firm is a union shop, then A) a worker may elect to either join or not join the union. B) only workers who have been union members for two years may be employed. C) only union members may be employed by the firm. D) a non-union worker may be hired but must join the union within a certain time period. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

26) A right-to-work law makes it illegal for A) employers to refuse to hire union workers. B) union membership to be a requirement for continued employment in any establishment. C) union membership to be denied on the basis of race, gender, or national origin. D) a union to exist in a state. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 27) A closed shop is a business enterprise in which A) employees cannot belong to a union when they are employed, and cannot join a union and keep working there. B) employees must join the union to maintain employment. C) employees must belong to the union before they can be employed. D) employees cannot belong to the union when they are hired, but may join the union later and keep their jobs. Answer: C Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 28) Laws that make it illegal to require union membership as a condition of continuing employment in a firm are A) union shop laws. B) right-to-work laws. C) closed-shop laws. D) jurisdictional laws. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

29) A legal arrangement whereby a firm can hire only union labor is called A) a union shop. B) a closed shop. C) a sweat shop. D) an open shop. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 30) The type of labor agreement that requires workers to be union members prior to being considered for employment is a(n) A) right-to-work agreement. B) closed-shop agreement. C) union shop agreement. D) open-shop agreement. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 31) A company can hire non-union workers, but a condition of their employment is that they must join the union within their first 90 days on the job. This is an example of a A) right-to-work law. B) closed-shop. C) union shop. D) voluntary craft union. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

32) The percentage of U.S. workers in the private sector who belong to unions is currently A) greater than 70 percent. B) approximately 55 percent. C) approximately 25 percent. D) approximately 11 percent. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 33) Which piece of legislation allowed states to pass right-to-work laws? A) Wagner Act B) Landrum-Griffin Act C) Taft-Hartley Act D) National Industrial Recovery Act Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 34) A state with "right-to-work" laws would most likely have A) higher employment levels than neighboring states without such laws. B) more workers' benefits than neighboring states without such laws. C) more union workers than neighboring states without such laws. D) more worker safety requirements than neighboring states without such laws. Answer: A Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 35) The Taft-Hartley Act of 1947 outlawed A) strikes. B) make-work rules and forcing unwilling workers to join a union. C) right-to-work states. D) none of these. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 149 Copyright © 2021 Pearson Education, Inc.

36) A closed shop is one in which A) a union is prohibited. B) some members belong to the union while others do not. C) belonging to a union is a condition of employment. D) the union is a co-manager of the day-to-day operations of the firm. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 37) The Taft-Hartley Act A) permits states to outlaw unions. B) permits states to pass right-to-work laws. C) encourages unions to engage in sympathy strikes. D) encourages unions to engage in secondary boycotts. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 38) A right-to-work state is one in which A) unions are illegal. B) there is guaranteed employment for all citizens. C) the union shop is prohibited. D) the closed shop is permitted. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

39) Which of the following is legal under the Taft-Hartley Act? A) closed shops B) collective bargaining C) secondary boycotts D) sympathy strikes Answer: B Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 40) Union membership, in terms of percentage of the U.S. civilian labor force, A) has increased steadily since the passage of the Wagner Act. B) peaked about 1960 and has since declined. C) was over 50 percent in 2020. D) has increased dramatically since 1970. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 41) Which of the following is LEAST likely to be a reason for the decline in U.S. union membership? A) declines in manufacturing employment B) increases in the work force of the public sector C) deregulation of transportation industries D) increasingly more immigrant workers to fill unskilled job positions Answer: B Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

42) A closed shop is a A) strike by a union in sympathy with another union's strike or cause. B) dispute involving two or more unions over which should have control of a particular jurisdiction. C) business enterprise in which employees must belong to the union before they can be hired and must remain in the union after they are hired. D) legal environment in which businesses may hire nonunion members conditional on their joining the union by some specified date after employment begins. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 43) A business enterprise that allows the hiring of nonunion members conditional on their joining the union is A) a closed shop. B) a union shop. C) a jurisdictional dispute. D) an industrial union. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 44) A union shop is a A) strike by a union in sympathy with another union's strike or cause. B) dispute involving two or more unions over which should have control of a particular jurisdiction. C) business enterprise in which employees must belong to the union before they can be hired and must remain in the union after they are hired. D) business which may hire nonunion members conditional on their joining the union by some specified date after employment begins. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

45) A right-to-work law makes it illegal A) to prevent union members from working in any firm. B) to fire a worker who has joined a union or who tries to organize a union at any firm. C) to inquire whether a prospective employee is a member of a union or not. D) for union membership to be a requirement for continued employment in any firm. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 46) The Taft-Hartley Act of 1947 made A) union shops illegal. B) closed shops illegal. C) sympathy strikes legal. D) secondary boycotts legal. Answer: B Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 47) Since the 1970s, union membership in the U.S. has been A) rising. B) remaining constant. C) declining. D) erratic. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 48) Which of the following laws made "closed shops" unlawful? A) Taft-Hartley Act B) National Industrial Recovery Act C) National Labor Relations Act D) Railway Workers Act Answer: A Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 153 Copyright © 2021 Pearson Education, Inc.

49) Which of the following type of shops is unlawful under the provisions of the Taft-Hartley Act? A) union shops B) closed shops C) modified union shops D) open shops Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 50) Laws that outlaw union shops and which may be passed (or not) by individual states are called A) Smoot-Hawley laws. B) pro-scab laws. C) free-rider laws. D) right-to-work laws. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 51) If you get a job and are required to join the union within a month, this is known as a(n) A) closed shop. B) open shop. C) agency shop. D) union shop. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

52) If you get a job and are never required to join the union, this is known as a(n) A) closed shop. B) open shop. C) agency shop. D) union shop. Answer: B Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 53) If you want to become an actor, and you must join the Screen Actors Guild after your first job, the Screen Actors Guild is a(n) A) closed shop. B) open shop. C) agency shop. D) union shop. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 54) Which type of collective bargaining agreement requires workers to be union members prior to being considered for employment? A) right-to-work B) union shop C) open shop D) closed shop Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

55) A right-to-work law is A) a federal law making the closed shop illegal. B) a federal law making the union shop illegal. C) a state law making the union shop illegal. D) a state law making the open shop illegal. Answer: C Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 56) Suppose that under its collective bargaining agreement the XYZ Corp. can hire nonunion workers, but these workers must join the union within 60 days. This agreement is an example of A) an open shop. B) a closed shop. C) a company union. D) a union shop. Answer: D Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 57) Right-to-work laws A) make it illegal to require union membership as a condition of continuing employment in a particular firm. B) make it illegal to require a union member to work abroad. C) make it illegal for a state to pass any laws regarding union membership. D) make a closed shop arrangement a legal condition that allows employees to obtain a particular job. Answer: A Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

58) Suppose that under its collective bargaining agreement, the XYZ Co. can only hire union members in good standing at the time of hiring. XYZ Co. is A) a union shop. B) a closed shop. C) an open shop. D) a company union. Answer: B Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 59) Currently about what percentage of the civilian labor force is unionized in the United States? A) 1 percent B) 12 percent C) 55 percent D) 70 percent Answer: B Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 60) What time period in U.S. history do we generally recognize as the peak of labor union membership? A) 1900s-1920s B) 1920s-1940s C) 1940s-1970s D) 1970s-2000s Answer: C Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

61) Suppose a union negotiates for its members a wage that is above the market-clearing wage. What problems does the union have to solve now? Explain. Answer: The higher wage implies there will be an excess of labor so the union must find a way to ration the jobs. The excess supply is due to two factors—the firms' quantity demanded for workers decreases and new workers are attracted into the industry due to the higher wage. Further, the higher labor costs are likely to encourage management to find ways to substitute other factors of production for labor. Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 62) A union can be viewed as a monopoly seller of a service. What are the three wage and employment strategies the union might use? Answer: The union might try to employ all members, but the only way it can do this is to accept the market clearing wage. The market would do this without the union, so the union will probably not pursue this strategy. It can maximize members' income. This is found by determining the point on the demand curve where the number of workers hired times the wage rate is at a maximum. Finally, it can maximize wages for certain workers, which would mean more of the members go without jobs. Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 63) Why might a union find that attaining the goal of employing all its members and the goal of maximizing total union wage receipts to be incompatible objectives? Answer: To ensure that all of its members are employed, a union must be willing to settle for a wage rate sufficiently low to induce employers to hire all those individuals. In contrast, to maximize total union wage receipts, a union must find a way to attain a sufficiently high wage rate (at which the elasticity of the demand for labor equals 1), which typically will not equal the wage rate required to induce employers to hire all union members. Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

64) Distinguish between a closed shop and a union shop. Are either or both shops legal? Explain. Answer: A closed shop is a situation in which a person must belong to the union before they can be hired while a union shop is one in which a nonunion worker must join the union after beginning employment. Closed shops are illegal in the United States, and union shops are illegal in states that have right-to-work laws. Diff: 2 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking 65) What was the overall trend of U.S. union membership beginning the 1960s? What was the main reason behind that trend? Answer: Since the 1960s, union membership in the United States has declined as a percentage of the labor force, reaching about 12 percent today. The absolute number of union members has also declined recently. The main reason for the decline in union membership is the decline in manufacturing employment, which has traditionally accounted for a large share of total union membership. Diff: 1 Topic: 28.5 Labor Unions Learning Outcome: Micro-17: Explain the effects of the factors of production, factor demand, and factor supply and labor in factor markets AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 29 Income, Poverty, and Health Care 29.1 The Distribution of Income 1) The Lorenz curve shows A) the demand for jobs. B) the supply of jobs. C) the elasticity of jobs. D) the distribution of income. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 2) The distribution of income in one nation can be illustrated by the A) Laffer curve. B) aggregate demand curve. C) Lorenz curve. D) Phillips curve. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 3) The graph which represents the distribution of income in an economy is called the A) Laffer curve. B) Lorenz curve. C) distribution curve. D) aggregate demand curve. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

4) According to the text, today's Lorenz curve is A) a straight line. B) a vertical line. C) more bowed than in 1929. D) less bowed than in 1929. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 5) According to the text, the highest 20 percent of U.S. income households earn about what percentage of total income today? A) 10 percent B) 25 percent C) 50 percent D) 95 percent Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 6) The Lorenz curve shows what portion of total money income is accounted for by A) different proportions of a country's households. B) only the wealthiest citizens. C) only poor people. D) taxpaying citizens only. Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 7) In a Lorenz curve, perfect income equality is represented by A) a vertical line. B) a horizontal line. C) a rectangular hyperbola. D) a 45-degree line originating from the origin. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

8) The more bowed out the Lorenz curve, the A) less equal the income distribution. B) more equal the income distribution. C) greater the overall wealth in the economy. D) less the overall wealth in the economy. Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 9) The less bowed the Lorenz Curve, the A) more equal the income distribution. B) less equal the income distribution. C) greater the number of low-income people. D) greater the number of high-income people. Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 10) A straight-line Lorenz curve shows A) an equal distribution of money income. B) a greater than proportionate share of income going to middle-income households. C) a high incidence of absolute poverty. D) a highly unequal distribution of income. Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 11) The more bowed (skewed) the Lorenz curve, A) the more equal the distribution of income. B) the greater the number of households in the society. C) the more unequal the distribution of money income. D) the greater the total income of the society. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

12) The Lorenz curve is a geometric representation of A) the profile of earnings for a "typical" family over time. B) the standard of living experienced by the poor in a country. C) the difference between pre-tax and post-tax income. D) the distribution of income. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 13) The more bowed the Lorenz curve, the A) richer the society. B) more unequal the distribution of money income. C) poorer the society. D) more equal the distribution of money income. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 14) A numerical measure of income distribution is A) Gross Domestic Product (GDP). B) the Gini coefficient. C) the Misery Index. D) the Lorenz Index. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 15) The more bowed the Lorenz curve, the A) lower the Gini coefficient. B) higher the Gini coefficient. C) less accurate the Gini coefficient. D) less reliable the Gini coefficient as a measure of income distribution. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

16) If a country has perfect income equality, the Gini coefficient is A) 1. B) 0. C) -1. D) infinity. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 17) If the Gini coefficient of Country A is 0.3 and the Gini coefficient of Country B is 0.45, we can conclude that A) income is more evenly distributed among households in Country B than in Country A. B) income is more evenly distributed among households in Country A than in Country B. C) wealth is more evenly distributed among households in Country B than in Country A. D) wealth is more evenly distributed among households in Country A than in Country B. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 18) Suppose 20 percent of the families receive 20 percent of the income, 40 percent of the families receive 40 percent of the income, and so forth. The Lorenz curve would be A) a straight line at a 45-degree angle from the origin. B) a straight line at a 30-degree angle from the origin. C) the most bowed curve possible. D) the horizontal axis. Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

19) The most unequal distribution of income in the above figure exists in A) country 4. B) country 1. C) country 5. D) country 3. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 20) The country reflecting perfect income equality in the above figure is A) country 4. B) country 1. C) country 5. D) country 3. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

21) Which of the following would be considered income in kind? A) tax refunds B) food stamps C) yard sales D) reduction in the tax rates Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 22) One reason some economists are critical of the Lorenz curve is because A) it reflects income before taxes. B) it reflects income after taxes. C) it reflects only the top bracket of taxpayers. D) it reflects only the poor in the country. Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 23) Which of the following is NOT a correct criticism of the Lorenz curve? A) It does not include payments in kind. B) It does not deal with differences in family size. C) It ignores the impact of age distribution on income distribution. D) It refers to money income after taxes. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 24) In calculating income for the Lorenz curve, one factor that is omitted is A) capital gains income. B) dividend payments. C) in-kind transfer payments from the government. D) pure economic rent. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

25) Some economists criticize the Lorenz curve because it A) includes too many things in measuring income, such as food stamps, housing aid, and other government programs. B) does not account for the effect of age on a family's income. C) measures unreported income earned in the underground economy. D) uses after-tax income when pre-tax income is more appropriate. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 26) Some economists criticize the Lorenz curve because it A) accounts for differences in the size of households when it should not. B) does not include the cumulative percentage of households. C) does not include unreported income earned in the underground economy. D) represents the inequality of lifetime income when it should just look at a specific time period. Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 27) Since World War II, the share of total income going to the bottom 20 percent of U.S. households has A) more than doubled. B) increased by 100 percent. C) remained constant. D) fallen. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

28) Compared to a sampling of other developed nations, the U.S. income distribution is more unequal than many others. What accounts for this? A) The lowest-income families in the United States earn much less than the lowest-income households in other nations. B) Marginal income tax rates are much higher in the United States than in any other nation. C) The highest-income families in the United States earn much more than the highest-income households in other nations. D) Other nations manipulate their data to look better. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 29) When examining the financial status of households, wealth is A) synonymous with income. B) a flow variable whereas income is a stock variable. C) a stock variable and includes both tangible assets and human capital. D) not as important as income because wealth does not change over time. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 30) The way income is allocated among the population is called the A) income curve. B) income spread. C) distribution of income. D) Gini allocation. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 31) Which of the following is the best definition of what economists define as total income? A) payment for labor services B) payment for labor services and for ownership of other factors of production C) payment for labor services, for use of other factors of production, and gifts and government transfers D) inheritance Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 9 Copyright © 2021 Pearson Education, Inc.

32) The Lorenz curve A) shows what portion of the population are living in poverty and what portion are living in wealth. B) shows what portion of total money income is accounted for by different proportions of the nation's households. C) shows what portion of the population is working as professionals, white- and blue-collar, workers and workers at menial tasks. D) breaks down the income levels of each group in the economy. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 33) The more bowed out the Lorenz curve is, the A) more equal the distribution of income. B) less equal the distribution of income. C) richer the society. D) poorer the society. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 34) A Lorenz curve that represents an unequal income distribution is A) a straight line starting at the origin. B) a straight line starting at 100% C) a bowed curved. D) a vertical line. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 35) A Lorenz curve that is perfectly straight indicates A) that society is very rich. B) that a small portion of the population accounts for most of the income. C) that a large portion of the population accounts for most of the income. D) complete income equality. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

36) If everyone earned the same income, the Lorenz curve would be A) a rectangular hyperbola. B) a straight line from the origin at a 45-degree angle. C) the horizontal axis. D) very bowed from the diagonal. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

37) The above figure displays A) income-inequality curves. B) curves of unfairness. C) Lorenz curves. D) Laffer curves. Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

38) Refer to the above figure. Which curve shows the most unequal distribution of income? A) A B) B C) C D) D Answer: D Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 39) Refer to the above figure. Which curve shows the second most unequal distribution of income? A) A B) B C) C D) D Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 40) Refer to the above figure. For which Lorenz curve does the richest 25 percent make 50 percent of the nation's money income? A) A B) B C) C D) D Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 41) Refer to the above figure. For which Lorenz curve does the richest 40 percent make 50 percent of the nation's money income? A) A B) B C) C D) D Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 12 Copyright © 2021 Pearson Education, Inc.

42) Refer to the above figure. Perfect income equality is shown by A) the horizontal axis. B) the vertical axis. C) curve A. D) curve D. Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 43) Refer to the above figure. Where are the poorest households represented on the graph? A) The poorest households are to the left along the horizontal axis. B) The poorest households are to the right along the horizontal axis. C) The poorest households are all along the horizontal axis. D) The poorest households are concentrated in the middle. Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

44) Refer to the above figure. Which of the above panels represents complete income equality? A) Panel A B) Panel B C) Panel C D) Panel D Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 45) Refer to the above figure. Which of the above graphs represents an unequal income distribution? A) Panel A B) Panel B C) Panel C D) Panel D Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

46) Changes in the Lorenz curve since 1929 in the United States indicate that A) the distribution of income today is identical to what it was in 1929. B) the distribution of income is slightly less equal today than in 1929. C) the distribution of income is slightly more equal today than in 1929. D) the distribution of income is much more equal today than it was in 1929. Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 47) All of the following are criticisms of the Lorenz curve EXCEPT A) The Lorenz curve does not include in-kind transfers. B) The Lorenz curve does not account for age differences. C) The Lorenz curve does not account for differences in the sizes of families. D) The Lorenz curve does not account for differences in education levels. Answer: D Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 48) Income in kind is defined as A) income received in the form of a paycheck. B) payment for services in the form of cash. C) tips. D) income received in the form of goods and services. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 49) Income in the form of goods and services is A) known as money income. B) known as income in kind. C) not considered income by economists. D) not part of wealth. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

50) All of the following are income in kind EXCEPT A) government provided housing. B) government provided education. C) tips received by a waitress. D) goods produced in the home. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 51) All of the following are income in kind EXCEPT A) income received from family members. B) services produced in the home. C) government provided food stamps. D) government provided medical aid. Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 52) Which of the following is NOT a true statement about the Lorenz curve? A) The Lorenz curve includes both money income and income in kind. B) The Lorenz curve does not include unreported income obtained from the underground economy. C) The Lorenz curve does not consider different sizes of households. D) The Lorenz curve does not consider age differences among wage earners. Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 53) Compared to the distribution of money income, the distribution of wealth is A) about the same. B) much more equal. C) much less equal. D) a little more equal. Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

54) The return on wealth is A) a stock variable. B) income. C) equal to the opportunity cost of holding capital. D) a stock or flow variable depending upon whether the wealth is in the form of bonds or other financial assets. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 55) Which of the following statements is TRUE about income and wealth? A) Income is a flow measure and wealth is a stock measure. B) Income is a stock measure and wealth is a flow measure. C) Both income and wealth are flow measures. D) Both income and wealth are stock measures. Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 56) Wealth is measured as A) only tangible objects. B) only buildings, machinery, land, cars, stocks and bonds. C) only nonhuman wealth. D) nonhuman and human wealth. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 57) When comparing the distribution of wealth to the distribution of income, it can be noted that A) the distributions are about the same. B) the measurement of income is much less accurate than the measurement of wealth. C) the measurement of wealth is much less accurate than the measurement of income. D) wealth does not generate income. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

58) All of the following would show a more equal distribution than the distribution of money income EXCEPT A) total income. B) after-tax income. C) wealth. D) lifetime earnings. Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 59) The common measure of wealth used in calculating the distribution of wealth includes A) the amount an individual will not receive during retirement. B) workers' claims on private pension funds. C) financial assets. D) human capital. Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 60) The richest 10 percent of U.S. houses hold more than two-thirds of all wealth. The problem with this statement is that A) it does not consider an individual's current income. B) it does not consider private and public pension plans. C) it is based entirely on nonhuman wealth. D) it is based entirely on human wealth. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

61) Each of the curves plotted in the graph shown in the above figure is known as a A) Laffer curve. B) Phillips curve. C) Keynesian curve. D) Lorenz curve. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 62) In the above figure, the curve that represents the most income inequality is A) a. B) b. C) c. D) d. Answer: D Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

63) In the above figure, the curve that represents the most income equality is A) a. B) b. C) c. D) d. Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 64) In the above figure, the curve that represents the second most income equality is A) a. B) b. C) c. D) d. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 65) All of the following are criticisms of the Lorenz curve analysis EXCEPT A) income-in-kind is not figured in. B) the inequality gap is not an issue that economists study. C) different sizes of households are ignored. D) it does not take into consideration lifetime earnings. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 66) Which of the following statements regarding the Lorenz curve is FALSE? A) A Lorenz curve is a geometric representation of the distribution of income. B) A Lorenz curve that is perfectly straight represents complete income equality. C) The less bowed is a Lorenz curve, the less equally income is distributed. D) The more bowed is a Lorenz curve, the more unequally income is distributed. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

67) If a nation's Lorenz curve lies on the 45 degree line of income equality, then A) more of the nation's income is received by the lowest 25 percent of families than by the highest 25 percent. B) every household's income level is different. C) more of the nation's income is received by the highest 25 percent of families than by the lowest percent. D) the income received by each 25 percent of families is 25 percent of the total income. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 68) Income-in-kind is A) money income. B) received in the form of goods and services. C) income in dollars. D) used to buy goods and services. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 69) Income is considered to be a A) nontaxable stream of funds. B) flow. C) stock. D) resource. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 70) Wealth is considered to be a A) nontaxable stream of funds. B) flow. C) stock. D) resource. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

71) The Lorenz curve shows A) how poverty rates change over time. B) the percentage of population below the poverty line. C) the degree of inequality in the income distribution. D) the ratio of cash income to payments-in-kind. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 72) The most widely used measure of income inequality is A) the Bureau of Labor Statistics' cost-of-living index. B) the Laffer curve. C) the Lorenz curve. D) the Gemini coefficient. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 73) A Lorenz curve measures the ________ on the horizontal axis. A) cumulative percentage of family income B) cumulative percentage of family wealth C) cumulative percentage of families D) demand of families on welfare Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 74) A Lorenz curve measures the ________ on the vertical axis. A) cumulative percentage of money income B) cumulative percentage of family wealth C) cumulative percentage of families D) demand of families on welfare Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

75) The Lorenz curve is criticized for all of the following EXCEPT A) that it excludes transfers-in-kind income. B) that it does not account for the size differences of households. C) that it does not account for age differences of households. D) that it does not account for the impact of trade on the standard of living. Answer: D Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

76) Use the above figure. Refer to the above diagram where curves (a) through (d) are for four different countries. Income is equally distributed in A) Country A. B) Country B. C) Country C. D) Country D. Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 77) Use the above figure. Refer to the above diagram where curves (a) through (d) are for four different countries. Income is most unequally distributed in A) Country A. B) Country B. C) Country C. D) Country D. Answer: D Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

78) Use the above figure. Refer to the above diagram where curves (a) through (d) are for four different countries. Income is third most unequally distributed in A) Country A. B) Country B. C) Country C. D) Country D. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

79) Use the above table. What percentage of income is received by the richest 20% of the population? A) 33.33 percent B) 16.67 percent C) 11.11 percent D) 40.00 percent Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 80) Use the above table. What percentage of income is received by the poorest 60% of the population? A) 27.78 percent B) 33.33 percent C) 44.44 percent D) 55.56 percent Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

81) Use the above table. What percentage of income is received by the poorest 20% of the population? A) 20 percent B) 13.3 percent C) 11.1 percent D) 7.0 percent Answer: C Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 82) Use the information in the above table. The top 40 percent of the population earn A) 66.7 percent of the income. B) 55.5 percent of the income. C) 50.0 percent of the income. D) 44.4 percent of the income. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 83) Use the information in the above table. If Income was evenly distributed, each person would receive A) $9,000. B) $2,500. C) $1,800. D) $1,000. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 84) The distribution of money income can be represented graphically using A) supply and demand diagrams. B) a Lorenz curve. C) a Keynesian curve. D) a Distribution curve. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

85) A diagonal straight line on a Lorenz curve represents A) a perfectly unequal distribution of income (one person has everything). B) a perfectly equal distribution of income. C) a high level of inequality in the distribution of income. D) an oblique distribution of income. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 86) Since 1929, the distribution of money income in the United States has A) become slightly more unequal. B) not dramatically changed. C) become more equal. D) shifted toward the poorer 20 percent away from the richer 20 percent. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 87) In the United States, the distribution of wealth A) is the same as the distribution of income. B) is more unequal than the distribution of income. C) is more equal than the distribution of income. D) is equal for all families. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 88) The wealthiest 10 percent of the population owns about A) 15 percent of all the wealth in the United States. B) 50 percent of all the wealth in the United States. C) 75 percent of all the wealth in the United States. D) 95 percent of all the wealth in the United States. Answer: C Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

89) A geometric representation of the distribution of income is referred to as A) the labor supply curve. B) the Lorenz curve. C) the Phillips curve. D) the Keynesian cross. Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 90) The 45° line on a Lorenz curve represents A) complete income equality. B) complete income inequality. C) complete wealth equality. D) complete wealth inequality. Answer: A Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 91) Compared with 1929, recent income distribution figures in the United States show A) slightly less inequality. B) much greater equality. C) greater equity. D) less equity. Answer: A Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 92) Regarding income distribution and the distribution of wealth, A) wealth is a stock concept and income a flow concept. B) a stock is evaluated at a given moment in time; a flow is evaluated during a period of time. C) income, a flow, can be viewed as a return on wealth. D) All of these are correct. Answer: D Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

93) Wealth A) is the same as income. B) includes assets such as houses, stocks, and bonds. C) does not include tangible objects. D) is a flow and not a stock. Answer: B Diff: 1 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 94) With respect to wealth in the United States, we presently find that the bottom 90 percent of Americans own approximately how much of the nation's wealth? A) 10 percent B) 30 percent C) 65 percent D) 85 percent Answer: B Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

95) Draw and explain a Lorenz curve. Answer:

In the above figure, the curve displaying the actual money income distribution is the Lorenz curve. The farther the Lorenz curve is from the 45-degree line that shows what the curve would be if money income were equally distributed, the more unequal is the actual distribution of income. Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 96) How does the distribution of wealth differ from the distribution of income in the United States? Answer: As conventionally measured, the distribution of wealth is more unequally distributed than the distribution of income. However, the wealth figures usually do not include workers' claims on pension plans or human capital. If these were included, the distribution of wealth would be less unequal than reported. Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

97) What are the major criticisms of the Lorenz curve? Answer: The Lorenz curve typically is presented in terms of the distribution of money income and ignores income in kind. It also does not account for differences in family sizes, the number of income earners in the family, or the ages of the families. The Lorenz curve also reflects income before taxes rather than disposable income, and fails to measure income from the underground economy. Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 98) Suppose there is a high inequality in household income between the highest and the lowest income groups in one country. In response, the government raises the income tax for the highest income group and provides subsidies to the lowest-income group. What would happen to the Lorenz curve as a result of the government programs? Explain. Answer: The government tax and subsidy policies would not change the Lorenz curve because it does not account for the income tax and income in kind provided by the government. Diff: 2 Topic: 29.1 The Distribution of Income Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 29.2 Determinants of Income Differences 1) Age is a determinant of income because A) with age typically come experience, education, and training that can increase income. B) age contributes to costs as medical expenses increase. C) older workers have accumulated more wealth. D) older workers have accumulated less wealth. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 2) Which of the following are determinants of differences in income? A) age B) marginal productivity C) discrimination D) all of these Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

3) Which factor listed below does NOT help account for the age-earning cycle? A) productivity B) number of hours worked each week C) effects of aging D) racial discrimination Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 4) The age-earning cycle shows an individual typically earning A) a constant income (adjusted for inflation) over the entire working life of the worker. B) an income that cycles upward and downward as an individual ages. C) an income that increases with age, peaks, and then falls as retirement approaches. D) an income that declines until age 30-35 and then increases rapidly. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 5) The age-earnings profile predicts that earnings will peak at A) the 35-40 age level. B) the 45-50 age level. C) the 60-65 age level. D) retirement. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 6) The age-earning cycle A) is an earnings profile of an individual throughout his or her lifetime. B) shows the earnings differences by age and by gender. C) depicts differences in the relationship between age and earnings across countries. D) shows the average incomes of people broken down by age categories. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

7) The age-earning cycle usually begins A) at relatively high income levels. B) at relatively low income levels. C) once a worker reaches 25 years of age. D) only when a worker is employed full time. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 8) The age-earning cycle shows declining income as a person approaches retirement age because A) worker productivity is increasing rapidly. B) worker and hours worked diminish. C) companies choose to promote these workers faster. D) companies add-in Social Security payments as a supplement. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 9) The age-earning cycle predicts that a typical person will A) be earning $50,000 in the year 2010. B) be earning the lowest income right before retirement. C) be earning the highest income right before retirement. D) be earning the highest income at about the age 45-50. Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 10) The learning curve suggests that an individual will A) receive the same income throughout a career. B) gain experience and increase productivity over time. C) be subject to frequent spells of unemployment. D) have an income that falls over time. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

11) Which of the following does NOT affect a worker's marginal productivity? A) education B) training C) talent D) inheritance of money Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 12) Which of the following is NOT considered to be a factor in the determination of a person's marginal productivity? A) innate abilities such as high intelligence B) investment in human capital such as education C) on-the-job training D) the elasticity of supply of labor Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 13) Much of a person's increased productivity can be linked to A) on-the-job training. B) the prevalent marginal tax rate. C) the price elasticity of demand for the product. D) the income elasticity of demand for the product. Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 14) Marginal productivity theory would suggest that A) all workers should be paid the same wage. B) higher productivity will increase the market wage of an individual. C) labor demand will have no impact on the wage paid. D) workers cannot do anything to improve their wage prospects for the future. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

15) Which of the following determinants of marginal productivity cannot be acquired by someone who wants to increase future productivity? A) education B) training C) talent D) experience Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 16) With a human capital investment (such as the investment in going to college), the most important cost tends to be A) foregone leisure. B) books and equipment. C) the opportunity cost of not working. D) taxes. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 17) In general, as individuals undertake additional years of schooling, A) their stock of human capital increases. B) the marginal productivity of individuals as workers declines. C) the marginal benefit to society of the extra years of education increases. D) the marginal productivity of individuals as workers becomes negative. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 18) The most common type of investment in human capital is A) having more children per family. B) the migration of labor in search of better jobs. C) expanded years of schooling. D) improved health care and maintenance. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

19) What is typically the main cost of pursuing a college education? A) tuition B) room and board C) books and supplies D) income forgone by not working Answer: D Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 20) In the absence of discrimination, as human capital investments increase, wages will generally A) decrease. B) increase. C) not change. D) increase or decrease. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 21) Investment in human capital A) is quite different from and has a much lower return than investment in physical capital. B) is just like investment in physical capital and has a return similar to that earned from other investments. C) is just like investment in physical capital but has a much greater return than do other investments. D) is not comparable to other investments in any way since human capital is embodied in the person. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 22) In the United States, inheritance accounts for roughly ________ of income inequality. A) 50 percent B) 30 percent C) 20 percent D) 10 percent Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 35 Copyright © 2021 Pearson Education, Inc.

23) The following are all determinants of income differences examined in the text EXCEPT A) age. B) marginal productivity. C) inheritance. D) height. Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 24) Most individual's income peaks when they are about A) 25. B) 40. C) 50. D) 65. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 25) The age-earnings cycle is A) the distribution of money income by age. B) the distribution of wealth by age. C) the relationship between earnings while working and retirement benefits for an individual. D) the regular earnings profile of an individual throughout his or her lifetime. Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 26) The regular earnings profile of an individual throughout his or her lifetime is A) the Lorenz curve. B) the age-earnings cycle. C) wealth. D) income-in-kind. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

27) Which of the following statements are correct about the age-earnings cycle? A) Earnings generally increase up till age 30 and then steadily decrease. B) Earnings increase throughout a person's lifetime until they reach retirement. C) Earnings increase with age because workers become more productive as they age until around 50 years. Around 50 the effects of aging outweighs the further increases in productivity. D) Since every person is different we can reach no general conclusions about the age-earnings cycle. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 28) The earnings of most people A) increase steadily until retirement. B) increase with age until around age 50 due to increased experience, training, and hours worked. C) increase with age until around age 40 due to increased experience and hours worked. D) increase with age until around age 60 due to increased experience, training, and hours worked, then level off as hours worked levels off. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 29) Suppose all people have the same age-earnings profile and the percent of the population in each age category is the same. The distribution of income at any point in time will be A) equal because all have the same profile. B) equal because incomes and wealth levels must then be the same. C) unequal because other sources of income will differ. D) unequal because incomes differ by age. Answer: D Diff: 3 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

30) One reason earnings tend to fall before retirement age is that A) the experience of people is no longer valuable after they are 50 or 55. B) people tend to reduce the number of hours they work after age 50. C) people are retiring earlier. D) firms discriminate against older workers. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

31) Refer to the above figure. Which of the graphs are consistent with the age-earnings profile? A) Panel A B) Panel B C) Panel C D) Panel D Answer: C Diff: 3 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

32) In a competitive economy, workers will be paid according to their A) status. B) age. C) marginal productivity. D) need. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 33) Which of the following is NOT a determinant of an individual's marginal product? A) talent B) money income C) experience D) educational level Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 34) Which of the following sources of productivity is the most difficult to acquire? A) education B) experience C) talent D) training Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 35) The return on human capital A) tends to be much greater than the return on physical capital. B) tends to be much lower than the return on physical capital. C) is similar to the return on physical capital. D) cannot be related to the return on physical capital since human capital and physical capital are so different. Answer: C Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

36) The main cost of a college education is A) tuition if one goes to a private college and room and board if one goes to a public college. B) dependent upon whether one's parents pay for the college or not. C) the lack of practical experience from spending time in college. D) the opportunity cost of not working. Answer: D Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 37) When measuring the benefits from investing in human capital A) the only benefits come from the increase in salary because of going to school. B) in addition to the monetary benefits, the benefit from expanding horizons should be included. C) we must include the costs of tuition and books but not the money made from part-time jobs. D) we must include the foregone earnings in the benefit calculation. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 38) Inheritance is responsible for about ________ percent of the income inequality in the United States. A) 10 B) 1 C) 67 D) 95 Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 39) Economic discrimination exists when A) there is an unequal distribution of income in a country. B) both income and wealth are unequally distributed in a country. C) there is unequal access to education. D) workers with the same marginal revenue products are paid different wages. Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

40) Economic discrimination against minorities exists when A) minorities have less education and training than whites. B) minorities are paid less than whites on average. C) minorities are paid less than whites with the same education, experience, and training. D) minorities are in different occupations than whites. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 41) Unequal pay that is caused by economic discrimination will be due to A) a noneconomic factor. B) differences in the marginal revenue product. C) a monopolistic labor market. D) difference in human capital. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 42) Which of the following is a reason for economic discrimination to occur? A) differences in access to education B) differences in gender C) differences in the quality of education D) barriers to entry in higher-paying occupations Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 43) The age-earnings profile for most people indicates A) earnings rise continually until a person retires. B) earnings initially decline and then rise continually until retirement. C) that when you adjust for inflation, earnings are constant throughout the entire workplace experience. D) earnings rise until the age of about 50 and then begin to fall until retirement. Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

44) Which of the following is NOT considered a determinant of income differences? A) productivity B) age C) discrimination D) equity or fairness Answer: D Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 45) Which of the following does NOT contribute to the marginal productivity of workers? A) discrimination B) talent C) experience D) education Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 46) Inheritance accounts for about A) 5 percent of income inequality. B) 10 percent of income inequality. C) 15 percent of income inequality. D) 30 percent of income inequality. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 47) Which of the following would NOT be considered a determinant of marginal productivity? A) talent B) gender C) experience D) training Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

48) Determinants of income differences include all of the following EXCEPT A) age. B) marginal productivity. C) moral hazard. D) discrimination. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 49) Typically, the major cost of a college education is A) tuition. B) books. C) foregone income. D) housing. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 50) Determinants of the marginal productivity of labor include all of the following EXCEPT A) talent. B) education. C) experience. D) location. Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 51) Going to college to get more knowledge and skills is considered to be an increase in A) physical capital. B) consumption. C) human capital. D) net exports. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

52) All of the following lead to a difference in income EXCEPT A) sales tax. B) discrimination. C) the age-earnings cycle. D) marginal productivity. Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 53) On average the productivity of an individual usually peaks when the individual is about A) 25. B) 40. C) 50. D) 65. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 54) If a goal of a nation's residents is to increase marginal productivity, they should increase A) expenditures on education. B) the inheritance tax. C) exports. D) the marginal propensity to consume. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 55) All of the following contribute to income inequality EXCEPT A) differences in education and training. B) differences in job tastes. C) differences in talent. D) government transfer programs. Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

56) The typical age-earnings cycle shows that A) there is a positive relationship between age and earnings that eventually turns into a negative relationship. B) there is a negative relationship between age and earnings that eventually turns into a positive relationship. C) there is a constant negative relationship between age and earnings. D) there is no relationship between age and earnings. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 57) The age-earnings cycle is an earnings profile of an individual throughout the person's lifetime. The profile shows that A) earnings usually peak at age 25 and then decline. B) earnings gradually rise until they peak around age 50. C) earnings and age have no particular correlation. D) younger workers have the most productivity. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 58) The opportunity cost of going to college for a student receiving a scholarship A) is the income that she would have earned if she did not go to college. B) is the risk of dropping out. C) is the food and living expenses that she has to purchase while in college. D) is zero because she does not have to pay tuition. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 59) The productivity standard for the distribution of income can be thought of as A) rewarding people according to their ability to produce useful goods. B) benefiting only the least productive worker. C) proving that egalitarians are correct. D) rewarding only the wealthy. Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 45 Copyright © 2021 Pearson Education, Inc.

60) One productivity standard for income distribution stated in the text is A) income distribution should be based on contribution to society's total output. B) tax payments are higher for higher income people. C) poor people pay too much in taxes. D) the poor should contribute more to society. Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 61) The contributive standard (merit standard) for distributing income implies that A) income should be distributed equally. B) income should be distributed according to need. C) income should be distributed according to the marginal productivity of workers. D) a transfer should be contributed to an individual above his or her contribution to net output. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 62) The contributive standard of income distribution is met by A) setting wages according to marginal productivity. B) having a highly progressive income tax. C) having the government determine all wages. D) using local committees to determine the needs of families in the area. Answer: A Diff: 3 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 63) The egalitarian principle of income refers to A) each person being paid differently. B) each person receiving the same income. C) each person receiving tax breaks. D) each person working the same number of hours. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

64) "To each exactly the same" refers to A) the productivity standard. B) the free market doctrine. C) the egalitarian principle. D) the ceteris paribus assumption. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 65) A major problem with using the egalitarian principle to distribute income is that A) it would eliminate the incentives that rewards provide in an economic system. B) it is difficult to know when an equal distribution of income has been achieved. C) it would not be fair to the wealthy. D) there exist no mechanisms to carry out such a scheme. Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 66) If income were distributed according to the egalitarian principle of "to each exactly the same," then one problem would be that A) there would be little or no incentive for individuals to take risky, hazardous, or unpleasant jobs. B) individuals would have an excess desire to invest in their own human capital. C) too many individuals would want to take risky jobs. D) productivity levels would probably become too high. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 67) The productivity standard says A) that everyone should have exactly the same income. B) that the age-earnings cycle should determine income. C) that people should be compensated on the basis of what they produce. D) that people should be compensated on the basis of their need. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

68) The egalitarian principle refers to A) "To each according to her need." B) "To each exactly the same." C) "To each according to her productivity." D) "To each according to his ability." Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 69) The merit standard refers to A) "To each according to her need." B) "To each exactly the same." C) "To each according to her productivity." D) "To each according to his ability." Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 70) The egalitarian principle says A) that everyone should have exactly the same income. B) that the age-earnings cycle should determine income. C) that people should be compensated on the basis of what they produce. D) that people should be compensated on the basis of their need. Answer: A Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 71) The belief that everyone should have exactly the same amount of income is A) merit standard. B) comparable-worth doctrine. C) egalitarian principle. D) Lorenz principle. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

72) If we were to pay everyone exactly the same income A) there would be a large amount of economic growth. B) there would be no incentive to invest in human capital. C) more people would seek an education. D) productivity would increase. Answer: B Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 73) Which of the following is considered a contributive standard for the distribution of income? A) rewarding workers according to their productivity B) rewarding workers according to their needs C) rewarding workers according to the number of their dependents D) all of these Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 74) If an employer pays employees according to the volume of business revenue they individually generate, then the employer is applying the A) productivity standard. B) merit standard. C) contributive standard. D) all of these Answer: D Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 75) Merit is judged by one's ability to produce A) what is considered useful by society. B) what is considered valuable by society. C) what is considered beneficial to society. D) all of these Answer: D Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

76) We measure a person's productive contribution in a market system by A) the marginal factor cost theory of the firm. B) the profit maximization theory of the firm. C) the marginal revenue product theory of wage determination. D) the egalitarian theory of wage determination. Answer: C Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 77) Which of the distributive standards does NOT involve a value judgment? A) productivity standard B) egalitarian standard C) merit standard D) All of the standards involve value judgments. Answer: D Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 78) Which of the following is NOT a normative standard for income distribution? A) the productivity standard B) the egalitarian principle C) rewarding people according to merit D) All of these are normative standards. Answer: D Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 79) If you believe that a worker should be paid on the basis of what he or she produced, you believe in A) the egalitarian principle. B) the productivity standard. C) the benefits standard. D) the comparative worth principle. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

80) If you believe that all workers should be paid the same, you believe in the A) egalitarian principle. B) productivity standard. C) benefits standard. D) comparative worth principle. Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 81) The idea that the Lorenz curve should be along the 45 degree line is consistent with A) the productivity standard. B) the egalitarian principle. C) the conservative principle. D) none of these. Answer: B Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 82) Which of the following is NOT correct regarding the theories of income distribution? A) Dealing with how income ought to be distributed is a normative issue. B) The productivity standard for the distribution of income is stated "to each according to what they produce." C) The egalitarian principle of income distribution is "to each exactly the same." D) Dealing with how income should be distributed is a positive economic issue. Answer: D Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 83) "To each according to what he or she produces" describes the ________ theory of income determination. A) productivity B) egalitarian C) equity D) needs Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

84) A person's productive contribution in a capitalist society is measured by determining the A) market value of the individual's output. B) comparable output of other workers in similar jobs. C) total number of goods produced by the individual. D) index of occupational values. Answer: A Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 85) Why doesn't the age-earning cycle continuously increase until retirement age? Answer: The typical worker sees a decline in earnings as he or she approaches retirement because people tend to reduce their hours worked, and have lower stamina and strength. The detrimental effects of aging tend to overcome the increases in productivity due to experience and training. Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 86) What is the age-earnings cycle? What is the typical age-earnings profile for a U.S. resident? Answer: The age-earnings cycle is the regular earnings profile of an individual throughout his or her lifetime. It usually starts with a low income, builds gradually to a peak at around age 50, and then gradually curves down until retirement age, at which time it approaches zero. Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 87) Earnings usually reflect a person's productivity. What are factors that cause differences in productivity across people so that earnings differ too? Answer: Productivity differences reflect differences in talent, training, experience, and human capital. People with more training or experience earn more, as do people with more human capital. Finally, some people just have a greater ability for certain things and this makes them more productive. Diff: 1 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

88) "The typical age-earning cycle provides evidence of economic discrimination by age." Do you agree or disagree? Why? Answer: Disagree. The typical age-earning cycle starts with a low income, builds gradually to a peak at around age 50, and then gradually drops until it approaches zero at retirement. The variations of earning by age, however, reflect many economic factors other than age, including work experience and productivity, and the number of hours per week that are worked. Therefore, the age-earning cycle alone is not evidence of age discrimination. Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 89) Explain the two theories of desired income distribution: the egalitarian principle and the productivity standard. Answer: The egalitarian principle suggests that income should be distributed equally across all individuals in society. The productivity standard suggests that people should be rewarded according to merit, with merit being judged by one's ability to produce what is considered valued by society. Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 90) Compare and contrast the two normative standards to income distribution discussed in the text: The productivity standard and the egalitarian principle. Answer: The productivity standard is also called the contributive standard or the merit standard. People are rewarded according to merit, where merit is determined by one's ability to produce what is considered useful by society. The egalitarian principle would distribute income equally. The two principles are very different since the former will generate an unequal distribution of income and the latter an equal distribution of income. They also differ greatly in incentive structure. The egalitarian principle provides no incentives for doing work that is unpleasant or for bearing risk or investing in human capital. Diff: 2 Topic: 29.2 Determinants of Income Differences Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

29.3 Poverty and Attempts to Eliminate It 1) The lowest percentage of the U.S. population in poverty is found when using which measurement of household resources? A) private income only B) private income plus cash benefits C) private income with cash and in-kind benefits D) private income with Social Security payments subtracted Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 2) The Social Security system is financed by A) a tax on individual retirement accounts. B) a payroll tax paid only by employers. C) a payroll tax paid by both employers and employees. D) a tax on luxury goods. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 3) The Social Security system is a(n) A) ad valorem system. B) ability to pay system. C) progressive tax system. D) pay-as-you-go system. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 4) The government finances Social Security through A) excise taxes. B) payroll taxes. C) the sale of goods and services. D) state taxes. Answer: B Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 54 Copyright © 2021 Pearson Education, Inc.

5) Which of the following statements is correct? A) The Social Security program funnels transfers from retired individuals to the youngest children of low-income families. B) Social Security is an entitlement which is available to everyone, including those who have not contributed to the fund during their active work years. C) Social Security benefits are received by people who had contributed to the fund during their active work years. D) As a public transfer payment, Social Security benefit is available only to the poor. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 6) The Social Security Fund is designed as A) a pay-as-you-go system. B) an investment portfolio that individual contributors can make periodic payments into. C) an account that allows periodic withdrawals by contributors. D) an individual account with a federal reserve bank. Answer: A Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 7) Social Security is a pure transfer program because A) it transfers funds from current workers to the poor. B) the government transfers funds from middle-income workers to welfare recipients. C) current payroll taxes are used to pay the eligible retirees. D) the government subsidizes the medical bill of the poor. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 8) Since Social Security is a pay-as-you-go program, the funds for the people retiring today A) come from those of us working today and in the future. B) come from the Federal Reserve. C) come from import taxes. D) come from foreign sales of gold. Answer: A Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 55 Copyright © 2021 Pearson Education, Inc.

9) The original objective of Social Security was A) to provide retirement fund for all persons. B) to prevent future depressions. C) to raise the nation's saving rate. D) a proper response to the stock market crash of 1929. Answer: A Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 10) The official poverty level is based on A) total net worth. B) pretax income, and includes cash subsidies but does not include in-kind subsidies such as food stamps. C) after-tax income, and includes both cash and in-kind government subsidies. D) wages and salaries, plus any unreported amounts of income from the underground economy. Answer: B Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 11) The threshold income level originally used to determine official poverty statistics was based on A) an income three times the amount of money needed to purchase a nutritionally adequate diet. B) standards provided by the United Nations based on studies done in poor countries around the world. C) the highest income of the lowest one-fifth of families in the country. D) a per capita income of $1,000 in 1958 prices. Answer: A Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 12) Which of the following CANNOT be eliminated in a growing economy such as the U.S. economy? A) absolute poverty B) relative poverty C) both absolute and relative poverty D) Neither absolute nor relative poverty can be eliminated. Answer: B Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 56 Copyright © 2021 Pearson Education, Inc.

13) When poverty is defined by an absolute real income level, what will happen to the poverty rate if income per capita in a country continues to grow? A) The poverty rate will increase forever. B) The poverty rate will eventually be zero. C) The poverty rate will increase and then decrease. D) The poverty rate will never change. Answer: B Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 14) When poverty is defined by an relative real income level, what will happen to the poverty rate if the distribution of income is NOT perfectly equal? A) The poverty rate will increase forever. B) The poverty rate will eventually be zero. C) The poverty rate will always remain constant. D) The poverty rate will change, but always exist. Answer: D Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 15) Relative poverty A) has been eliminated in the United States. B) will always be with us. C) has never existed in the United States. D) can be eliminated in the next 20 years. Answer: B Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 16) Relative poverty refers to A) how a family's income compares to the incomes of those around them. B) poverty levels at a stated income cutoff. C) the number of poor in one state relative to another. D) none of these. Answer: A Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 57 Copyright © 2021 Pearson Education, Inc.

17) If we include cash benefits and in-kind benefits available to low-income people, the share of the U.S. population in poverty A) drops dramatically. B) increases somewhat. C) increases dramatically. D) does not change. Answer: A Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 18) If an individual receives in-kind transfers from the government in the form of food stamps, public housing, and so on, his money income is A) less than his total income. B) greater than his total income. C) the same as his total income. D) equal to his in-kind income plus his wages. Answer: A Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 19) Which of the following statements about the Social Security (OASDI) program is FALSE? A) Benefits are paid to individuals who would be financially secure in their absence. B) Benefits are based on need. C) Benefits are an intergenerational transfer program from those who work to those who don't work. D) When an insured worker dies, benefits continue for widows or other dependents. Answer: B Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 20) Which of the following statements is an accurate statement about the Social Security (OASDI) program? A) The program is financed by voluntary contributions. B) Only 50 percent of workers are covered by OASDI. C) Benefits are based on financial need. D) The program transfers income from those who work to those who do not work. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 58 Copyright © 2021 Pearson Education, Inc.

21) Which of the following statements about Social Security is FALSE? A) Social Security is an intergenerational transfer where the benefits paid are only roughly related to past earnings. B) Over 90 percent of all employed workers in the United States are covered by Social Security. C) Benefit payments under Social Security are based on the recipient's need. D) Benefit payments under Social Security redistribute income from young to old. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 22) Which of the following statements about the Supplemental Security Income (SSI) program is FALSE? A) It is designed to establish nationwide minimum incomes for the aged, the blind, and the disabled. B) Benefits are based on need. C) Recipients who receive benefit payments under Social Security are also eligible for SSI. D) It covers children and individuals with mental disabilities, including drug addicts and alcoholics. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 23) Which of the following statements about the Earned Income Tax Credit Program (EITC) program is FALSE? A) On net the EITC discourages work by low- or moderate-income earners more than it rewards work. B) It provides rebates of Social Security taxes to low-income workers. C) Recipients who receive benefit payments under Social Security are also eligible for SSI. D) It is the largest poverty reduction program in the U.S.. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

24) All of the following are social insurance programs designed to attack poverty EXCEPT A) Social Security. B) temporary assistance to needy families. C) food stamps. D) tuition assistance. Answer: D Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 25) Which of the following income maintenance programs is designed to establish nationwide minimum incomes for the aged, the blind, and the disabled? A) the Old-Age Survivors' and Disability Insurance (OASDI) program B) the Supplemental Security Income (SSI) program C) the Temporary Assistance to Needy Families (TANF) program D) the food stamps program Answer: B Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 26) Under the Social Security program currently in existence, A) benefits are based on need. B) benefits are determined by whether or not one contributed to the system. C) benefits are provided to everyone who contributed to the system EXCEPT those under private retirement programs that provide an annual income in excess of $13,500. D) benefits are guaranteed to be no lower for future retirees than for current retirees. Answer: B Diff: 3 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 27) The funds paid to the government today for Social Security taxes are A) invested to provide for the future benefits of the taxpayers. B) saved to ensure sufficient resources in the future to pay the benefits of workers today when they reach retirement age. C) used by the government to purchase goods and services that will enhance the future productivity of business in the country. D) used to pay the benefits of those who are currently retired. Answer: D Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 60 Copyright © 2021 Pearson Education, Inc.

28) The purpose of the Supplemental Security Income program is A) to provide a minimum income for all households with children. B) to provide a guaranteed minimum income for all Americans. C) to provide a minimum income for the aged, blind, and the disabled. D) to supplement Social Security for the elderly with medical problems. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 29) The purpose of the Temporary Assistance to Needy Families program is A) to provide rebates of Social Security taxes to low-income workers. B) to provide cash assistance and supportive services to assist the family, helping them achieve economic self-sufficiency. C) to provide a minimum income for the aged, blind, and the disabled. D) to supplement Social Security for the elderly with medical problems. Answer: B Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 30) Current income maintenance programs A) often provide benefits to people who are working and earning substantially more than the poverty level. B) reduce the incentive of recipients to work. C) have safeguards to ensure that recipients work whenever physically able. D) fail to make the income distribution more equal. Answer: B Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 31) The purpose of the Earned Income Tax Credit Program (EITC) is to A) provide rebates of Social Security taxes to low-income workers. B) encourage low- and moderate-income workers to take second jobs to increase their income. C) provide in-kind services such as food stamps and public housing to those individuals who have poor credit. D) give tax credits to low-income individuals who do volunteer work in their communities. Answer: A Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 61 Copyright © 2021 Pearson Education, Inc.

32) The official poverty rate of the United States A) is higher today than at any other time in our history. B) has risen steadily since 1981. C) was lowest in the late 1960s. D) is lowest today. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 33) Originally, the threshold income level used to determine official poverty statistics was based on A) a per capita income of $3000 in 1955 prices. B) the lowest income of the second quartile of families in the country. C) an income three times greater than necessary to purchase a nutritionally adequate diet. D) figures developed by a committee in the American Economic Association. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 34) Which of the following statements is TRUE? A) A growing economy should see a decline in relative poverty but not in absolute poverty. B) A growing economy should see a decline in absolute poverty but not in relative poverty. C) A growing economy should see a decline in both absolute and relative poverty. D) A growing economy is usually unrelated to changes in either absolute or relative poverty. Answer: B Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 35) Which of the following statements is FALSE? A) The official absolute poverty level in the United States is far above the average income of many countries in the world. B) In a relative sense, the problem of poverty will always exist. C) An equal distribution of income would eliminate relative poverty. D) An equal distribution of income would eliminate absolute poverty. Answer: D Diff: 3 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 62 Copyright © 2021 Pearson Education, Inc.

36) Many argue the poor are getting poorer, at least in a relative sense. Evidence that contradicts this is that A) household income of the lowest twenty percent of households relative to the highest twenty percent of households has fallen over the last thirty years. B) the official poverty level of income has increased over the years. C) household spending of the lowest twenty percent of households relative to the highest twenty percent of households has held constant over the last thirty years. D) the pretax distribution of income is more equal than the after-tax distribution of income. Answer: C Diff: 3 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 37) The official poverty level is based on pretax income including cash. Which of the following statements is correct regarding this official specification of poverty? A) This is a good definition of poverty since it is made up of the income from productive resources. B) This is not a good definition of poverty because our tax structure consists of the same tax rate for different income brackets C) This is not a good definition of poverty because it does not include in-kind subsidies. D) This is a good definition of poverty because it is easy to measure. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 38) Social Security is A) an insurance program operated by the federal government. B) a retirement program that invests the person's contributions into interest-earning financial assets so the proceeds can fund the person's retirement. C) a social insurance program that guarantees that an elderly person will never fall below the poverty level. D) an intergenerational transfer program that only vaguely relates to past earnings. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

39) The income transfers that a person receives from Social Security A) is not related to the amount that they have contributed. B) is a yearly proportion of the amount contributed. C) is the same for everyone whether they contributed to the system or not. D) depends entirely on the amount received from private pensions. Answer: A Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 40) Which program provides assistance to the aged, blind and disabled? A) Social Security Program B) Supplemental Security Income program C) TANF D) Earned Income Tax Credit Answer: B Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 41) The government program that provides aid to families in need is A) TANF. B) Social Security program. C) Supplemental Security Income program. D) Earned Income Tax Credit. Answer: A Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 42) The program that was created to provide rebates of Social Security taxes to low-income workers is A) Supplemental Security Income. B) food stamps. C) Earned Income Tax Credit program. D) TANF. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

43) Since the War on Poverty was started in 1965, the United States has spent more than $12 trillion on income maintenance programs. The effect has been to A) reduce poverty levels substantially. B) reduce poverty levels moderately. C) have virtually no effect on poverty levels. D) increase poverty substantially. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 44) In an attempt to reduce the poverty rate, there has recently been a movement away from income maintenance programs to A) Supplemental Security Income programs. B) reducing the age a person can retire at. C) encouraging people to get jobs. D) incorporating the Lorenz policy in decisions. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 45) The USDA threshold income level was originally based on the cost of A) housing. B) transportation. C) basic clothing. D) a nutritionally adequate food plan. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 46) Which of the following groups of U.S. residents would likely qualify for SSI benefits? A) college students B) incarcerated murderers C) the disabled D) new federal retirees Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

47) The ________ program was created in 1975 to provide rebates of Social Security taxes to low-income workers. A) food stamp B) SSI C) TANF D) EITC Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 48) Which of the following statements is FALSE regarding the definition of poverty? A) A threshold income level is used to define poverty. B) Adjustments to the poverty level are made on the basis of changes in the Consumer Price Index. C) Real incomes in the United States have been growing at a compounded annual rate of almost 2 percent per capita. D) Poverty cannot be defined in relative terms. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 49) In a growing economy, it is possible to eliminate A) absolute poverty. B) relative poverty. C) both absolute and relative poverty. D) either absolute nor relative poverty. Answer: A Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 50) All of the following are governmental efforts to decrease poverty EXCEPT A) Supplemental Security Income. B) the earned income program. C) transfer payments. D) tariffs. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 66 Copyright © 2021 Pearson Education, Inc.

51) The official poverty rate in the United States includes A) less than 5 percent of the population. B) between 10 and 15 percent of the population. C) between 20 to 25 percent of the population. D) over 35 percent of the population. Answer: B Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 52) The poverty income threshold in the United States was originally calculated by A) multiplying a nutritionally adequate food plan for emergency use by 4. B) multiplying a nutritionally adequate food plan for emergency use by 2. C) multiplying a nutritionally adequate food plan for emergency use by 3. D) multiplying a nutritionally adequate food plan for emergency use by 5. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 53) Which of the following is NOT a program designed to attack poverty? A) Supplementary Security Income B) food stamps C) Social Security D) federal corporate income tax Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 54) Official poverty rates in the last 40 years have A) fallen dramatically. B) risen dramatically. C) stayed roughly the same. D) been eliminated. Answer: C Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

55) The official definition of poverty is A) exactly the 10 percent of U.S. residents with the lowest incomes. B) exactly the 20 percent of U.S. residents with the lowest incomes. C) exactly the 50 percent of U.S. residents with the lowest incomes. D) a relative measure. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 56) The federal government began officially measuring poverty in the A) 1860s. B) 1900s. C) 1980s. D) 1960s. Answer: D Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 57) The incidence of absolute poverty is reduced by A) annual recalculations of the poverty line. B) government welfare programs. C) economic growth. D) the size of the budget deficit. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 58) All of the following aim to reduce income inequality EXCEPT A) Social Security payments. B) earned income tax credits. C) regressive taxes. D) food stamp programs. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

59) Attempts to alleviate poverty have included all of the following income-maintenance programs EXCEPT A) Social Security. B) temporary assistance to needy families. C) 401(k) plans. D) food stamps. Answer: C Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 60) Some economists argue that the official poverty figures overstate poverty in this country. Why? Answer: Official poverty figures do not include in-kind subsidies, which would lift some people above the official poverty cutoff. They also do not include income from the underground economy. Someone who works for cash and does not report it to the government has a higher income than official statistics indicate. Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 61) How can absolute poverty be eliminated? How can relative poverty be eliminated? Does the elimination of one lead to the elimination of the other? Explain. Answer: Absolute poverty can be eliminated by economic growth that lifts all families above the poverty level. Relative poverty can be eliminated by a perfectly equal distribution of income. Eliminating one does not eliminate the other. If incomes rise so that no one is below the poverty level, but higher incomes rise faster, relative poverty may increase. If everyone earns a subsistence income, there is no relative poverty but everyone experiences absolute poverty. Diff: 2 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 62) Describe four of the five major income maintenance programs in the United States that were discussed in the text. Answer: The Social Security program has helped maintain income for the elderly, while the Supplemental Security Income and Temporary Assistance to Needy Families have provided benefits for those who do not qualify for Social Security. Food stamps subsidize food consumption for many people, and the Earned Income Tax Credit Program provides rebates of Social Security taxes to low-income workers. Diff: 1 Topic: 29.3 Poverty and Attempts to Eliminate It Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 69 Copyright © 2021 Pearson Education, Inc.

29.4 Health Care 1) Which of the following is considered a "third party" within the medical services industry? A) the patient B) the private insurance company C) the for-profit hospital D) the medical provider, i.e., physician Answer: B Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 2) According to the text, the portion of total U.S. national income spent on health care was about ________ in 2015 as opposed to about ________ in 1965. A) 34 percent; 17 percent B) 17 percent; 34 percent C) 6 percent; 17 percent D) 17 percent; 6 percent Answer: D Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 3) Today the portion of total U.S. national income spent on health care is about A) 7 percent. B) 18 percent. C) 35 percent. D) 51 percent. Answer: B Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 4) An important contributor to rising U.S. health care costs in recent years is A) less interest on the part of Americans to stay physically fit. B) the increasing proportion of the population that smokes. C) an easing of standards at medical schools that has permitted unqualified people to become physicians. D) the aging of the population. Answer: D Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 70 Copyright © 2021 Pearson Education, Inc.

5) The percentage of national income spent on health care A) has steadily decreased since 1965. B) has steadily increased since 1965. C) increased until the end of the 1970s and then decreased in the 1980s and 2000s. D) decreased until the end of the 1970s and then increased in the 1980s and 2000s. Answer: B Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 6) The impact of technological change in the health care area has been to A) reduce the quality of health care while raising the costs. B) reduce the cost of health care. C) increase the quality of health care while decreasing the costs. D) increase both the quality of health care and the costs of health care. Answer: D Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 7) A problem with third-party financing of so much of health care is that A) it reduces the quality of health care received by most people. B) it discourages physicians from getting second opinions and running enough tests to be sure the right procedure is followed. C) it causes the demand for medical services to increase, which causes health care costs to increase. D) it discourages people from relying on the judgments of physicians in making decisions about health care. Answer: C Diff: 3 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

8) Among the reasons that health care expenditures have grown so rapidly in the United States over the last two decades are all of the following EXCEPT A) an emphasis on wellness programs and preventive medicine. B) the aging of the U.S. population. C) expensive new medical technologies. D) third-party financing. Answer: A Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 9) An individual with no deductible on his or her health insurance policy will tend to engage in a lifestyle that is less healthy than a person with a $2,000 insurance deductible. This is said to be a problem of A) healthy selection. B) moral hazard. C) wellness training. D) blue-zoning. Answer: B Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 10) The top 5 percent of health care users in the United States account for A) 10 percent of all health costs. B) over 50 percent of all health costs. C) over 75 percent of all health costs. D) almost 90 percent of all health costs. Answer: B Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 11) Which of the following is NOT a reason for rising health care expenditures in the United States over the last 40 years? A) aging of the population B) technological change C) third-party financing of health care expenditures D) discovery of new diseases Answer: D Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 72 Copyright © 2021 Pearson Education, Inc.

12) The impact of technological change in the health-care area has been to A) increase both the quality of health care and the monetary costs of health care. B) increase the monetary costs of health care and decrease the quality of health care. C) decrease the monetary costs of health care while decreasing the quality of health care. D) increase longevity but decrease quality of life. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 13) Rising health care spending is a problem confronting the federal government because A) it is the government's job to make sure everyone receives the health care they need. B) federal spending on health care has increased rapidly over the last thirty years. C) the federal-funded VA hospitals have been expanding faster than government revenues can provide for. D) the medical expenses of federal employees has been rising at a rate much faster than for nonfederal workers. Answer: B Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 14) An example of third-party financing of health care is A) patients paying for their visit to the doctor. B) patients not going to the doctor in order to save money. C) a patient going to another doctor for a second or a third opinion. D) Medicare. Answer: D Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 15) One problem with third-party financing of health care is that A) people have more incentive to utilize health care. B) demand falls so that suppliers cannot take advantage of economies of scale. C) it reduces the quality of health care people receive. D) it discourages people from relying on their physicians' advice in making health care decisions. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 73 Copyright © 2021 Pearson Education, Inc.

16) What impact do private insurance companies and Medicare have on national medical costs? A) Medical costs go up because insurance leads to an increase in the quantity demanded of medical services. B) Medical costs go up because insurance will lead to the reduction in the supply of medical services due to the amount of paperwork required. C) Medical cost are unaffected by insurance companies. D) Medical costs go down because the insurance company pays the bill. Answer: A Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 17) Other things being equal, a national health insurance program would A) generate higher life expectancies and lower infant mortality rates. B) generate lower life expectancies and higher infant mortality rates. C) increase total health care expenditures. D) increase the quality of life. Answer: C Diff: 3 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 18) Other things being equal, a national health insurance program would A) decrease the demand for health care. B) decrease moral hazard. C) decrease total health care expenditures. D) reduce individuals' incentives to make decisions that promote better health. Answer: D Diff: 3 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 19) Rising healthcare costs are attributable to A) people living longer and desiring more care. B) reliance on expensive technology to support and prolong life. C) third-party financing of healthcare costs. D) all of these. Answer: D Diff: 3 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

20) A benefit of deductibles and health savings accounts is that they A) reduce the moral hazard problem associated with third-party payers. B) increase the quality of health care. C) reduce the use of expensive techniques for hopeless cases. D) reduce the incomes of physicians. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 21) The percentage of total national income spent on health care in the United States has A) declined rapidly since 1965. B) remained below the level of inflation. C) risen steadily since 1965. D) remained constant over the last few years. Answer: C Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

22) The above figure supports all of the following statements regarding health care EXCEPT A) the demand for health care is insensitive to price changes; as the price goes up, so does the quantity demanded. B) if all medical expenses were paid for by third parties, the quantity demanded would increase tremendously. C) due to third party payments, patients demand a higher quantity of health care services per year. D) the lower the deductible, the greater is the quantity demanded of health care services per year. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

23) Health care costs have been rising due to A) an aging population. B) new technologies. C) third-party financing. D) All of these are correct. Answer: D Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 24) Approximately how much of aggregate national income in the United States is spent on health care today? A) 3 percent B) 45 percent C) 18 percent D) 34 percent Answer: C Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 25) The use of hospitals today is dominated by A) the elderly. B) immigrants. C) obstetrical care. D) the wealthy. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 26) The impact of technology on health care has A) provided for a higher quality of life. B) increased health care costs. C) contributed to increased life expectancy. D) All of these are correct. Answer: D Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

27) All of the following are reasons that health care costs have risen so much in the past few decades EXCEPT A) the aging population. B) higher imports. C) new technologies. D) third party payments. Answer: B Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 28) The idea that some people engage in risky behavior due to the fact that they have good health care is known as A) moral hazard. B) risk aversion. C) zero-sum game. D) risk-taking behavior. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 29) The twin economic problems of the U.S. health care industry are the A) rising health care costs and the declining quality of health care services. B) rising health care costs and the rising malpractice insurance costs. C) rising health care costs and the moral hazard problem in health care services. D) declining rate of immunization rates and the rising malpractice insurance costs. Answer: C Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 30) In the year 2015, the United States spent about A) 17 percent of GDP on health care. B) 100 percent of GDP on health care. C) 6 percent of GDP on health care. D) 2 percent of GDP on health care. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

31) Currently, about ________ of all health care spending is paid by individuals. A) 89 percent. B) 45 percent. C) 10 percent. D) 3 percent Answer: C Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 32) Which of the following is NOT a reason for the increase in health care costs? A) the aging of the population B) the implementation of new technologies C) the increase in third party payments D) the decrease in the fertility rate Answer: D Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 33) The federal government and insurance companies are examples of third party A) payers for health care. B) users of health care. C) providers of health care. D) observers of health care. Answer: A Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 34) Since the 1930s, out-of-pocket payments for health care have A) declined from about 50 to 40 percent of total payments. B) declined from about 95 to 10 percent of total payments. C) declined from about 70 to 30 percent of total payments. D) not changed and remain at 70 percent of total payments. Answer: B Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

35) Since the 1930s, third-party payments for health care have A) risen from about 5 to 90 percent of total payments. B) declined from about 95 to 10 percent of total payments. C) declined from about 70 to 30 percent of total payments. D) risen from about 30 to 50 percent of total payments. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 36) The health care market in the United States is characterized by A) considerable government involvement. B) third-party payment of health care costs. C) asymmetric information between providers and consumers. D) all of these Answer: D Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 37) Jose decides to join the Middle State University's football team when he learns that his health insurance will pay for any subsequent injury. This illustrates A) a moral hazard problem. B) monopolistic behavior. C) a symmetric information problem. D) oligopolistic behavior. Answer: A Diff: 1 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 38) A major benefit of a health savings account is that it A) combats moral hazard. B) means more health care services will be demanded. C) eliminates rising health care costs. D) creates the incentive to see a doctor regularly. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

39) In insurance markets, moral hazard occurs when the behavior of A) the insured person changes in a way that raises costs for the insurer, since the insured person no longer bears the full costs of that behavior. B) the insurer changes in a way that raises costs for the insured person, since the insurer no longer bears the full costs of that behavior. C) the insured person changes in a way that eliminates rising health care costs for the insurer, since the insured person no longer bears the full costs of that behavior. D) the insured person has an incentive to under consume medical services, simply because the insured person no longer bears the full cost of medical services. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 40) As a result of moral hazard A) both physicians and hospitals order more procedures. B) physicians and hospital administrators have no incentive to raise costs. C) patients increasingly have to worry about the expense of operations and other medical procedures. D) both physicians and hospitals have a financial interest in trying to keep hospital costs down. Answer: A Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 41) Why have health care costs risen so much in recent years? Answer: The elderly use a disproportionate amount of health care, and the population is getting older, so there is a rising demand for health care. Furthermore, new technologies have contributed to higher prices. Third-party financing for health care also encourages people to demand more services than they would otherwise, causing higher prices. Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

42) "It is difficult to compare over time health care expenditures, costs, and output." Do you agree or disagree? Why? Answer: Agree. First, expenditures and costs are not the same thing. A system like Britain's has lower expenditures but not necessarily lower costs since people spend more time waiting for services. Years ago, expenditures were much lower, partially because people suffered and died from ailments that now can be cured. Further, as improvements in health care permit longer lives, health care expenditures will increase. The interrelationships between health care, technology, costs, and expenditures are extremely complicated. Diff: 3 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking 43) How is moral hazard related to health care? Answer: Moral hazard is affiliated with many insurance systems. A person who is insured will use health care services more than one who is not insured and may engage in a lifestyle that is less healthful than one with less insurance. These create greater costs to the insurance companies and the health care system. Physicians also are more likely to require tests when insurance companies pick up the costs. Diff: 2 Topic: 29.4 Health Care Learning Outcome: Micro-25: Discuss the economics of income distribution and discrimination AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 30 Environmental Economics 30.1 Private versus Social Costs 1) Which of the following statements best defines private costs? A) They are internal in the sense that the buyer or seller must explicitly take them into account. B) They are costs borne by people other than those who commit the action. C) They are synonymous with social costs. D) They represent explicit costs incurred by producers in the private sector. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 2) Costs that are borne solely by the individuals who incur them are called A) private costs. B) public costs. C) social costs. D) implicit costs. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 3) When the costs of an action are NOT fully borne by the two parties engaged in a transaction, this is called a(n) A) externality. B) opportunity cost. C) accounting cost. D) internal cost. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

4) Noise from a hard rock concert is an example of a situation in which A) social costs are greater than private costs. B) social costs are less than private costs. C) social costs are equal to private costs. D) social costs are not external costs. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 5) An individual who pays for a vehicle has incurred a A) social cost. B) private cost. C) negative externality. D) positive externality. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 6) Private costs are the same as A) implicit costs. B) social costs. C) public costs. D) internal costs. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 7) All of the following are private costs of operating an automobile EXCEPT A) gasoline for operating the vehicle. B) depreciation of the vehicle. C) car insurance. D) harm to the environment from emissions. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

8) Internal costs are A) costs borne solely by the individuals who incur them. B) costs borne by people in the same society as those who incur them. C) costs borne by people working in the firm that incurs them. D) costs that are incurred by the producers but buyers do not pay for them. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 9) To find the social cost of an action, add together A) the external and accounting costs. B) the private costs and the internal costs. C) the external costs and the internal costs. D) the internal costs and the private opportunity costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 10) Society must pay the full opportunity cost of any activity A) that uses scarce resources. B) that causes costs to rise. C) that increases revenues. D) none of these Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 11) Social costs are A) costs borne by society whenever a resource-using action takes place. B) costs incurred by government and borne by all taxpayers. C) costs incurred in governmental welfare programs. D) external costs minus internal costs. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

12) The total social cost of production is equal to A) external cost minus internal cost. B) internal cost minus external cost. C) external cost plus internal cost. D) internal cost plus opportunity cost. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 13) There is "too much" steel production if the A) social costs of steel production are significantly lower than the private costs. B) social benefits of steel production are declining. C) social costs of steel production are significantly higher than the private costs. D) social costs of steel production are declining. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 14) Social costs are A) private costs plus any external costs. B) the costs of the externality only. C) costs incurred when common property is used. D) the costs associated with reaching and enforcing agreements. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 15) A social cost that is NOT fully paid by the individual using an automobile is A) traffic congestion. B) gasoline and oil. C) insurance. D) depreciation of the vehicle. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

16) When the social costs exceed the private costs, economists state that there is A) a positive externality. B) an underproduction of output. C) a negative externality. D) a waste of resources in production. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 17) When social and private costs differ, economists state that A) there will be economic profit in the society. B) the society will produce inside the production possibilities frontier. C) there is an externality. D) there is not an efficiency problem but an equity problem. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 18) An externality that is NOT fully paid by the individual using an automobile is A) insurance for the vehicle. B) gasoline for the vehicle. C) air pollution from the vehicle. D) operation of the vehicle. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 19) If social cost exceeds private cost, there is A) underproduction of a good. B) a negative externality. C) a positive externality. D) an economic loss in the activity. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

20) Where pollution is concerned, if an automobile driver considers only the internal costs of his actions, he is apt to A) use resources very carefully and in small quantities. B) garage his car and drive very seldom. C) be making a positive contribution to the greater community. D) drive too much and use up more scarce resources than he would if he had to cover all his costs. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 21) If a person does NOT pay all costs associated with a particular resource-using activity, then A) the external costs of the activity are greater than the private costs of the activity. B) the social costs of the activity are greater than the private costs of the activity. C) the external costs of the activity are greater than the internal costs of the activity. D) the full costs of the activity are the sum of private costs plus internal costs. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 22) If the social costs of refining oil are greater than the private costs of oil refining, then A) the external costs of oil refining are greater than the social costs of oil refining. B) users of products that use refined oil are paying too much for the products. C) there is too much oil refining. D) the amount of oil refining needs to increase in order to bring social costs and private costs in line with each other. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 23) When a person does NOT have to pay the full costs for using a scarce resource, then A) the use of the resource is not affected since society pays for the resource. B) more of the resource will be used. C) the internal costs of using the resource are too high. D) the social costs of the resource are less than they would be if the "correct" amount of the resource were being used. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 6 Copyright © 2021 Pearson Education, Inc.

24) Suppose there are two factories on a river, and both need clean water for their production processes. The upstream factory takes in clean water and dumps dirty water back into the river. The downstream firm must clean up the water it gets from the river before using it. In this situation A) the private costs of the downstream factory are more than the private costs of the upstream factory, but for both factories private costs and social costs are the same. B) the social costs are greater than the private costs for the upstream firm, while the social costs are less than the private costs for the downstream firm. C) the upstream factory's private costs are less than its social costs, and its external costs are borne by the downstream factory. D) the internal costs of the upstream factory are externalized by the downstream factory, which then passes them on to its customers. Answer: C Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 25) When a person does NOT have to pay the full costs for using a scarce resource, then there is A) an underproduction of a good. B) a negative externality. C) a positive externality. D) an opportunity cost in the activity for the person but not for society. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 26) When social costs for using a scarce resource are included, then there is A) a decrease in the production of the good. B) a negative externality. C) a decrease in the price of the good. D) a positive externality. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

27) When both internal and external costs for using a scarce resource are included, then there is A) an increase in the production of the good. B) a negative externality. C) an increase in the price of the good. D) a positive externality. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 28) Which of the following is an example of an external cost? A) the cost of labor to a firm B) the pollution caused by automobile exhaust C) the cost of tires for your car D) the opportunity cost of getting a college education Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 29) If coal-burning electrical utility companies fully internalized pollution costs, then we could expect A) an increase in electricity prices. B) a decrease in electricity prices. C) no change in electricity prices. D) a greater use of coal to produce electricity. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 30) Externalities exist because A) private costs differ from social costs. B) private costs are equal to social costs. C) low productivity of workers in production. D) too much government interference in the market. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

31) If the external costs of production are NOT taken into account, then production will A) be less than socially desirable. B) be more than socially desirable. C) be the same since only prices are affected by externalities. D) not continue. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 32) If crop dusting on your farm causes your neighbors to have sore throats, then crop dusting is creating A) only explicit costs. B) opportunity costs. C) external costs. D) internal costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 33) If firms were forced to take into account the full social costs of production, then A) output would decrease but pollution levels would probably remain at the same levels. B) output would be unaffected but pollution levels would come down. C) output and pollution levels would decrease. D) output could be increased and pollution levels would decrease. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 34) If the market price of a good does NOT include all of the costs and benefits that arise from the production or consumption of the good, then A) the market is perfectly competitive. B) an externality is present. C) society is consuming and producing the optimal amount of the good. D) resources are properly allocated. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

35) In economic analysis, air pollution, water pollution, and scenery destruction are considered to be A) externalities. B) internalities. C) private costs. D) opportunity costs. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 36) If a good is produced by firms that generate external costs, the price consumers pay A) will be efficient as long as it equals the marginal costs of the firms. B) will be too low. C) will be too high because the consumers end up paying the costs instead of the firm. D) will be the correct price, but the quantity sold of the good will be too large. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 37) If a good is produced by firms that incur all private and external costs, the price consumers pay A) will be efficient since it includes all social costs. B) will not be socially acceptable. C) will be too high because the consumers end up paying all of the costs instead of the firm. D) will be the correct price, but inefficient. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 38) The Clear Plastic Company's plant discharges large quantities of toxic chemicals into some groundwater sources. Residents in the surrounding area have higher medical bills because of Clear Plastic's pollution. These additional medical costs represent A) a positive externality. B) a negative externality. C) the company's private costs. D) the neighboring families' external costs. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 10 Copyright © 2021 Pearson Education, Inc.

39) The Clear Plastic Company's plant discharges large quantities of toxic chemicals into some groundwater sources. Residents in the surrounding area have higher medical bills because of Clear Plastic's pollution. As long as Clear Plastic Company is allowed to emit pollution and ignore any externalities, the firm will A) overproduce. B) underproduce. C) charge too high a price for its output. D) be absorbing the full value of its social costs. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 40) The Clear Plastic Company's plant discharges large quantities of toxic chemicals into some groundwater sources. Residents in the surrounding area have higher medical bills because of Clear Plastic's pollution. If the firm is forced to pay the social costs of its production, A) the amount of plastic it produces will increase in order to pay the additional costs. B) the price it charges for its plastic will decrease. C) its supply curve will shift to the right. D) it will produce less and charge more for its plastic. Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

41) Refer to the above figure. It represents supply and demand for The Black Ash Steel Company's output. The firm's plant belches large quantities of smelly fumes and black ash into the air. Residents in the surrounding area have higher medical bills as a result. If the firm is forced to pay the full social cost of its production, what will occur? A) Black Ash's supply curve will shift from SA to SB. B) Demand for the firm's steel will shift to the left. C) The company's supply curve will shift from SB to SA. D) Black Ash will increase its own output to cover the cost increase. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 42) Private costs are A) external costs borne by private firms. B) explicit costs rather than implicit costs. C) costs borne by private members of society rather than governmental bodies. D) costs borne solely by the individuals who incur them. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 43) Costs borne solely by the individuals who incur them are A) private costs. B) social costs. C) internality. D) common property. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 12 Copyright © 2021 Pearson Education, Inc.

44) Which of the following is NOT a private cost? A) the health insurance costs a firm must pay for its employees B) the pollution caused by a firm dumping its wastes into the river C) the coffee pot that Jan dropped and broke this morning D) the amount that a firm must pay for raw materials to make its product Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 45) Steve raises bees to pollinate his orange trees. One of the bees just stung him. This is a(n) A) private cost. B) social cost. C) opportunity cost. D) common property. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 46) John raises bees to pollinate his orchard. A couple of bees which escaped ended up pollinating his neighbor's orchard, so A) John's neighbor has received an internal cost of John's bee-keeping. B) John's neighbor has received an external cost of John's bee-keeping. C) John's neighbor has received an external benefit of John's bee-keeping. D) None of these is correct. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 47) External costs are A) borne by individuals other than those who incurred them. B) another term for implicit costs. C) borne by the public but incurred by the government. D) borne by the government but incurred by the public. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

48) The sum of internal and external costs is A) private cost. B) social cost. C) opportunity cost. D) common property. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 49) Social costs are A) costs that are borne by the government. B) the full cost borne by society whenever a resource use occurs. C) borne by individuals who incur them. D) borne by no one in society. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 50) The total costs of using a resource are made up of A) private costs only. B) external costs only. C) social costs only. D) internal and private costs only. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 51) The sum of internal and external costs is A) externalities. B) social costs. C) internalities. D) private costs. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

52) When a person drives an automobile, that individual is creating A) internal costs only. B) private costs only because the individual pays for the insurance, gas etc. C) external costs only. D) social costs. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 53) Which of the following statements is TRUE about the relationship among external, internal and social costs? A) Social costs will always be higher than external costs. B) Social costs will always be lower than internal costs. C) Internal costs will always be higher than external costs. D) Internal costs will never equal external costs. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 54) Which of the following statements is TRUE about the relationship among external, internal and social costs? A) External cost is the difference between social and internal costs. B) Internal cost is the sum of social and external costs. C) Social cost is the difference between internal and external costs. D) none of these Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 55) The social costs of an activity are greater than the private costs of the activity when A) a person does not pay all costs associated with a particular resource-using activity. B) the internal costs of the resource-using activity are less than the external costs of the activity. C) the internal costs of the resource-using activity are positive. D) the external costs of the resource-using activity are zero. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

56) When social costs of an activity exceed private costs, A) there is a tendency for resources to be under-utilized. B) this means that resources are being efficiently used. C) there is a tendency for resources to be over-utilized. D) None of these is correct. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 57) When social costs of an activity exceed private costs, A) a market failure exists. B) there is a tendency for resources to be under-utilized. C) this means that resources are being efficiently used. D) the actual price is above the efficient price. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 58) If the social costs of driving an automobile are greater than the private costs of driving an automobile, then A) the external costs of auto driving exceed the social costs of auto driving. B) the external costs of auto driving exceed the internal costs. C) the price of automobile driving is too high. D) either people drive their autos too much or more funds should be spent on reducing air pollution. Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

59) An example of a situation in which the social costs are greater than the private costs would be A) a new restaurant takes business away from an established restaurant. B) hand-held calculators putting slide rule manufacturers out of business. C) when a member of a rock band's ability to hear deteriorates from performing in so many loud concerts. D) a physician who cannot examine patients with a stethoscope in an examination room adjacent to an airport. Answer: D Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 60) Suppose there are two identical factories on a river. Both require clean water for their production processes. The upstream firm gets clean water from the river and dumps dirty water into the river. The downstream firm must clean the water it gets from the river before it can use the water and later it dumps dirty water into the river. In this situation A) the private costs of the two firms are the same since both dump dirty water into the river. B) the upstream factory's private costs are lower than its social costs since it passes the costs of the dirty water on to the downstream firm. C) the private costs of the downstream firm are greater than the private costs of the upstream firm and the social costs are less than the private costs for both firms. D) the private costs of the upstream firm are less than its social costs while the social costs of the downstream firm are less than its private costs. Answer: B Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 61) Suppose there are two firms on a river and the production processes of both require clean water. The upstream firm's process dirties the water, which it dumps back into the river. The downstream firm must clean the water before using it in its production process. If the two firms would merge, A) the external costs of the merged firm would equal the external costs of the upstream firm, which would then be passed on to its customers. B) the total costs of production fall since the external costs disappear. C) the external costs of the upstream firm are private costs after the merger. D) the internal costs of the downstream firm become external costs of the merged firm. Answer: C Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

62) An example of the external costs due to automobile driving is A) wear and tear on toll roads. B) the opportunity cost of the driver's time. C) air pollution due to exhaust fumes. D) the cost of washing dirty cars. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 63) When a person can pass some of her costs of using a resource on to someone else, A) the use of the resource is not affected by her actions. B) the internal costs of using the resource exceed the private costs. C) she uses too much of the resource. D) she uses too little of the resource. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 64) A person removes the anti-pollution devices on his automobile. An external cost associated with this is A) the feeling of guilt the person feels for violating the law. B) the ticket he gets when a highway patrol officer pulls him over. C) the man's neighbor washes his car more often because of increasing smog. D) the man buys less gasoline, reducing the income of local gas stations. Answer: C Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 65) Air pollution is a problem because A) people are greedy. B) people are not environmentally conscious. C) people make use of air without having to bear all the costs of their actions. D) a market economy does not provide as strong an incentive for environmental cleanup as a socialist economy. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

66) If pollutants from smoke stacks in a city such as Newark cause people to paint their homes and cars more frequently, this implies A) external benefits to the home and car owners. B) external costs on home and car owners. C) internal cost to home and car owners. D) none of these. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 67) By adding internal costs to external costs, we determine the total A) private cost. B) social cost. C) accounting cost. D) opportunity cost. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 68) Another name for internal cost is A) private cost. B) social cost. C) psychological cost. D) marginal cost. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 69) Which of the following constitutes an external cost of driving an automobile? A) insurance B) fuel C) pollution D) license Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

70) In a situation in which internal costs differ from social costs, we say that there exists a(n) A) welfare loss. B) welfare benefit. C) internality. D) externality. Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 71) When a person smokes a cigarette in his car and throws the butt out of the window, this is a(n) A) marginal cost. B) external cost. C) marginal personal benefit. D) internal benefit. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 72) Costs that are borne solely by the individuals who incur them are A) private costs. B) social costs. C) external costs. D) transaction costs. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 73) Social costs is equal to the sum of A) internal and private costs. B) internal and external costs. C) internal and implicit costs. D) internal and production costs. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

74) When the total external and internal costs of a transaction are taken into consideration, this is known as A) public costs. B) average total costs. C) social costs. D) marginal costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 75) When there are no externalities, A) social costs are greater than private costs. B) social costs are less than private costs. C) private costs are greater than social costs. D) private costs equal social costs. Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 76) Which of the following is FALSE? A) Social costs do not include private costs. B) Private costs do not include external costs. C) If social costs are greater than private costs, "too much" of a good is being produced. D) Pollution is a social cost. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 77) An externality A) may be positive or negative. B) means a rapidly rising cost borne by consumers. C) is the cost of producing a good outside the United States. D) is the indirect cost, the overhead, of producing a product. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

78) Which of the following statements is TRUE for society as a whole? A) Supply of services always reflects all social costs. B) Demand for services always reflects all social costs. C) Private costs are not always equal to social costs. D) Social benefits are always emphasized in advertising. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 79) When the private costs and the social costs are NOT the same, there is a(n) A) externality. B) internality. C) public good. D) monopoly. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 80) A good that has external costs associated with its production will be A) produced at the optimal level. B) underproduced. C) overproduced. D) not produced. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

81) In the above figure, S1 represents the supply curve which includes private costs, and S2 is the supply curve which includes social costs. If the firm is producing a product that has external costs that the firm does NOT have to pay, what will be the equilibrium price and quantity? A) P1, Q4 B) P2, Q3 C) P4, Q1 D) P3, Q2 Answer: B Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

82) In the above figure, S1 represents the supply curve which includes private costs, and S2 is the supply curve which includes social costs. If the firm is producing a product that has external costs that the firm does have to pay, what will be the equilibrium price and quantity? A) P1, Q4 B) P2, Q3 C) P4, Q1 D) P3, Q2 Answer: D Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 83) An externality occurs whenever A) private costs are the same as social costs. B) private costs are the same as internal costs. C) private costs diverge from social costs. D) private costs plus internal costs equal social costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 84) A good that has external benefits associated with its production will be A) produced at the optimal level. B) underproduced. C) overproduced. D) not produced. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

85) A large farm uses fertilizer that nearby landowners complain may contaminate their water. Tests are conducted and contaminants are found. The costs resulting from this decision are referred to as A) implicit costs. B) factor costs. C) external costs. D) opportunity costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 86) All of the following are examples of goods for which external costs commonly exist EXCEPT A) cigarettes. B) automobiles. C) vaccinations. D) oil transportation. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 87) Which of the following is the main reason for externalities? A) The full cost of a transaction is not borne by the buyer/seller of the product. B) Police enforcement of scalping is not uniformly enforced. C) the lack of organized exchanges for all goods and services D) The production of public goods uses up scarce resources. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 88) Which one of the following is an example of an external cost? A) the cost to attend college B) labor costs to a firm C) emissions from a factory D) a house payment owed by a friend Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 25 Copyright © 2021 Pearson Education, Inc.

89) You enter a classroom, which is littered with newspapers. This is because A) students are too lazy to clean up. B) maintenance people only clean once a day. C) it is a way to protest against the tuition rates. D) students do not pay for littering. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 90) Social costs of a good are equal to A) external costs minus private costs. B) private costs minus external costs. C) private costs plus external costs. D) external costs divided by the private costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 91) There is an externality present only when A) private costs equal social benefits. B) private benefits equal social benefits. C) private costs or benefits diverge from social costs or benefits. D) private costs equal social costs. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 92) An externality exists when A) there are private costs. B) there are internal costs. C) there are external costs. D) there are opportunity costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

93) A situation in which a private cost diverges from a social cost is A) internal costs. B) an externality. C) an internality. D) a transactions cost. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 94) A situation in where the costs of an action are NOT fully borne by the two parties engaged in exchange is A) an externality. B) an internality. C) internal costs. D) a transactions cost. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 95) An externality is a situation in which A) private costs diverge from social costs. B) internal costs diverge from private costs. C) there are no social costs. D) the cost borne by the consumer is greater than the monetary price. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

96) Refer to the above figure. S1 is the supply curve that includes only private costs. S2 is the supply curve that includes social costs. If the firm sets output by focusing on private costs, the per-unit external cost will equal A) P2. B) P4 - P2. C) P4 - P1. D) P2 - P1. Answer: C Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 97) Refer to the above figure. S1 is the supply curve that includes only private costs. S2 is the supply curve that includes social costs. The free market rate of output is ________ and the corrected, socially optimal amount of output is ________. A) Q4; Q1 B) Q2; Q1 C) Q4; Q2 D) Q2; Q4 Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

98) Refer to the above figure. S1 is the supply curve that includes only private costs. S2 is the supply curve that includes social costs. From this figure we know that A) an external benefit exists. B) private costs are less than social costs. C) private costs equal social costs. D) private costs are greater than social costs. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 99) A good which has social costs that exceed private costs has a price A) equal to marginal social cost. B) that is too low. C) that is too high. D) that is inefficient because price exceeds marginal social cost. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 100) A good that has social costs that exceed private costs has a quantity that is A) too high. B) too low. C) just right. D) the best society can do. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 101) A good that has social costs that are equal to private costs has a price that is A) too high. B) too low. C) just right. D) equal to marginal cost. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

102) A good that has social costs that are less than private costs has a quantity that is A) too high. B) too low. C) just right. D) equal to zero. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 103) The inclusion of external costs in the decision making process determining equilibrium price and quantity leads to A) lower priced items and increased quantity. B) lower priced items and a decline in quantity. C) higher priced items and increased quantity. D) higher priced items and a decline in quantity. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 104) The inclusion of external benefits in the decision making process determining equilibrium price and quantity leads to A) lower priced items and increased quantity. B) lower priced items and a decline in quantity. C) higher priced items and increased quantity. D) higher priced items and a decline in quantity. Answer: A Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 105) Which of the following is NOT a possible solution to the problem of pollution? A) subsidizing the costs of production of activities that generate pollution B) converting a resource that is communally owned into a privately owned resource C) regulating the quantity of pollution that can be generated D) imposing a pollution tax on producers Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

106) If external costs are included and added to a firm's private costs, then A) the demand curve will shift to the right. B) the demand curve will shift to the left. C) the supply curve will shift to the right. D) the supply curve will shift to the left. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 107) A method of forcing a company to internalize the total cost of production is A) to impose a tax on the company to reduce production. B) to provide a subsidy to encourage production. C) for government not to interfere in the company's activities. D) to force the company to reduce the wages it pays to its employees. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 108) If a firm is forced to take external costs into account, it will A) reduce production and charge a higher market price. B) increase production and charge a lower market price. C) reduce prices and hire more workers. D) reduce prices and hire fewer workers. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 109) If a firm is NOT forced to pay for external costs, it will A) continue to overproduce the good. B) continue to under produce the good. C) request a subsidy from the government. D) raise prices. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

110) Economists typically suggest three choices that allow a polluter to decide how to absorb most, or perhaps all, of the social costs of its actions, which are A) continuing to overproduce the good, lowering the price of the good, or cutting output. B) reducing the pollution-causing activity, changing production techniques, or paying a price to pollute. C) installing pollution abatement equipment, paying to pollute, or just ignoring the issue. D) paying a pollution tax, continuing to use existing production techniques, or continuing the polluting behavior without regard to the social implications. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 111) Which of the following statements about pollution or pollution control is TRUE? A) A nationwide uniform tax on emissions is the appropriate way to reduce pollution levels. B) A tax to reduce pollution levels should be based on the economic damages rather than on the absolute amount of pollution. C) Private costs of pollution usually exceed social costs. D) The optimum amount of pollution abatement is where the total benefits of pollution abatement equal the total costs of pollution abatement. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 112) There are two coal-burning electrical utilities—one in tiny, rural Moscow, Idaho, and another in metropolitan Detroit, Michigan—and each produces the same amount of pollution per unit of output. If a permit tax is going to be used to force these firms to internalize pollution costs, the tax levied should be A) the same in each city. B) higher in Moscow than in Detroit. C) higher in Detroit than in Moscow. D) less than zero in each area. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

113) A difficulty with using a uniform per-unit tax to address a negative externality is that A) the tax will reduce output. B) the tax will increase price. C) the social cost of pollution might vary across geographic regions. D) the social cost of pollution should not be assessed on the consumers, but should be assessed on the firms. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 114) In order to internalize the externality due to pollution, the government should impose a tax based on A) the economic damage associated with the pollution. B) the physical amount of pollution. C) the size of the firm causing the pollution. D) the value of the pollution-causing business activity. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 115) To totally internalize an externality, a government can levy a tax related only to the physical quantity of pollution if A) the economic damages associated with the pollution are different across different locations. B) the economic damages are too large to be determined. C) the economic damages associated with the pollution are the same across different locations. D) the economic damages are zero. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 116) To correct for a negative externality, a government might impose a uniform tax related only to the physical quantity of pollution if A) the administrative costs are high. B) the cost of ascertaining the actual economic costs are relatively small. C) the economic damages are zero. D) the economic damages associated with the pollution are different across different locations. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 33 Copyright © 2021 Pearson Education, Inc.

117) An externality refers to the idea that A) explicit costs differ from implicit costs. B) decision-makers do not internalize all the costs. C) we cannot do anything that does not affect other people. D) private and internal costs differ. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 118) Your neighbor has just planted some fragrant flowers. The wonderful scent drifts into your room and makes you happy. A) This scent is an internal cost to you. B) This cannot be an externality since you are enjoying the scent. C) This is an externality since you get a benefit from your neighbor's flowers. D) The social cost of this activity is entirely borne by you neighbor. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 119) In order to correct the problems associated with external costs, A) the signals given to the economy must change so that decision-makers will take into account all the costs of their actions. B) the government must take over production of industries that are responsible for most of the pollution. C) standards must be established that make it illegal to pollute. D) the prices of all goods must be raised so people will consume less of the world's resources. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

120) Which of the following methods could be used to correct for external costs? A) Impose a tax or an effluent fee on the offenders. B) Have the offender clean up the pollution it caused. C) Require firms in the industry to install pollution control devices. D) All of these would be appropriate. Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 121) Suppose cars are taxed according to the amount of pollution they emit per gallon of gasoline consumed. We would expect to observe all of the following EXCEPT A) an increase in quantity demanded of less-polluting automobiles and a reduction in quantity demanded of more-polluting automobiles. B) an increase in quantity demanded of more fuel-efficient cars. C) an increase in production of automobiles that were less polluting. D) an increase in the miles driven. Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 122) The most efficient way to get firms to reduce pollution is to A) set uniform emission standards and require all firms to meet the standards. B) make the worst polluters shut down and go out of business. C) make them pay for the social costs of production and let them decide how to respond to the higher costs. D) provide firms and consumers with the information about the effects of their actions and encourage them to behave responsibly. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

123) When a polluter has to bear the full social cost of their actions, they will A) weigh the costs and benefits of each potential action and might decide to not stop polluting by paying a fine. B) go out of business since pollution abatement is expensive. C) always decide to reduce the amount of pollution by reducing the quantity they produce. D) increase the price of the product and the quantity produced to pay for the additional costs. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 124) To efficiently improve environmental quality, it is usually A) better to focus on the hardest areas to clean up first since these usually are the biggest problems. B) more appropriate to concentrate on the physical quantities of pollution rather than on economic costs. C) best to set up stringent emission standards that must be followed by everyone. D) better to focus on economic damages rather than physical quantities of pollution. Answer: D Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 125) A uniform tax according to the physical quantities of pollution may not be the appropriate way to correct for an externality because A) it places a unfair burden on small producers. B) a uniform tax can only account for social costs and not external costs. C) a firm will reduce production. D) it may not adequately account for economic damages. Answer: D Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

126) Which of the following might be a way that an automobile driver's pollution costs could be internalized? A) The driver could purchase abatement equipment for her car. B) The state could eliminate gas taxes. C) The state could pay a gas subsidy for everyone who drives. D) The state could allow her to drive in the High-Occupancy Vehicle (HOV) lane. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 127) When an external cost exists that is NOT taken into account in the production of a product, A) the level of output is too low, and the supply curve should shift to the right to account for the externality. B) the level of output is optimal, and there should be no change in the supply curve. C) the price of the product is too high, and production should be expanded to lower the price. D) the level of output is too high, and the supply curve should shift to the left to account for the externality. Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 128) The government imposes a tax on an industry that produces goods creating a negative externality. Yet the industry produces more than the optimum quantity of output. This means A) the tax is more than the external cost associated with the product. B) the tax is less than the external cost associated with the product. C) the company should advertise the product more. D) the company should increase the production of the product. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

129) All of the following are choices for the polluter when faced with additional costs to abate the externality EXCEPT A) ignore the government regulations. B) install pollution abatement equipment. C) reduce the pollution-causing activity. D) pay the price to pollute. Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 130) The government is considering levying a tax on the pollution generated from two electric power plants (Plant A and Plant B). Plant A is located in a city with a high density of population, and Plant B is located in the rural area with a low density of population. The government should A) levy the same tax per unit of pollution on both plants. B) levy a higher tax per unit of pollution on Plant A because of its higher economic damage. C) levy a higher tax per unit of pollution on Plant B because of its lower economic damage. D) tax only Plant A but not Plant B because Plant B generates less revenue. Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 131) To correct for the social impact of pollution, the government should levy a per-unit tax A) that is the same for all polluters regardless of their locations or sizes. B) according to the economic damage of the pollution. C) according to the business activity of the polluter. D) only to those polluters that can afford to pay for the tax. Answer: B Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 132) The marginal cost curve of a firm measures A) external costs. B) pollution costs. C) private costs. D) social costs. Answer: C Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 38 Copyright © 2021 Pearson Education, Inc.

133) If all firms had to bear all the social costs of their actions, we should observe marginal cost curves A) of all firms shifting up. B) of some firms shifting up, of some others shifting down, and of the rest not shifting at all. C) of all firms that had generated externalities shifting up while there would be no change for the rest of the firms. D) of some firms shifting up and of the rest shifting down. Answer: B Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

134) Use the above table. If the level of production was determined by the market, it would be A) 4. B) 5. C) 6. D) 7. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 135) Use the above table. What will the price be before external costs are internalized with a tax? A) $14 B) $13 C) $12.20 D) $1.80 Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge

136) Use the above table. What will the output level be when external costs are internalized with a tax? A) 4 B) 5 C) 6 D) 7 Answer: B Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 137) Use the above table. What will the price be when external costs are internalized with a tax? A) $14 B) $13 C) $12.20 D) $1.80 Answer: A Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 138) Use the above table. What will the tax be when external costs are internalized? A) $14 B) $13 C) $12.20 D) $1.80 Answer: D Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 139) Use the information in the above table. The external marginal costs are A) increasing. B) decreasing. C) constant. D) inverse to quantity produced. Answer: A Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

140) The marginal cost to society of reducing pollution increases with the increased use of pollution abatement because A) of the diminishing marginal utility of abatement. B) of the reduced demand for abatement. C) of the diminishing returns from abatement. D) of the high cost of abatement. Answer: C Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 141) What are social costs? How do they differ from private costs? Answer: Social costs are costs borne by society whenever a resource use occurs. Social costs include private costs plus external costs, so when external costs are zero, social costs are the same as private costs. Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 142) What is an externality? Answer: An externality is a situation in which private costs diverge from social costs because there are external costs. External costs are costs not borne by the parties engaged in the exchange or by an individual engaged in a resource-using activity. Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 143) Why don't people take into consideration the external costs of their actions and reduce the amount of externalities? Answer: People have no incentive to take into consideration the external costs of their actions. Since their utility or income would be lower if they bore all the costs associated with their activities, most people will not do so voluntarily. Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

144) What are the private costs of driving an automobile? What are the external costs? Answer: The private costs include gas, maintenance, repair, depreciation, and insurance. External costs include the costs associated with air pollution, which include costs to clean cars and paint houses more often, increased health care costs, and the disutility of the air pollution. Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 145) "Private costs are borne by individuals while social costs are borne by society." Do you agree or disagree? Why? Answer: Disagree. Social costs are private costs plus external costs, and external costs are borne by people who are not part of the exchange. They are still borne by individuals though. Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 146) Suppose that the nationwide average cost of air pollution generated by a car is $1,000. Would a tax of $1,000 on every car induce people to take external costs into consideration and bring about the optimal price and output for autos? Explain. Answer: Not necessarily. The $1,000 is an average. Some cars cause more pollution and some less. Cars in Wyoming impose fewer external costs than cars in Los Angeles, and cars that are driven more miles pollute more. A system of pollution fines would be more effective in reducing pollution if the taxes differed depending on the make, with high-polluting cars taxed more, and if part of the tax were on gasoline to reflect cars driven more. We also would want taxes to differ depending on where the car was located. Diff: 3 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

147) Using a graph, show the effects of a negative externality. Where is the socially optimum point of output? How can it be achieved? Answer:

See the above figure. E is the equilibrium when people only take into consideration private costs, with output Q1 and price P1. When external costs (EC) are added to private costs, the optimal point is E*, with output Q* and price P*. That is, the social optimum with externalities is to produce less and charge a higher price than private costs alone indicates. If a tax is imposed that caused price to increase to P*, or output were restricted to Q*, the optimum could be achieved. Diff: 2 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 148) Is a uniform per-unit tax on firms that cause an externality an optimal policy for correcting the externality? Explain. Answer: No. The concept of externality is about the economic costs rather than the amount of externality. The economic costs or damages can vary across different locations so that the optimal tax on pollution should also vary from location to location, depending on the size of economic damages. Diff: 1 Topic: 30.1 Private versus Social Costs Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

30.2 Pollution 1) Assuming that pollution cannot be removed from the environment at zero cost, the optimal level of pollution A) will be zero. B) will be negative. C) will be greater than zero. D) cannot be determined. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 2) As society approaches total pollution abatement, A) the marginal benefit to society declines. B) the marginal benefit to society increases. C) the marginal benefit to society increases, but at a decreasing rate. D) the marginal cost to society declines. Answer: A Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 3) As society is near total pollution abatement, A) the marginal cost to society falls. B) the marginal cost to society rises. C) the marginal cost to society equals the marginal benefit to society. D) the marginal cost to society falls but then rises. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 4) It is assumed that the marginal benefit of air cleanliness falls with the degree of cleanliness since A) the marginal cost of air cleanliness increases. B) air cleanliness is a public good and not a private good. C) the marginal utility of air cleanliness falls with the degree of cleanliness. D) the generation of pollution should be considered an externality. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 44 Copyright © 2021 Pearson Education, Inc.

5) The marginal cost of pollution abatement is graphically illustrated by A) an upward-sloping curve. B) a downward-sloping curve. C) a horizontal curve. D) a vertical curve. Answer: A Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 6) The marginal benefit of pollution abatement is graphically illustrated by A) an upward-sloping curve. B) a downward-sloping curve. C) a horizontal curve. D) a vertical curve. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 7) Attaining higher and higher levels of air cleanliness causes A) additional costs to rise to increasingly high levels. B) larger and larger increases in per capita incomes. C) additional costs to fall to lower and lower levels. D) larger and larger marginal benefits to society. Answer: A Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 8) According to economic analysis, the optimal level of pollution is A) always zero. B) at the point at which the marginal benefits of pollution control exceed the marginal cost. C) at the point at which the marginal benefits of pollution control are less than the marginal cost. D) at the point at which the marginal benefits from pollution control are equal to the marginal cost. Answer: D Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

9) In the process of reducing pollutants in our environment, we are A) achieving a cleaner environment at no real cost. B) causing higher levels of unemployment. C) reallocating resources in an inefficient manner. D) trading off less of other goods and services for a cleaner environment. Answer: D Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 10) In general, we would expect the marginal cost of pollution abatement to be A) zero. B) decreasing. C) increasing. D) constant. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 11) The marginal benefit from pollution abatement A) increases as pollution abatement increases because people learn to want an even cleaner environment as the environment gets cleaner. B) decreases as pollution abatement increases because of the law of diminishing marginal product. C) is constant as pollution abatement increases because pollution abatement is valued for its own sake and not for the utility it provides. D) decreases as pollution abatement increases because of the law of diminishing marginal utility. Answer: D Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 12) The total benefits to society from pollution abatement A) increase at an increasing rate with the increase of pollution abatement. B) increase at a decreasing rate with the increase of pollution abatement. C) decrease at an increasing rate with the increase of pollution abatement. D) decrease at a decreasing rate with the increase of pollution abatement. Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

13) The optimal quantity of air pollution is A) whatever amount of pollution is produced by the profit maximizing firm. B) found by equating the marginal benefits from further reductions in pollution and the marginal costs of further reductions in pollution. C) found by setting the quantity of air pollution equal to the quantity of water pollution. D) a meaningless concept since monetary values cannot be attached to problems associated with pollution. Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 14) Which of the following statements concerning pollution is correct? A) Economic efficiency requires that pollution be completely eliminated. B) Economic efficiency dictates that the optimal amount of pollution arises at the point at which price equals private marginal cost. C) Pollution should be reduced to the point at which the marginal benefit from further reduction equals the marginal cost of further reduction. D) Pollution should be reduced to the extent necessary to return production to the production possibilities frontier. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 15) In economic analysis, the optimal level of pollution A) is always zero. B) arises at the point at which the marginal benefit from further reduction equals the marginal cost of further reduction. C) occurs at the point at which demand crosses the private cost supply curve. D) should be determined by the private market without any government intervention. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

16) From an economic standpoint, the amount of pollution should be A) zero. B) the amount that allows firms to maximize profits. C) the amount where firms are earning a normal rate of return on investment. D) at the point at which the marginal benefit from further reduction equals the marginal cost of further reduction. Answer: D Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 17) The optimal amount of pollution is NOT zero because A) it has been found that pollution in moderate amounts actually has positive benefits. B) there are no benefits to anyone from having zero pollution. C) zero pollution would be too costly. D) we don't have the political structure that could accomplish the goal. Answer: C Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 18) The marginal benefit of pollution abatement A) increases at an increasing rate as abatement increases. B) decreases as pollution abatement increases because of the law of diminishing marginal utility. C) increases as pollution abatement increases because of the law of increasing marginal returns. D) is constant as pollution abatement increases. Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 19) The costs of pollution abatement A) increase at an increasing rate with the increase in pollution abatement. B) increase at a decreasing rate with the increase in pollution abatement. C) decrease at an increasing rate with the increase in pollution abatement. D) decrease at a decreasing rate with the increase in pollution abatement. Answer: A Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

20) Refer to the above figure. The marginal cost of pollution abatement is curve A) (1). B) (2). C) (3). D) (4). Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 21) Refer to the above figure. The marginal benefit of pollution abatement is curve A) (1). B) (2). C) (3). D) (4). Answer: D Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

22) Refer to the above figure. If the marginal cost curve for pollution abatement shifts to the right, everything considered, A) the degree of air quality or cleanliness will also decrease. B) the degree of air quality or cleanliness will stay unchanged. C) the degree of air quality will improve. D) The marginal cost of pollution abatement has nothing to do with air quality. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 23) Refer to the above figure. Suppose the marginal benefit and the marginal cost curves of pollution abatement are normally shaped. Technological change that made it easier to produce in a "cleaner" fashion would cause A) curve (4) to shift out, increasing the optimal amount of pollution abatement. B) curve (3) to shift up, raising the marginal benefits and costs and reducing the amount of pollution abatement. C) curve (2) to shift out, increasing the optimal amount of pollution abatement. D) curve (1) to shift out, increasing the optimal amount of pollution abatement. Answer: C Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 24) Refer to the above figure. Suppose the marginal benefit and the marginal cost curves of pollution abatement are normally shaped. Suppose the equilibrium is for a factory in Los Angeles. What would happen if the same factory were in the middle of Nevada? A) The marginal cost curve (1) would shift to (2) and there would be no difference in the level of abatement. B) The marginal cost curve (2) would shift to the left and there would be less abatement in Nevada. C) The marginal benefit curve (4) would shift to the left and there would be less abatement in Nevada. D) The marginal benefit curve (2) would shift to the right and there would be more abatement in Nevada. Answer: C Diff: 3 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

25) The marginal cost curve of pollution abatement is A) downward sloping. B) upward sloping. C) upward sloping up to a given level and then downward sloping. D) vertical. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 26) Technological change that makes it easier to produce in a "cleaner" fashion would cause A) the marginal cost curve of pollution abatement to shift left, increasing the degree of air quality. B) the marginal cost curve of pollution abatement to shift right, increasing the degree of air quality. C) the marginal benefit curve of pollution abatement to shift right, increasing the degree of air quality. D) the marginal benefit curve of pollution abatement to shift left, increasing the degree of air quality. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 27) Suppose people value clean air more as their incomes increase, then A) the marginal cost curve of pollution abatement to shift left, increasing the degree of air quality. B) the marginal cost curve of pollution abatement to shift right, increasing the degree of air quality. C) the marginal benefit curve of pollution abatement to shift right, increasing the degree of air quality. D) the marginal benefit curve of pollution abatement to shift left, increasing the degree of air quality. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

28) The marginal cost curve of pollution abatement A) slopes upward because of the law of diminishing product. B) slopes upward because firms will maximize profits. C) slopes downward because of the law of diminishing marginal utility. D) slopes downward because of the law of diminishing returns. Answer: A Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 29) The optimal amount of air pollution is A) found by equating the marginal benefits from reducing pollution by one more unit with the marginal costs of reducing pollution by an additional unit. B) found by equating the total benefits from reducing pollution by one more unit with the total costs of reducing pollution by an additional unit. C) found by setting the marginal benefits from reducing pollution by one more unit equal to zero. D) a meaningless concept since we cannot monetize the environment. Answer: A Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 30) Which of the following statements is TRUE about the optimal quantity of pollution? A) It equals zero. B) Pollution abatement should continue up to the point where marginal cost equals the average total cost. C) Trade-offs exist between producing a cleaner environment and producing other goods and services. D) Firms should be allowed to determine the profit-maximizing amount of pollution abatement. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

31) Why is the optimal quantity of pollution not less than the point at which the marginal benefit equals the marginal cost? A) The point of intersection occurs at a low level of pollution. B) There are no external costs below that level. C) Below that point firms will have to reduce the quantity that they are currently producing and lower the price. D) Below that point the value that people place on less pollution is less than the cost of reducing the pollution. Answer: D Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

32) In the above figure, the optimal level of pollution cleanup is A) Q1. B) Q2. C) Q3. D) Q4. Answer: C Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 53 Copyright © 2021 Pearson Education, Inc.

33) In the above figure, if a firm is cleaning up Q4 units of pollution, it is an A) efficient solution, because marginal social benefits are greater than marginal social costs. B) efficient solution, because marginal social benefits are equal to marginal social costs. C) inefficient solution, because marginal social benefits are greater than marginal social costs. D) inefficient solution, because marginal social costs are greater than marginal social benefits. Answer: D Diff: 3 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 34) In the above figure, if a firm is cleaning up Q2 units of pollution, it is an A) efficient solution, because marginal social benefits are greater than marginal social costs. B) efficient solution, because marginal social benefits are equal to marginal social costs. C) inefficient solution, because marginal social benefits are greater than marginal social costs. D) inefficient solution, because marginal social costs are greater than marginal social benefits. Answer: C Diff: 3 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 35) In the above figure, if a firm is cleaning up Q3 units of pollution, it is an A) efficient solution because marginal social benefits are greater than marginal social costs. B) efficient solution because marginal social benefits are equal to marginal social costs. C) inefficient solution because marginal social benefits are greater than marginal social costs. D) inefficient solution because marginal social costs are greater than marginal social benefits. Answer: B Diff: 3 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 36) According to economic analysis, the optimal quantity of pollution exists at the point at which the A) total benefit of pollution control is equal to the total cost. B) marginal benefit of pollution control is equal to the marginal cost. C) level of pollution is at zero. D) level of pollution is acceptable to the society. Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

37) Pollution A) creates a negative externality. B) is increased when property rights are defined. C) is absent in a free market economy. D) exists because air and water are privately owned resources. Answer: A Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 38) The idea that it takes 90 percent of your time to clean up the last 2 percent of your house illustrates that A) the marginal cost of cleaning up slopes downward. B) the marginal cost of cleaning up slopes upward. C) the marginal benefit of cleaning up is constant. D) the marginal benefit of cleaning up slopes upward. Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 39) The marginal benefit of the pollution abatement curve A) has a zero slope. B) has a positive slope up to a certain point and then a negative slope. C) slopes upward. D) slopes downward. Answer: D Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 40) Voluntary agreements about cleaning up pollution attempt to A) internalize externalities. B) internalize private costs. C) externalize social costs. D) externalize private costs. Answer: A Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

41) Generally, as levels of pollution are reduced, A) marginal benefits from the reduction decrease. B) marginal benefits from the reduction increase. C) marginal costs from the reduction decrease. D) marginal benefits totally offset marginal costs. Answer: A Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 42) Generally, as levels of pollution are reduced, A) marginal benefits from the reduction increase. B) marginal costs from the reduction increase. C) marginal costs from the reduction stay the same. D) marginal costs from the reduction decrease. Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 43) The level of pollution at which the marginal benefits equal the marginal cost of cleaning up is always A) the zero pollution level. B) the optimal quantity of pollution. C) the pollution maximum. D) the pollution minimum. Answer: B Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

44) In the above figure A) the optimal degree of air cleanliness is less than 100 percent. B) the marginal cost curve slopes up because of the law of diminishing returns. C) Neither A nor B are correct. D) Both A and B are correct. Answer: D Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 45) The optimal quantity of pollution in the above figure A) is defined as the level where the marginal benefit is at a maximum. B) is where the optimal degree of air cleanliness is 100 percent. C) is the level of pollution at which the marginal benefit equals the marginal cost. D) cannot be determined. Answer: C Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

46) The above table shows marginal costs and marginal benefits of clean air in a particular industrial area. In the table, when the quantity of clean air is at 25 percent, A) the quantity of polluted air is 25 percent. B) the marginal benefit of clean air exceeds the marginal cost. C) the marginal benefit of clean air is less than the marginal cost. D) the quantity of clean air is optimal. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge 47) The above table shows marginal costs and marginal benefits of clean air in a particular industrial area. In the table, when the quantity of clean air is at 75 percent, A) the quantity of polluted air is 75 percent. B) the marginal benefit of clean air exceeds the marginal cost. C) the marginal benefit of clean air is less than the marginal cost. D) the quantity of clean air is optimal. Answer: C Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 48) In the above table, the optimal quantity of clean air is A) 0 percent. B) 50 percent. C) 75 percent. D) 25 percent. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Application of knowledge

49) The marginal cost of pollution abatement is the A) additional cost to clean up an additional unit of pollution. B) additional benefit from cleaning up an additional unit of pollution. C) total social costs of pollution clean-up divided by total social benefits. D) total social costs of pollution clean-up divided by the total units of clean-up. Answer: A Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 50) The marginal benefit of pollution abatement is the A) additional cost to clean up an additional unit of pollution. B) additional benefit from cleaning up an additional unit of pollution. C) total social costs of pollution clean-up divided by total social benefits. D) total social costs of pollution clean-up divided by the total units of clean-up. Answer: B Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 51) Explain how the optimal quantity of air pollution is determined. Answer: As the air becomes cleaner, the marginal benefit of air cleanliness diminishes, reflecting the fact that the more clean air we breathe, the less we value an additional unit of cleanliness. The marginal cost of air cleanliness increases as air becomes cleaner, however, reflecting the fact that attaining each additional unit of air cleanliness requires incurring higher additional costs. The optimal amount of air cleanliness (or the optimal amount of pollution) arises at the point at which the marginal benefit of clean air equals the marginal cost. Diff: 2 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 52) "The optimal level of pollution is zero." Do you agree or disagree? Why? Answer: Disagree. There are costs to cleaning up pollution. Therefore, the optimal level of pollution arises at the point at which the marginal benefit from further reducing pollution equals the marginal cost of further reducing pollution. Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

53) Suppose people value clean air more as their incomes increase. What would happen to the optimal amount of clean air as a country develops economically? Is there an economic prediction we can make from this? Answer: The optimal amount of clean air would increase because the marginal benefit curve of clean air would shift out as incomes rose. We would expect richer countries to spend more on air pollution clean-up than poorer countries. Diff: 3 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 54) Why do economists believe that it is socially optimal to have some amount of pollution? Answer: Economists recognize the trade-off between producing a cleaner environment and producing other goods and services. Zero pollution could be achieved only if people give up resources for producing other goods and services. The optimal amount of pollution is therefore determined by equating the marginal cost and marginal benefit of reducing pollution at very high levels of pollution abatement, and the marginal cost for zero pollution is much higher than its marginal benefit. Diff: 1 Topic: 30.2 Pollution Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers 1) The most recent agreement in which participating nations agreed to reduce their overall emissions of greenhouse gases was A) the 2015 Paris Agreement on Climate Change. B) the 1987-1993 Uruguay Round of climate change. C) the 1997 Kyoto Protocol on climate change. D) the 2001 Doha Round of climate change. Answer: A Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

2) In the Paris Agreement on Climate Change, participating nations agreed to A) trade carbon-dioxide permits. B) eliminate all emissions of greenhouse gases by 2050. C) reduce their overall emissions of greenhouse gases to yield a reduction in the global temperature by 2050. D) buy greenhouse gas emission permits from developing nations. Answer: C Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 3) In response to the Paris Agreement on Climate Change of 2015, the U.S. government A) immediately implemented its own cap-and-trade program for greenhouse gas emissions. B) increased the upper limit on the number of available permits for its nation's large polluters. C) promised to reduce its nation's emissions of greenhouse gases by reducing the use of coal to generate electricity. D) promised to buy greenhouse gas emission permits from developing nations. Answer: C Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 4) In 2005, the European Union began a program to A) reduce greenhouse gas emissions by 10 percent within 5 years. B) eliminate greenhouse gas emissions by 50 percent within 15 years. C) subsidize firms that pollute more than a given limit. D) allow the trading of carbon-dioxide permits among firms. Answer: D Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 5) In a market for emission permits, firms that emit over their allowed limits A) are forced to shut down. B) are taxed by the government for the amount of emissions. C) receive a subsidy for the amount of emissions. D) pay a price of these emissions. Answer: D Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

6) In a market for emission permits, firms that emit over their allowed limits A) are forced to shut down. B) are taxed by the government for the amount of emissions. C) will sell their excess allowances through a trading system. D) must buy more allowances through a trading system. Answer: D Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 7) In a market for emission permits, firms that emit below their allowed limits A) will buy even more allowances through a trading system. B) are taxed by the government for the amount of emissions. C) receive a subsidy for the amount of emissions. D) will sell their excess allowances through a trading system. Answer: D Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 8) In principle, a cap-and-trade program would A) cause firms to generate more pollution than their allowed limits. B) cause firms to generate less pollution than their allowed limits. C) raise the production costs of all firms. D) lower the production costs of all firms. Answer: B Diff: 2 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 9) Under a cap-and-trade program, what would happen if governments reduce firms' pollution caps? A) The market clearing price of pollution permits will increase. B) The market cleaning price of pollution permits will decrease. C) The marketing cleaning price of pollution permits will not change. D) The marketing clearing price of pollution permits will cease to exist. Answer: A Diff: 2 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

10) The Paris Agreement on Climate Change of 2015 was signed by A) only the United States and the European Union. B) only nations in Asia. C) nearly 200 nations. D) all nations in the world. Answer: C Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 11) The Paris Agreement on Climate Change was signed by participating nations in A) 2001. B) 1972. C) 2015. D) 2020. Answer: C Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 12) Participating nations in the 2015 Paris Agreement on Climate Change agreed to reduce overall greenhouse gases emissions A) to as much as 20 percent below the levels of the 2015 through 2025. B) to as much as 10 percent below the levels of the 2015 through 2050. C) to yield a net increase in the global temperature of no more than 2.7 degrees Fahrenheit by 2050. D) to yield a net decrease in the global temperature by 2.7 degrees Fahrenheit by 2050. Answer: C Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 13) The Emission Trading Scheme of the European Union A) created a market for pollutants. B) sets a cap on the amount of pollutants in each country. C) allowed firms to benefit from emitting pollutants. D) sets the amount of per-unit tax on each pollutant. Answer: A Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

14) Which of the following best describes the impact of the Emissions Trading Scheme in the European Union between 2005 and the late 2010s? A) Overall greenhouse gas emissions increased. B) Overall greenhouse gas emissions decreased. C) Overall greenhouse gas emissions were totally eliminated. D) Overall greenhouse gas emissions were constant. Answer: A Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 15) Which of the following was signed in Paris in 2015? A) the Agreement on Climate Change B) the Zero Greenhouse Gas Agreement C) the Treaty on Global Warming D) the Protocol on World Pollution Answer: A Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 16) Participating nations in the 2015 Paris Agreement on Climate Change agreed to reduce overall greenhouse gases emission through 2050 to A) as much as 20 percent below the levels in 2015. B) as much as 80 percent below the levels in the 2015. C) to yield a net increase in the global temperature of no more than 2.7 degrees Fahrenheit by 2050. D) to yield a net increase in the global temperature of no more than 2.7 degrees Fahrenheit by 2025. Answer: C Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 17) The EU Emission Trading System created a market for A) permits to emit greenhouse gases. B) crude oil. C) wind energy. D) devices that lower the global temperature. Answer: A Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 64 Copyright © 2021 Pearson Education, Inc.

18) Which of the following is TRUE of the European Union's cap-and-trade program? A) Firms are taxed based on the their pollution levels. B) Firms are forced to shut down when they exceed their pollution limits. C) Governments subsidize firms to develop devices to reduce pollution. D) Firms can trade pollution permits to meet their pollution limits. Answer: D Diff: 1 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 19) By 2006, the market price of European Union emissions allowances dropped because A) governments set their overall emission caps too high. B) firms had drastically reduced their emissions. C) firms underreport their emission amounts. D) the market did not clear. Answer: A Diff: 2 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 20) Which of the following is TRUE of the cap-and-trade program in the United States? A) The state of California began a cap-and-trade program in 2013. B) The United States implemented the cap-and-trade program immediately after signing the Paris Agreement on Climate Change in 2015. C) All states in the U.S. have implemented a cap-and-trade program before the Paris Agreement on Climate Change in 2015 D) The state of Texas is currently the only state in the U.S. that has not implemented a cap-andtrade program. Answer: A Diff: 2 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

21) If pollution is bad, why do we still use pollution-causing resources such as coal and oil to generate electricity? A) Governments lack the political will to enforce the use of pollution-free resources. B) The cost of using pollution-free resources to generate power in many circumstances is much higher than generating that same power through conventional pollution-causing means. C) Pollution is only a private cost. D) The transaction costs of pollution are too low. Answer: B Diff: 2 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 22) Explain how a market for pollutant emission allowances can induce firms to reduce the amount of emissions. Answer: In the market for emission allowances, firms that exceed their pollution limits must buy allowances from firms that have unutilized allowances available. If the government tightens the pollution limits, then more firms have to purchase allowances, driving up the market clearing price of the allowances. Firms that have to pay for the higher price of allowances would have an incentive to reduce their emissions. Diff: 2 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 23) "Creating a free market for carbon-dioxide emission permits would only encourage firms to pollute more." Do you agree or disagree? Why? Answer: Disagree. In a market of carbon-dioxide permits, firms that exceed their pollution limits must buy permits from firms that emit less than their limits. If an increasing number of firms pollute more than their limits, then the market clearing price of the permits will increase. A higher price of the permits will induce firms to reduce their emissions. Diff: 2 Topic: 30.3 Reducing Humanity's Carbon Footprint: Restraining Spillovers Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

30.4 Common Property and Wild Species 1) When negative externalities exist, a voluntary agreement can be negotiated. Which of the following statements is TRUE? A) Voluntary agreements usually do not work since the owner has no incentive to negotiate. B) Transaction costs must be low relative to the expected benefits of reaching an agreement. C) Voluntary agreements are difficult to negotiate because they usually involve government intervention. D) Voluntary agreements always leave the owner worse off. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 2) Which of the following would be viewed as a common property problem? A) Your property is burglarized. B) Vandals damage your property. C) People pick all of the flowers in a public park. D) To be safe you must lock your door at night. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 3) All the costs associated with making, reaching, and enforcing agreements are called A) private costs. B) opportunity costs. C) transaction costs. D) social costs. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

4) The exclusive rights of ownership that allow the use, transfer, and exchange of property are called A) common property rights. B) private property rights. C) transaction costs. D) social benefits. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 5) Economic theory suggests that if natural resources can be held as private property, then A) conservation will be nonexistent. B) owners will have an incentive not to abuse them. C) natural resources will be sold off for immediate use. D) people will simply hold them and refuse to make them available. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 6) Common property ownership without granting property rights to individuals will likely leads to A) an efficient allocation of resources. B) production at a rate at which price is less than social cost. C) more social justice. D) an increase of externalities. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 7) When no property rights exist, A) no one has an economic incentive to care for common property, and an externality may well occur. B) there will be no production. C) externalities will be internalized by voluntary arrangements among a small group of parties. D) society will produce beyond the production possibilities frontier, but the allocation of resources is not apt to be optimal. Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 68 Copyright © 2021 Pearson Education, Inc.

8) Private property rights involve A) exclusive rights to use, transfer, and exchange the property. B) exclusive rights to use property, but not to exchange the property. C) rights to enjoy the property in any way desired but not to transfer or exchange the property. D) rights granted by the government for renewable terms of 100 years or more. Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 9) Common property is A) property that has mineral or oil deposits. B) a resource that everyone is free to use as much as they want. C) property owned by a group such as a club. D) property that has little economic value. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 10) Buffalo in the United States almost became extinct while cattle have never been close to extinction. The difference is due to A) the greater marginal value of a buffalo relative to a head of cattle, leading to greater "harvesting" of buffalo. B) the use of private property rights on cattle and common property rights on buffalo. C) the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo. D) the differences in size between the two animals, and the effect of size differences on the costs of hunting them. Answer: B Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

11) Government intervention will not be necessary when voluntary contracting internalizes an externality. Which of the following is NOT a necessary condition for this to occur? A) well-defined private property rights B) low transaction costs C) large numbers of individuals involved in the transactions D) low contract enforcement costs Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 12) The costs associated with reaching and enforcing agreements are called A) private property costs. B) common property costs. C) transaction costs. D) audit costs. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 13) With defined property rights, an externality A) can only be corrected with government intervention. B) will not lead to a misallocation of resources. C) may be internalized with voluntary contracting, under certain circumstances. D) must lead to society producing inside its production possibilities frontier. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

14) A farmer notices that a neighboring rancher's cattle are wandering and destroying some of his crops. The farmer decides to offer a payment to the rancher if the rancher will reduce the size of his herd. By doing so, the farmer A) can be sure that the size of the herd will be reduced and the size of his own harvest will be increased. B) indicates to the rancher that there is an opportunity cost to the wandering of the cattle, and thereby internalizes the externality. C) inadvertently bears the costs of the externality when the rancher should be liable for the costs. D) informs the rancher that the cattle have destroyed crops, which should induce the farmer to build a fence in order to maintain good relations. Answer: B Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 15) One difficulty in using voluntary transactions to internalize externalities is that A) people are motivated by self-interest and are often unwilling to engage in a transaction that might make another person better off. B) the government usually will not enforce contracts of this type. C) transaction costs of coming to an agreement can be very large when numerous people are involved. D) people usually don't understand what the real opportunity costs are that they face. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 16) Transaction costs are A) the costs, such as sales taxes, that are imposed by the government. B) equal to the hourly cost of a lawyer used to write a contract. C) the costs associated with making, reaching, and enforcing agreements. D) not true costs because they relate to time rather than real resources. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

17) In general, pollution exists if A) people are unconcerned about the hazards associated with pollution. B) there are poorly defined private property rights. C) there are poorly defined common property rights. D) profit-making activity is taken to an extreme. Answer: B Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 18) The underlying reason for the problem of pollution is A) a poorly run Environmental Protection Agency. B) greed on the part of consumers. C) greed on the part of producers. D) poorly defined property rights that are expensive to enforce. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 19) Changing the ownership of the ocean from common property to private property would A) ensure that this resource would be allocated in a more efficient manner. B) ensure that this resource would be allocated in a less efficient manner than under common property rights. C) not be economically desirable. D) result in no appreciable change in efficiency of utilization of this resource. Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 20) Exclusive rights of ownership that allow the use, transfer, and exchange of property are called A) common property rights. B) nonexclusive property rights. C) private property rights. D) public property rights. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

21) When no one owns a particular resource, A) property rights are clearly defined. B) individuals have legal recourse for any damages caused to their resource. C) no one has any incentive to consider externality spillovers associated with that resource. D) positive externalities will arise. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 22) Private property rights are A) an externality. B) a social cost. C) property that is owned by everyone and therefore by no one. D) exclusive rights of ownership. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 23) Common property is A) an externality. B) a social cost. C) property that is owned by everyone and therefore by no one. D) any resource that is free for the user. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 24) Common property often results in A) a negative externality. B) a social benefit. C) more efficient production of goods. D) exclusive rights of ownership. Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

25) Common property is A) a resource that everyone is free to use as much as they want. B) property that belongs to both spouses in a marriage. C) property owned by a group such as a club or a church. D) generic property as opposed to specific property. Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 26) In general, pollution exists in situations in which A) people are selfish. B) people refuse to take social responsibility seriously. C) there are poorly defined private property rights. D) there exists public property. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 27) My neighbor has broken one window of my house. I have legal recourse to sue for damages because of A) social costs. B) transactions costs. C) common property rights. D) private property rights. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 28) Buffalo in the United States almost became extinct while cattle, an animal that provides similar products, never has been close to extinction. The difference is due to A) the greater marginal value of a head of cattle relative to buffalo, leading to over-hunting of buffalo. B) the greater marginal value of a buffalo relative to a steer, leading to the overharvesting of buffalo. C) cattle existing in Europe also while buffalo were specific to North America. D) the use of private property rights on cattle and common property rights on buffalo. Answer: D Diff: 3 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 74 Copyright © 2021 Pearson Education, Inc.

29) Transaction costs are A) the costs associated with making a transaction that is required by the government. B) not true costs since they are often not paid. C) the costs associated with exchanges in the service area. D) the costs associated with making, reaching and enforcing agreements. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 30) Which of the following is a TRUE statement? A) Externalities cannot be solved by market solutions and always require government action. B) Externalities would never be a problem if people were willing to comply with government regulations. C) Voluntary agreements can solve externality situations by making the party incurring the costs bear the costs of his or her actions. D) Externalities can only be handled by government regulation and emission taxes cannot work effectively. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 31) Your neighbor in an apartment complex plays his music very loudly late at night, which makes it difficult for you to get to sleep. You offer the neighbor $50, the monetary value you put on your sleep, to never play his music between midnight and 7 AM. By doing so A) you have failed to bring about an efficient solution since you should have complained to the police. B) you have indicated the cost of the externality. The externality is not internalized even if he accepts your offer. C) you have indicated the cost of the externality, which internalizes the externality. D) you have indicated a willingness to make the external cost a social cost. Answer: C Diff: 3 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

32) Which of the following is a TRUE statement? A) Any property right system will yield a situation in which all externalities are internalized. B) Voluntary agreements can always yield a situation in which all externalities are internalized. C) Opportunity costs always exist with whoever has property rights. D) Opportunity costs turn external costs into social costs. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 33) Voluntary agreements may not be a feasible method to internalize an externality when A) the dollar value of the externality is large. B) the externality is negative rather than positive. C) there are significant transaction costs. D) there are high taxes on the firms that cause the externalities. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 34) In which of the following externality situations would it be most likely that voluntary agreements could be used to internalize an externality? A) littering on highways B) overharvesting of alligators in Louisiana C) poaching of elephants in Africa D) trees of one neighbor blocking a view of another Answer: D Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 35) Which of the following is NOT a possible solution to the problem of pollution? A) converting a resource that is communally owned into a privately owned resource B) imposing a tax on polluters that is related to the amount of pollution C) regulating the amount of pollution that a firm can produce D) subsidizing the costs of production of activities that generate pollution Answer: D Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

36) The best method to reduce pollution is A) to never start polluting. B) to establish private property rights. C) dependent upon the characteristics of the resources and the transaction costs. D) dependent upon the quality of government bureaucrats and the level of greed in the society. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 37) When there is a resource for which property rights are NOT well defined and there is a difference between private costs and social costs, then all but which of the following is a way to close the difference? A) the free market system B) taxation C) subsidization D) regulation Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 38) Common property A) is owned by everyone. B) is owned by no one. C) Neither A nor B are correct. D) Both A and B are correct. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 39) The exclusive rights of ownership of property are generally referred to as A) level property rights. B) private property rights. C) public property rights. D) common property rights. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

40) A resource that is a common property is A) oil on land owned by a drilling and refining company. B) natural gas on land owned by an energy producer. C) your neighbor's backyard. D) water in a publicly owned river. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 41) Property that is owned by everyone and therefore by no one in particular is referred to as A) common property. B) social property. C) private property. D) free property. Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 42) Property owned by everyone is generally referred to as A) social property. B) free property. C) common property. D) natural property. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 43) Which of the following is NOT an example of common property? A) cable TV B) air C) gravity D) sunshine Answer: A Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

44) Which type of property would be the most likely to experience pollution? A) common property B) private property C) property held in partnership D) corporate property Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 45) For voluntary action to correct an externality, A) transaction costs have to be high. B) transaction costs have to be low. C) transaction costs have to be split evenly between all of the parties involved. D) transaction costs are irrelevant. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 46) All of the costs associated with making and enforcing contracts are referred to as A) alternative costs. B) opportunity costs. C) marginal costs. D) transactions costs. Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 47) In a situation in which property rights are not well-defined and social costs exceed private costs, government can use all of the following to induce producers to bring private costs into alignment with social costs EXCEPT A) taxing production. B) coercive limits on production. C) subsidization of production. D) regulation of production. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking

48) Suppose a large tree on Jack's property blocks Amy's view of the ocean. Jack accepts Amy's offer of $2,000 to cut down the tree. This is an example of A) internalizing externalities via voluntary agreements. B) a result of logrolling. C) a consequence of a positive externality. D) a consequence of private costs exceeding social costs. Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 49) The costs associated with the negotiation and enforcement of an agreement are A) property costs. B) resource factor costs. C) transaction costs. D) opportunity costs. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 50) When property rights are clearly defined, there is generally a A) law that must be passed to ensure fairness. B) regulatory agency that handles externalities. C) common property problem. D) voluntary agreement that can be reached. Answer: D Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 51) In order for a voluntary agreement to be reached in general, transaction costs should be A) infinite. B) high relative to expected marginal benefits of the agreement. C) low relative to expected marginal benefits of the agreement. D) determined by the Environmental Protection Agency. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

52) Many ecologists argue that several species of whales are close to extinction. If this is TRUE, the reason is A) inadequate enforcement of international laws. B) whales are a type of common property. C) the marginal benefit of hunting and killing a whale is greater than zero. D) whale-killing technology is too productive. Answer: B Diff: 3 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 53) All of following are commonly considered to be common property EXCEPT A) spotted owls in the wild. B) fish in an ocean. C) pigs raised on a farm. D) wild salmon in a river. Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 54) Which of the following is most likely to be common property? A) lawn in a privately owned golf club B) farm raised catfish in Alabama C) tuna in the Pacific Ocean D) cattle in a Texas ranch Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 55) Which of the following are most likely to become an endangered species? A) animals in the wild B) domesticated animals C) animals that people like to keep at home as pets D) animals that people have property rights to own Answer: A Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

56) Endangered species are likely to be A) private property. B) common property. C) both private and common property. D) neither private nor common property. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 57) Protecting endangered species is likely to be A) a private cost. B) a public cost. C) both private and public costs. D) neither a private nor public cost. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 58) Which of the following is TRUE about species in the world? A) Most extinct species became extinct within the past 30 years. B) The majority of extinct species became extinct before humans appeared. C) Extinct species became extinct only after human appeared. D) No species has ever become extinct. Answer: B Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 59) The trade-off of saving the spotted owls in the Pacific Northwest was A) the loss of salmon in the region. B) the increase in the number of marbled murrelets. C) the loss of logging activities by lumber companies. D) none. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

60) Which of the following is most likely to be private property? A) bees B) house flies C) farm raised shrimps D) winds Answer: C Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 61) Wild animals are likely to be A) private property. B) endangered species. C) externalities. D) all of these. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 62) The Endangered Species Act is an attempt to A) protect endangered species against greedy loggers, farmers, and business people. B) protect endangered species from the overzealousness of many environmentalists. C) protect species endangered because there are no private property rights on them. D) prevent some people from earning a good living. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 63) For endangered species, the federal government A) can only protect the animal on federal property because of common property issues. B) has the right to regulate activities on private land to save the species from extinction. C) turns over the protection of an endangered species to the state authorities where the species lives. D) will capture a pair of animals so that the species does not become extinct. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

64) Saving endangered species A) benefits all people in society without any trade-off. B) must involve the loss of another species. C) may involve a trade-off in terms of the loss of other economic activities. D) requires the government to list those species as common property. Answer: C Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 65) The problem associated with endangered populations of migratory birds is the A) common property problem. B) free rider problem. C) deadweight loss problem. D) inefficient production problem. Answer: A Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 66) The problem of overfishing in waters that are commonly owned can be solved by A) the use of the Coase Theorem. B) establishing property rights for fishing in the waters. C) subsidizing fishing. D) allowing the market to ration fish. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 67) The problem of overfishing in waters that are commonly owned can be solved when the government determines the total amount of fish that can be removed from a given area during each fishing season. Then the fishermen A) will not be able to fish. B) can trade their rights (shares) to fish or not. C) will externalize their private costs to the government. D) will lower their private costs to fish. Answer: B Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

68) The Endangered Species Act has A) caused a loss of economic activities on some private land. B) saved all endangered species without affecting anyone. C) further reduced the number of endangered species. D) had no impact on either the number of endangered species or other economic activities. Answer: A Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 69) Approximately what percentage of the world's extinct species became extinct before humans appeared on earth? A) 2 percent B) 10 percent C) 67 percent D) more than 99 percent Answer: D Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 70) Today, the earth has ________ of all of the species that have ever lived. A) less than 1 percent B) about 50 percent C) about 99 percent D) 100 percent Answer: A Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 71) What is common property? What does common property have to do with externalities? Answer: Common property is property that is owned by everyone, so no one can be excluded from using it. There is a tendency to overuse common property, which means that people can use it and pass some of their costs on to others. That is, externalities are likely to be associated with common property. Diff: 1 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

72) Why are externalities associated with common property rather than private property? Answer: When private property rights exist, individuals can take someone to court and collect damages when the actions of that person damage the individual's property. When the person has to pay damages, the externality is internalized. With common property, no one can exclude anyone else and there is no legal recourse for collecting damages from the person. Diff: 3 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 73) Explain why the buffalo almost became extinct while cattle did not, even though both provide similar goods for people. Answer: Cattle have been privately owned for most of human history while the buffalo was a common property resource. A person obtained private property rights on a buffalo by killing it, so they were overhunted. With private property rights, people have an incentive to preserve the resource so there will be animals available in the future. Diff: 3 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-22: Explain how externalities affect market efficiency AACSB: Analytical thinking 74) "The number of species on earth is decreasing drastically and economic development is the main factor for the problem." Do you agree or disagree? Why? Answer: Disagree. First, it is unclear that the number of species on earth is decreasing drastically: While estimates of the number of species dying off are between a low of one every four years to a higher of 50,000 per year, many new species are discovered every year. Also, economic development itself is not the main factor for the extinction of many species. Instead, the main reason is related to the issue of property rights as most endangered species are common property, or property without property rights. Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking 75) Why do most endangered species belong to common property? Answer: In contrast to private property, most endangered species are common property to which no one has a property right and thus has no vested interest in ensuring that their populations survive over time. Diff: 2 Topic: 30.4 Common Property and Wild Species Learning Outcome: Micro-23: Discuss the economics of public goods and common resources AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 31 Comparative Advantage and the Open Economy 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange 1) Since World War II, world trade has A) decreased in importance as nations turn inward due to security concerns. B) increased, but not as dramatically as annual world real GDP has climbed. C) risen sharply, outpacing gains in annual world real GDP. D) increased in relative importance for most nations, but not for the United States. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 2) Today, the share of international trade in U.S. GDP is A) almost 0 percent. B) about 16 percent. C) about 30 percent. D) more than 150 percent. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 3) The importance of international trade in the U.S. economy A) has been decreasing and is expected to continue to decrease. B) has been decreasing but is expected to start to increase. C) has been increasing and is expected to continue to increase. D) has been increasing but is expected to decrease in the future. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

4) For the United States since 1950, imports as a percentage of GDP has A) tripled. B) increased slightly. C) remained constant. D) decreased. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 5) Since 1950, the balance of trade for United States has A) gone from a surplus to a deficit. B) gone from a deficit to a surplus. C) remained constant. D) gone from a small deficit to a larger deficit. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 6) Since 1950, the volume of world trade and the volume of world real GDP A) have both increased at roughly the same rate. B) have both decreased at roughly the same rate. C) have both increased, but the volume of world trade has increased more slowly than the volume of world real GDP. D) have both increased, but the volume of world trade has increased faster than the volume of world real GDP. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 7) Today, in the United States, imports are about A) 16 percent of GDP. B) 30 percent of GDP. C) 8 percent of GDP. D) 60 percent of GDP. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking

8) Today, in the United States, exports are about A) 90 percent of GDP. B) 13 percent of GDP. C) 28 percent of GDP. D) 4 percent of GDP. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 9) During the past 40 years, U.S. exports as a percent of GDP and U.S. imports as a percent of GDP A) both rose at the same pace. B) both fell at the same pace. C) both rose, but U.S. imports as a percent of GDP rose at a faster pace. D) both rose, but U.S. exports as a percent of GDP rose at a faster pace. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 10) Assume that U.S. producers can manufacture cookies at a lower opportunity cost than Mexican producers. If this is the case A) it will not be possible for Mexico to have an comparative advantage in the production of any other products. B) Mexico could still have the comparative advantage in cookie production. C) it would still be possible for Mexico to have a comparative advantage in trade for some other products. D) Mexico would have the comparative advantage in all products compared to the United States. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

11) The ability to produce a good or service at a lower opportunity cost than other producers is called A) absolute advantage. B) comparative advantage. C) implicit advantage. D) marginal advantage. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 12) Specialization in trade will be economically efficient if it is based upon A) national security needs. B) absolute advantage. C) comparative advantage. D) government regulations. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 13) The principle of comparative advantage essentially states that A) there are some goods for which the opportunity costs of production are the same regardless of who produces them. B) some goods have high opportunity costs and low absolute costs. C) specialization can reduce output rather than increase it. D) total output of an economic system is greatest when each good is produced by those who have the lowest opportunity cost of producing the good. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

14) Matt and Chloe each produce two goods. According to the principle of comparative advantage, the total output produced by these individuals will be greatest A) if Chloe produces both goods and Matt produces nothing. B) if each good is produced by the individual who has the lower opportunity cost of producing that good. C) if each good is produced by the individual who has the higher absolute cost of producing that good. D) if Matt produces both goods and Chloe produces nothing. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 15) Suppose Ethan and Ava work in a farm that grows apples and oranges of the same size. In one hour, Ethan can pick 6 pounds of apples or 1 pound of oranges. Ava can pick 8 pounds of apples or 1 pound of oranges. It can be concluded that A) Ethan has a comparative advantage in picking apples. B) Ethan has an absolute advantage in picking apples. C) Ava has a comparative advantage in picking apples. D) Ava has an absolute advantage in picking oranges. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 16) Given two economic systems, A and B, if economy A has a comparative advantage in the production of widgets, then A) the inputs necessary to produce widgets in economy A cost less than in economy B. B) economy A must give up less of all other goods to produce widgets than economy B. C) economy A is less efficient in the production of some goods than economy B. D) economy A would not benefit from the specialization of production. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

17) Given two economic systems, A and B, if economy A has an absolute advantage in the production of widgets, then A) fewer inputs are necessary to produce widgets in economy A than in economy B. B) economy A must give up less of all other goods to produce widgets than economy B. C) economy A is less efficient in the production of widgets than economy B. D) economy A would not benefit from the specialization of production. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 18) That each individual should engage in economic activities in which he or she is relatively more efficient is an application of the concept of A) competition. B) absolute advantage. C) scarcity. D) comparative advantage. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 19) According to the principle of comparative advantage, a nation should specialize in economic activities A) that incur lower opportunity costs. B) that incur higher opportunity costs. C) for which it has an absolute advantage. D) for which it has no absolute advantage. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

20) If Kami can produce 40 wireless earbuds or 30 cellphones during a month's time, while Sally can produce 10 wireless earbuds or 20 cellphones, then it is correct to state that A) Kami has a comparative advantage in producing wireless earbuds. B) Kami has a comparative advantage in producing both wireless earbuds and cellphones. C) Sally has a comparative advantage in producing both wireless earbuds and cellphones. D) Sally has an absolute advantage in wireless earbuds. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 21) If Abigail can produce 4 wireless earbuds or 3 smartphones in a day, while Jacob can produce 1 wireless earbud or 2 smart phones, then it is correct to state that A) Abigail has a comparative advantage in producing smartphones. B) Abigail has an absolute advantage in producing wireless earbuds but not smartphones. C) Jacob has a comparative advantage in smartphones. D) Jacob has an absolute advantage in smartphones. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

22) According to the above table, which assumes that opportunity costs of producing goods X and Y are constant, the opportunity cost of producing one unit of Good X is ________ units of Good Y for Sherry and ________ units of Good Y for Holly. A) 25; 100 B) 0.5; 2.5 C) 2; 0.4 D) 100; 25 Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

23) According to the above table, which assumes that opportunity costs of producing goods X and Y are constant, the opportunity cost of producing one unit of Good Y is ________ units of Good X for Sherry and ________ units of Good X for Holly. A) 50; 40 B) 25; 10 C) 2; 2/5 D) 1/2; 2 1/2 Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 24) According to the above table, which assumes that opportunity costs of producing goods X and Y are constant, Sherry has comparative advantage in production of A) Good X. B) Good Y. C) both goods. D) neither good. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 25) According to the above table, which assumes that opportunity costs of producing goods X and Y are constant, Holly has comparative advantage in production of A) Good X. B) Good Y. C) both goods. D) neither good. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

26) According to the above table, which assumes that opportunity costs of producing goods X and Y are constant, which of the following statements is TRUE? A) Sherry will be willing to produce only good X and trade units of that good to Holly as long as she receives more than 0.5 units of good Y from her in exchange. B) Holly will be willing to produce only good X and trade units of that good to Sherry as long as she receives less than 2.5 units of good Y in exchange. C) Sherry will be willing to produce only good Y and trade units of that good to Holly as long has she receives less than 2 units of good X from her in exchange. D) Holly will be willing to produce only good Y and trade units of that good to Sherry as long as she receives less than 0.4 unit of good X in exchange. Answer: A Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 27) Suppose that the opportunity cost of producing goods differs between two nations. We can correctly state that A) the two nations should not specialize in the production of goods. B) specialization can lead to a decrease in the production of all goods. C) specialization can lead to an increase in the production of all goods. D) neither country has a comparative advantage in the production of any good. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 28) A country will specialize in the good for which A) it has absolute advantage. B) it has moderate production costs. C) it can produce at minimum average cost. D) it has comparative advantage. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

29) Specialization and international trade lead to A) an outward shift in the production possibilities curve. B) an inward shift in the consumption possibilities frontier. C) a lower opportunity cost of domestic production of all goods. D) an enhanced level of consumption. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 30) Comparative advantage is defined as A) producing all goods at lower opportunity costs than other countries can. B) producing more output of all goods than anyone else can. C) producing one good at a lower opportunity cost than another country can. D) the ability to produce more output from given inputs than anyone else can. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 31) Consider a world of two countries producing only wheat and cloth. In one hour, residents of Country A can produce 1 unit of wheat and 0.5 unit of cloth, whereas residents of Country B can produce 0.3 unit of wheat and 0.4 unit of cloth. Country A should export A) wheat and cloth; country B should not export anything. B) wheat and country B should export cloth. C) nothing and country B should export both wheat and cloth. D) cloth and country B should export wheat. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

32) Consider a world of two countries facing opportunity costs and producing only wheat and cloth. In one hour, residents of Country A can produce a maximum of either 1 unit of wheat or 0.5 unit of cloth, whereas residents of Country B can produce a maximum of either 0.3 unit of wheat or 0.4 unit of cloth. Country B should export A) wheat and cloth; country A should not export anything. B) wheat and country A should export cloth. C) nothing and country A should export both wheat and cloth. D) cloth and country A should export wheat. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 33) Suppose Canada has a comparative advantage relative to the United States in the manufacture of clothing and the United States has a comparative advantage in producing agricultural products. Which of the following is most likely to occur? A) Canada and the United States will not trade agricultural products or clothing. B) Canada will sell clothing to the United States and the United States will sell agricultural products to Canada. C) Canada will sell agricultural products to the United States and Canada will buy clothing from the United States. D) Canada will sell clothing to the United States but not buy any agricultural products from the United States. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 34) When the principle of comparative advantage determines trade, then a country will A) specialize only in that good with the highest opportunity cost. B) specialize only in goods with the lowest opportunity costs. C) specialize only in that good where output is less per worker hour than another country. D) specialize only in that good where production costs are more than average total costs. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

35) Consider the following information, and assume that opportunity costs are constant: On one hand, residents of Country A can produce more corn in a year than residents of Country B, but they can produce computers at a lower opportunity cost than residents of country B. On the other hand, residents of country B can produce more computers in a year than residents of Country A, but they can produce corn at a lower opportunity cost than residents of country A. It can be concluded that residents of A) Country A should produce corn and trade it for computers produced in Country B. B) Country B should produce computers and trade them for corn produced in Country B. C) Country A should produce computers and trade them for corn produced in Country B. D) both countries should choose not to trade. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 36) If Country A can produce a unit of good 1 at a lower opportunity cost than can Country B, it is correct to state that Country A A) has a comparative advantage in producing good 1. B) has an absolute advantage in producing good 1. C) will import good 1 from country Y. D) will not produce good 1. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 37) Consider a world with two countries and two goods. Under which of the following conditions does comparative advantage NOT exist? A) One country can produce both goods more cheaply than the other country. B) One country has more productive resources or inputs than another country. C) The opportunity cost of producing each good is the same in each country. D) One country has an absolute advantage in producing one good while the other country has an absolute advantage in producing the other good. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

38) Suppose that opportunity costs are constant in both France and Italy. In France, maximum feasible hourly production levels are either 3 units of wheat or 5 units of wine. In Italy, maximum feasible hourly production levels are either 4 units of wheat or 10 units of wine. It is correct to state that A) Italy has an comparative advantage in producing both wheat and wine. B) Italy has a comparative advantage in producing wine. C) France has a comparative advantage in producing both wheat and wine. D) France has a comparative advantage in producing wine. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 39) Suppose that opportunity costs in India and Thailand are constant. In India, maximum feasible hourly production rates are either 0.3 unit of cloth or 0.2 unit of food. In Thailand, maximum feasible hourly production rates are either 0.5 unit of cloth or 0.5 unit of food. It is correct to state that A) India has a comparative advantage in producing cloth. B) India has a comparative advantage in producing both cloth and wheat. C) India has no comparative advantage in producing cloth or wheat. D) Thailand has a comparative advantage in producing cloth. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking Maximum Feasible Hourly Production Rates for Either Food or Cloth Using All Available Resources

40) Using the data in the above table and assuming constant opportunity costs, it is correct to state that A) the United States has a comparative advantage in producing food. B) Mexico has an absolute advantage in producing both food and cloth. C) the United States has a comparative advantage in producing both food and cloth. D) Mexico has a comparative advantage in producing cloth. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 13 Copyright © 2021 Pearson Education, Inc.

41) Using the data in the above table and assuming constant opportunity costs, it is correct to state that A) the United States has an absolute advantage in producing cloth. B) Mexico has a comparative advantage in producing food. C) the United States has a comparative advantage in producing both food and cloth. D) Mexico has a comparative advantage in producing both food and cloth. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 42) Using the data in the above table, and assuming constant opportunity costs, it is likely that A) the United States will import food. B) Mexico will export cloth. C) the United States will export both cloth and food. D) Mexico will export both cloth and food. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 43) Using the data in the above table, and assuming constant opportunity costs, it is likely that A) the United States will export food. B) Mexico will import cloth. C) the United States will import both cloth and food. D) Mexico will import both cloth and food. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

44) If country A exports good X to country B and country B exports good Y to country A, it is most likely that A) A has an absolute advantage in the production of good X. B) B has a comparative advantage in the production of good Y. C) the opportunity cost of domestic production of good Y for country A is lowered with trade. D) B is producing less of good Y than in the no-trade case. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 45) Comparative advantage is defined as A) the ability to produce more output of one good relative to another good than another country can. B) the ability to produce more output from given inputs of resources than others can. C) the ability to use more input of resources than others can. D) having a lower average fixed cost in the production of a good than does someone else. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

46) Refer to the above table. Assuming that opportunity costs are constant, which of the following is a correct statement? A) The United States has a comparative advantage in TV production. B) The United States has a comparative advantage in producing both goods. C) Mexico has a comparative advantage in producing TVs. D) Mexico has a comparative advantage in producing both goods. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

47) According to the above table, if these two countries trade, A) Mexico should specialize in tablets and the United States in TVs. B) the United States should specialize in both tablets and TVs. C) the United States should specialize in tablets and Mexico should specialize in TVs. D) we cannot tell which country should specialize in which good without knowing the amount of labor utilized in each country. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 48) According to the above table, if these two countries trade, A) Mexico should export tablets and the United States export TVs. B) the United States should import tablets and Mexico should import TVs. C) the United States should export tablets and Mexico should export TVs. D) we cannot tell which country should export which good without knowing the amount of labor utilized in each country. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 49) According to the above table, if these two countries trade, A) Mexico should import tablets and the United States import TVs. B) the United States should import tablets and Mexico should import TVs. C) the United States should export TVs and Mexico should export tablets. D) we cannot tell which country should export which good without knowing the amount of labor utilized in each country. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

50) According to economic historians, one result of international trade is that it A) aids in the international transmission of ideas. B) reduces the world-wide output of goods. C) reduces the world-wide consumption of goods. D) causes persistent world-wide inflation. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 51) Which of the following is counted as a benefit from international trade? A) New production processes developed in one nation are transmitted to others. B) Intellectual property such as music and computer applications is introduced throughout the world. C) New goods have been introduced to other parts of the world. D) All of these are benefits from international trade. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 52) The ability to produce an item at a lower opportunity cost compared with other producers is known as A) competitive dominance. B) productive dominance. C) comparative advantage. D) absolute advantage. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

53) The ability to produce the same quantity of a good or service using fewer units of labor is known as A) competitive dominance. B) productive dominance. C) comparative advantage. D) absolute advantage. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 54) Comparative advantage is A) the ability to produce more output from given inputs than another producer can. B) the ability to produce a good at a lower opportunity cost than other producers. C) the ability to produce more output of all goods than anyone else can. D) the ability to produce all goods at lower costs than anyone else can. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 55) Absolute advantage is A) the ability to produce more output from given inputs than another producer can. B) the ability to produce a good at a lower opportunity cost than other producers. C) is always a relative concept. D) the ability to produce all goods at lower costs than anyone else can. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

56) Mary can clean 20 windows per hour or type 30 pages of paper per hour. Tom can clean 18 windows per hour or he can type 25 pages of paper per hour. Based on this A) Mary has comparative advantages in both activities. B) Tom has comparative advantages in both activities. C) Tom has a comparative advantage in cleaning windows. D) Mary has a comparative advantage in cleaning windows. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 57) The ability to produce a good or service at a lower opportunity cost than other producers is A) absolute advantage. B) the quota system. C) intellectual property. D) comparative advantage. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 58) When nations specialize according to their comparative advantage, A) total production and consumption in the world increase. B) consumption rises in one country but must fall in all others. C) total world production rises but total consumption in the world declines. D) none of these Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

59) If there are two goods and two countries, then one country can have A) a comparative advantage in only one good. B) a comparative advantage in both goods. C) a higher opportunity cost of producing both goods. D) a lower opportunity cost of producing both goods. Answer: A Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 60) If there are two goods and two countries, then one country can have A) an absolute advantage in only one good. B) an absolute advantage in both goods. C) a higher opportunity cost of producing both goods. D) a lower opportunity cost of producing both goods. Answer: B Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 61) In an hour April can solder 50 connections or inspect 20 parts while Austin can solder 25 connections or inspect 20 parts in an hour. A) April has a comparative advantage over Austin in both soldering and inspecting. B) April has a comparative advantage over Austin in soldering while Austin has a comparative advantage in inspecting. C) Austin has a comparative advantage over April in soldering while April has a comparative advantage in inspecting. D) Austin had a comparative advantage over April in both soldering and inspecting. Answer: B Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

62) Country A can product 100 units of Good X in a day and 40 units of Good Y while Country B can produce 50 units of Good X and 40 units of Good Y. A) These countries will not trade since Country A has a comparative advantage in the production of both goods. B) These countries will not trade since Country A will always be able to take advantage of Country B. C) These countries should trade since Country A has a comparative advantage in the production of Good X and Country B has a comparative advantage in the production of Good Y. D) These countries should trade since Country B has a comparative advantage in the production of Good X and Country A has a comparative advantage in the production of Good Y. Answer: C Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

Maximum Feasible Hourly Production Rates of Either Product A or Product B Using All Available Resources Product A B

Country X 4 4

Country Y 8 4

63) Refer to the above table. If opportunity costs are constant, then the opportunity cost of producing good B in country X is ________, and the opportunity cost of producing good B in country Y is ________. A) 1 unit of A; 2 units of A B) 1 unit of A; 0.5 unit of A C) 1 unit of B; 2 units of A D) 1 unit of A; 0.5 unit of B Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

64) Refer to the above table. If opportunity costs are constant, each nation produces only the one good for which it has a comparative advantage, and trade can occur between the two countries, A) Country X will produce Product A and Country Y will produce Product B. B) Country X will produce Product B and Country Y will produce Product A. C) Country X will refuse to trade with Country Y since Country X has a comparative advantage in both products. D) Country Y will refuse to trade with Country X since Country Y has a comparative advantage in both products. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 65) Refer to the above table. If opportunity costs are constant and both countries produce only the goods for which they have comparative advantages and then trade, hourly world output would equal A) 4 units of Product A and 4 units of Product B. B) 8 units of Product A and 4 units of Product B. C) 8 units of Product A and 8 units of Product B. D) 12 units of ProductA and 8 units of Product B. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 66) Refer to the above table. Assuming constant opportunity costs, A) Country X has a comparative advantage in the production of both goods. B) Country Y has a comparative advantage in the production of both goods. C) Country X has a comparative advantage in the production of Product A while Country Y has a comparative advantage in the production of Product B. D) Country Y has a comparative advantage in the production of Product A while Country X has a comparative advantage in the production of Product B. Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

67) Refer to the above table. Assuming constant opportunity costs, A) neither country will be willing to engage in trade at any rate of exchange of Product A for Product B. B) both countries will be willing to engage in trade at a rate of exchange of 0.3 unit of Product A for 1 unit of Product B. C) both countries will be willing to engage in trade at a rate of exchange of 3 units of Product A for 1 unit of Product B. D) both countries will be willing to engage in trade at a rate of exchange of 1.5 unit of Product A for 1 unit of Product B. Answer: D Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

Maximum Feasible Hourly Production Rates of Either Computers or Bicycles Using All Available Resources Product Computers Bicycles

United States 8 2

China 3 6

68) Refer to the above table. Assuming that opportunity costs are constant, the opportunity cost of producing a computer in the United States is equal to ________, and the opportunity cost of producing a computer in China is ________. A) 4 bicycles; 0.5 bicycles B) 0.25 bicycle; 2 bicycles C) 2.67 computers; 0.33 bicycles D) 0.375 bicycle; 3 computers Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

69) Refer to the above table. Assuming that opportunity costs are constant, the opportunity cost of producing a bicycle in the United States is equal to ________, and the opportunity cost of producing a bicycle in China is ________. A) 4 computers; 0.5 computer B) 0.25 computer; 2 computers C) 2.67 bicycles; 0.33 computers D) 0.375 computer; 3 bicycles Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 70) Refer to the above table. Assuming that opportunity costs are constant, which of the following is a correct statement? A) The United States has a comparative advantage in computers. B) The United States has a comparative advantage in bicycles. C) China has a comparative advantage in computers. D) China has a comparative advantage in both goods. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 71) Refer to the above table. If opportunity costs are constant and the two countries trade, A) the United States should specialize in computers and China in bicycles. B) the United States should specialize in bicycles and China in computers. C) the United States should specialize in both bicycles and computers, and China should specialize in neither. D) there will be no trade because they are so different. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

72) Refer to the above table. If opportunity costs are constant, the two countries will gain from trade at a rate of exchange of A) 0.1 computer for 1 bicycle. B) 5 computers for 1 bicycle. C) 1 computer for 1 bicycle. D) 8 bicycles for 1 computer. Answer: C Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

Maximum Feasible Hourly Production Rates of Either Computers or Bicycles Using All Available Resources Product Computers Bicycles

United States 8 4

Canada 10 2

73) Refer to the above table. Assuming constant opportunity costs, the opportunity cost of producing a computer in the United States is ________ while the opportunity cost of producing a computer in Canada is ________. A) 0.8 bicycle; 2 computers B) 2.5 computers; 0.25 bicycle C) 0.5 bicycle; 0.2 bicycle D) 2 bicycles; 5 bicycles Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

74) Refer to the above table. Assuming constant opportunity costs, the opportunity cost of producing a bicycle in the United States is ________ while the opportunity cost of producing a bicycle in Canada is ________. A) 8 computers; 10 computer B) 4 computers; 10 computers C) 5 computers; 2 computers D) 2 computers; 5 computers Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 75) Refer to the above table. It may be concluded that A) Canada has a comparative advantage in computer production. B) Canada has a comparative advantage in bicycle production. C) The United States has a comparative advantage in producing both goods. D) The United States has a comparative advantage in producing neither good. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 76) Refer to the above table. It may be concluded that A) The United States will export computers and import bicycles. B) Canada will export computers and import bicycles. C) The United States will export both goods. D) The United States will import both goods. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

77) Refer to the above table. If opportunity costs are constant, then the United States and Canada will produce goods in which they have a comparative advantage and trade at a rate of exchange of A) 4 computers for 1 bicycle. B) 6 computers for 1 bicycle. C) 0.1 computer for 1 bicycle. D) 1 computer for 1 bicycle. Answer: A Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking Maximum Feasible Hourly Production Rates of Either Cuckoo Clocks or Movies Using All Available Resources Product Cuckoo Clocks Movies

United States Switzerland 4 2 10 4

78) Based on the data in the above table, then if opportunity costs are constant, the opportunity cost of producing movies in the United States is ________, and the opportunity cost of producing movies in Switzerland is ________. A) 2 movies; 2 cuckoo clocks B) 2.5 movies; 0.4 cuckoo clocks C) 0.4 cuckoo clocks; 0.5 cuckoo clocks D) 2.5 cuckoo clocks; 2 cuckoo clocks Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 79) Refer to the above table. If opportunity costs are constant, residents of the United States will gain from specializing and trading with Switzerland if they A) produce both clocks and films and export clocks to Switzerland. B) produce both clocks and films and export both to Switzerland. C) import films and export clocks to Switzerland. D) import clocks and export films. Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 27 Copyright © 2021 Pearson Education, Inc.

80) Assume that maximum feasible hourly productions levels if all resources are utilized in the United States are either 3 yards of fabric or 9 bushels of wheat. Maximum feasible production levels if all resources are utilized in Japan are either 6 yards of fabric or 12 bushels of wheat. Based on this information, A) beneficial trade is absolutely impossible between the two countries. B) the United States will benefit from trading but Japan will not. C) both nations will gain from specialization and trade, with the United States exporting wheat and Japan exporting fabric. D) Japan should specialize in both products. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

The Number of Worker Days to Produce One Cuckoo Clock or Movie Using All Available Resources U.S. Switzerland Product (Worker-Days) (Worker-Days) Cuckoo Clocks 8 6 Movies 12 4 81) Based on the data in the above table, then if opportunity costs are constant, the opportunity cost of producing one cuckoo clock in the United States is ________, and the opportunity cost of producing one cuckoo clock in Switzerland is ________. A) 3 movies; 1.33 cuckoo clocks B) 0.33 movies; 0.67 cuckoo clocks C) 0.67 movie; 1.5 movies D) 1.5 movies; 0.67 movie Answer: D Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

82) Refer to the above table. Assuming constant opportunity costs, which of the of the following statements is correct if the rate of exchange is 1 movie for 1 cuckoo clock? A) U.S. residents would be willing to export cuckoo clocks, but Swiss residents would not gain from exporting movies at this rate of exchange. B) Swiss residents would be willing to export movies, but U.S. residents would not gain from exporting cuckoo clocks at this rate of exchange. C) U.S. residents will gain from exporting movies and Swiss residents will gain from exporting cuckoo clocks at a rate of exchange. D) U.S. residents will gain from exporting cuckoo clocks and Swiss residents will gain from exporting movies at a rate of exchange. Answer: C Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 83) Assume that maximum feasible hourly productions levels if all resources are utilized in the United States are either 8 yards of fabric or 4 bushels of wheat. Maximum feasible production levels if all resources are utilized in Japan are either 3 yards of fabric or 6 bushels of wheat. Based on this information, A) beneficial trade is absolutely impossible between the two countries. B) the United States will benefit from trading but Japan will not. C) both nations will gain from specialization and trade, with the United States exporting wheat and Japan exporting fabric. D) both nations will gain from specialization and trade, with the United States exporting fabric and Japan exporting wheat. Answer: D Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 84) Which of the following is a TRUE statement? A) Everyone benefits from free trade. B) Exporters benefit from trade and importers do not. C) Consumers benefit from trade and producers do not. D) Free trade harms domestic producers of goods that face import competition. Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

85) In order to obtain an efficient allocation of resources worldwide, A) countries that have a lot of resources should ship resources to countries that do not have a lot of resources. B) countries that have a lot of resources should not trade since poorer countries cannot compete. C) each country should produce the good they have a comparative advantage in and then trade. D) no trade among countries should occur. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 86) Benefits of free trade include all of the following EXCEPT A) increased world production. B) higher standards of living. C) transmission of new ideas. D) increased international mobility of labor. Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 87) According to international trade theory, A) trade is based on absolute advantage. B) comparative advantage is based on absolute advantage. C) every country has a comparative advantage in something. D) less developed countries cannot trade successfully with developed countries. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

88) If Bob can complete mathematics homework assignments at a lower opportunity cost than Jane can accomplish, then Bob has ________ in completing mathematics homework assignments. A) a relative disadvantage B) an absolute advantage C) a complete advantage D) a comparative advantage Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 89) Which of the following is NOT a benefit of international trade? A) It increases overall output. B) It results in a transmission of ideas. C) It promotes self-sufficiency. D) It results in the transmission of new processes. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 90) All of the following are reasons that trade between nations is beneficial EXCEPT A) gains from specialization. B) exchange of ideas. C) protection of domestic industries. D) gains from trade. Answer: C Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

91) Comparative advantage is the ability, compared with another producer A) to produce more of a product with the same resources. B) to use fewer inputs to produce the same amount of a product. C) to produce a higher-quality product with fewer resources. D) to produce an additional unit of a product at lower opportunity cost. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 92) The ability to produce a good or service at a lower opportunity cost than other producers is A) absolute advantage. B) comparative advantage. C) opportunity advantage. D) special advantage. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 93) International trade is based on the existence of A) absolute advantage. B) perfect advantage. C) productivity advantage. D) comparative advantage. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

Individual Pramilla Sam George Lucas

Opportunity Cost 2 units of good X to produce 1 unit of good Y 3 units of good X to produce 1 unit of good Y 4 units of good Y to produce 1 unit of good X 5 units of good Y to produce 1 unit of good X

94) Consider the opportunity costs of producing goods X and Y that are listed for the four individuals above. Which person has a comparative advantage in producing good X? A) Pramilla B) Sam C) George D) Lucas Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 95) Consider the opportunity costs of producing goods X and Y that are listed for the four individuals above. Which person has a comparative advantage in producing good Y? A) Pramilla B) Sam C) George D) Lucas Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 96) The ability to produce a good at lower opportunity costs than another producer is known as A) comparative advantage. B) marginal cost production. C) economies of scale. D) absolute advantage. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

97) Comparative advantage is based on the A) concept that some countries are superior to others. B) concept of absolute advantage of producing goods in different countries. C) concept of relative opportunity cost of producing goods in different countries. D) concept that some countries are better endowed with natural resources. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 98) Countries engaged in international trade specialize in production based on A) relative price levels. B) relative foreign exchange rates. C) comparative advantage. D) the differences in transportation costs. Answer: C Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

Maximum Feasible Hourly Production Rates (in Tons) of Either Cookies or Coffee Using All Available Resources Product Cookies Coffee

Country Alpha 3 9

Country Beta 8 4

99) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing cookies in country Alpha is ________, and the opportunity cost of producing cookies in country Beta is ________. A) 0.33 ton of coffee; 2 tons of coffee B) 3 tons of coffee; 0.5 ton of coffee C) 0.375 ton of cookies; 2.25 tons of coffee D) 2.67 tons of coffee; 0.44 ton of cookies Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge

100) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing coffee in country Alpha is ________, and the opportunity cost of producing coffee in country Beta is ________. A) 0.33 ton of cookies; 2 tons of cookies B) 3 tons of cookies; 0.5 ton of cookies C) 0.375 ton of coffee; 2.25 tons of cookies D) 2.67 tons of cookies; 0.44 ton of coffee Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 101) Use the above table. If these two countries, Alpha and Beta, specialize based on comparative advantage A) Alpha will specialize in cookies, and Beta will specialize in coffee production. B) Alpha will specialize in producing both items. C) Beta will specialize in producing both items. D) Alpha will specialize in coffee, and Beta will specialize in cookies. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking Maximum Feasible Hourly Production Rates (in Tons) of Either Knives or Forks Using All Available Resources Product Knives Forks

Country Alpha 9 6

Country Beta 3 12

102) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing knives in country Alpha is ________, and the opportunity cost of producing knives in country Beta is ________. A) 2 forks; 0.33 knife B) 0.5 knife; 3 forks C) 1.5 forks; 0.25 fork D) 0.67 fork; 4 forks Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 35 Copyright © 2021 Pearson Education, Inc.

103) Use the above table. Assuming constant opportunity costs, if countries Alpha and Beta specialize based on comparative advantage, then A) Alpha should specialize in knives and Beta should specialize in forks. B) Alpha should specialize in forks and Beta should specialize in knives. C) Alpha should specialize in producing both items. D) Beta should produce both items. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 104) Use the above table. Assuming constant opportunity costs, if countries Alpha and Beta specialize based on comparative advantage, then they will trade if the rate of exchange is A) 5 knives for 1 fork, and Alpha imports forks. B) 0.5 knives for 1 fork, and Alpha imports forks. C) 0.5 fork for 1 knife, and Beta imports knives. D) 6 forks for 1 knife, and Beta imports knives. Answer: B Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking Maximum Feasible Hourly Production Rates (in Tons) of Either Pizzas or Donuts Using All Available Resources Product Pizzas Donuts

Country Alpha 10 10

Country Beta 2 12

105) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing donuts in country Alpha is ________, and the opportunity cost of producing donuts in country Beta is ________. A) 1 pizza; 0.17 donut B) 1 pizza; 6 donuts C) 10 donuts; 12 pizzas D) 0.2 pizza; 1.67 donuts Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Application of knowledge 36 Copyright © 2021 Pearson Education, Inc.

106) According to the above table, Alpha has comparative advantage in producing A) pizzas. B) donuts. C) both pizzas and donuts. D) neither pizzas nor donuts. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

Maximum Feasible Hourly Production Rates (in Tons) of Either Wine or Beef Using All Available Resources Product Wine (gallons) Beef (pounds)

Argentina 30 10

France 60 30

107) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing a gallon of wine in Argentina is A) 0.33 pound of beef. B) 0.5 pound of beef. C) 2 pounds of beef. D) 3 pounds of beef. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 108) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing a pound of beef in Argentina is A) 2 gallons of wine. B) 3 gallons of wine. C) 0.5 gallons of wine. D) 0.33 gallons of wine. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 37 Copyright © 2021 Pearson Education, Inc.

109) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing a pound of beef in France is A) 2 gallons of wine. B) 3 gallons of wine. C) 0.5 gallons of wine. D) 0.33 gallons of wine. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 110) Use the above table. Assuming constant opportunity costs, the opportunity cost of producing a gallon of wine in France is A) 0.33 pound of beef. B) 0.5 pound of beef. C) 2 pounds of beef. D) 3 pounds of beef. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 111) Use the above table. Assuming constant opportunity costs, a comparative advantage in producing wine is possessed by A) neither Argentina or France. B) both Argentina and France. C) Argentina. D) France. Answer: C Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

112) Use the above table. Assuming constant opportunity costs, a comparative advantage in producing beef is possessed by A) neither Argentina or France. B) both Argentina and France. C) Argentina. D) France. Answer: D Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 113) Use the above table. Assuming constant opportunity costs, if Argentina and France specialize based on comparative advantage, then they will trade if the rate of exchange is A) 2.5 gallons of wine for 1 pound of beef, and Argentina imports beef. B) 4 gallons of wine for 1 pound of beef, and France imports beef. C) 0.2 pound of beef for 1 gallon of wine, and Argentina imports wine. D) 8 pounds of beef for 1 gallon of wine, and France imports wine. Answer: A Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 114) Use the above table. Assuming constant opportunity costs, if Argentina and France specialize based on comparative advantage, then they will trade if the rate of exchange is A) 7 gallons of wine for 1 pound of beef, and Argentina imports beef. B) 0.25 gallons of wine for 1 pound of beef, and France imports beef. C) 0.25 pounds of beef for 1 gallon of wine, and Argentina imports wine. D) 0.4 pounds of beef for 1 gallon of wine, and France imports wine. Answer: D Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

115) Specialization allows for A) more consumption for all trading partners. B) more consumption for the trading partner with the comparative advantage. C) more consumption for the trading partner with the absolute advantage. D) equal consumption among trading partners. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 116) An effect of international trade is A) the increase in the average price of goods as the cost of transportation has to be included. B) the transmission of ideas around the world. C) that only countries that have absolute advantage in producing a good can participate. D) that the United States has a trade surplus. Answer: B Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking 117) If the residents of a country specialize in a good in which they have a comparative advantage and trade with residents in another nation, the residents in the first country A) can consume more than they could without trade. B) will produce less than they could without trade. C) will have a lower standard of living. D) will be exploited by the second nation. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

118) Suppose that opportunity costs are constant and that Gorge can either bake a maximum of six pies or three cakes in a day. Brandi can either produce a maximum of eight pies or two cakes in a day. Gorge's opportunity cost to produce one cake is A) one-half pie. B) two pies. C) six pies. D) four pies. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 119) Suppose that opportunity costs are constant and that Gorge can either bake a maximum of six pies or three cakes in a day. Brandi can either produce a maximum of eight pies or two cakes in a day. Brandi's opportunity cost to produce one cake is A) one-half pie. B) two pies. C) six pies. D) four pies. Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 120) Suppose that opportunity costs are constant and that Gorge can either bake a maximum of six pies or three cakes in a day. Brandi can produce a maximum of eight pies or two cakes in a day. Brandi has an comparative advantage in the production of A) cakes. B) pies. C) both cakes and pies. D) neither cakes nor pies. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking

121) Suppose that opportunity costs are constant and that Gorge can either bake a maximum of six pies or three cakes in a day. Brandi can produce a maximum of eight pies or two cakes in a day. Gorge has an comparative advantage in the production of A) cakes. B) pies. C) both cakes and pies. D) neither cakes nor pies. Answer: A Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 122) According to the Swiss Institute for Management Development, the top country in terms of productive efficiency is A) Germany. B) Japan. C) Switzerland. D) the United States. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 123) The United States is considered by the Institute for Management Development to be the most competitive economy because A) U.S. residents are willing to work harder than anyone else is. B) of widespread entrepreneurship. C) of a high saving rate. D) of selected restrictions on imports from Japan and Europe. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

124) All of the following are cited as factors in explaining U.S. competitiveness EXCEPT A) large investments in scientific research. B) economic restructuring. C) widespread entrepreneurship. D) reducing the federal deficit. Answer: D Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 125) All of the following are cited as factors in explaining U.S. competitiveness EXCEPT A) the open U.S. financial system. B) economic restructuring. C) investments in information technology. D) the decline of entrepreneurship. Answer: D Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 126) The concept of "global competitiveness" A) is not practical because economic well-being is evaluated within each country. B) means that the economic well-being of each nation must be compared with nations with same size population. C) means that the economic well-being of each nation must be compared with nations on the same continent. D) means that the export-import ratio of each nation must be compared. Answer: A Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

127) People who focus on the "competitiveness" of the United States are A) focusing on the right thing if the United States is to stay a leading economic power. B) treating the United States as if it is a business firm. C) also focusing on the importance of education. D) correctly recognizing that trade is a zero-sum game. Answer: B Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 128) Discuss the relationship between world trade and world Gross Domestic Product (GDP) since the early 1950s. Answer: Both world trade and world GDP have grown substantially since the early 1950s, but trade has grown much more than has GDP. Both imports and exports as a percent of GDP have increased for the United States as well. Diff: 1 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Macro-3: Identify and interpret key macroeconomic measures AACSB: Analytical thinking 129) Why is trade based on comparative advantage? Answer: The relevant cost of producing a good is how much of other goods must be sacrificed. The opportunity cost of a good is the economically important cost, and comparative advantage is based on opportunity costs. World output can be greater when countries specialize based on comparative advantage. Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 130) How can comparative advantage yield gains from trade? Answer: Comparative advantage refers to the ability to produce a good or service at lower opportunity cost compared to other producers. If nations specialize in producing goods in which they have a comparative advantage and trade at rates of exchange that are more favorable than the opportunity costs they would have faced without trade, then they can obtain more goods for consumption with trade than they could have obtained for consumption without trade. These consumption gains are the gains from trade. Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-3: Discuss different types of market systems and the gains that can be made from trade AACSB: Analytical thinking

131) "Everybody has a comparative advantage in something." Do you agree or disagree? Why? Answer: Agree. Since comparative advantage is based on relative abilities, everyone has a comparative advantage in something. If A is better at B at everything, but A is 50 percent better than B in activity X while only 20 percent better than B in activity Y, B has a comparative advantage in Y because B must give up less X to produce another Y than A. The relativity of the concept implies that everyone has a comparative advantage in something. Diff: 3 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 132) "International trade bestows benefits on countries through the international transmission of ideas." Do you agree or disagree? Explain. Answer: Agree. Ideas developed in one place can be transferred to other places, benefiting people in both places. Often the idea is originally embodied in goods, but eventually the idea itself usually gets transferred as well. Diff: 2 Topic: 31.1 Why We Trade: Comparative Advantage and Mutual Gains from Exchange Learning Outcome: Micro-20: Apply the concepts of opportunity cost, marginal analysis, and present value to make decisions AACSB: Analytical thinking 31.2 Arguments against Free Trade 1) In the long run, imports will most likely be paid for with A) exports. B) the sale of real and financial assets. C) the extension of credit. D) higher domestic unemployment. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

2) In the long run, if imports increase, then exports A) will not change. B) will decrease. C) will also increase. D) will become zero. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 3) Goods that are produced domestically and then sold in other countries are called A) exports. B) imports. C) tariffs. D) quotas. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 4) Goods that are produced in other countries and then sold domestically are called A) exports. B) imports. C) tariffs. D) quotas. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 5) Restricting imports usually leads to A) a country producing beyond its production possibilities frontier. B) a country consuming even further beyond its production possibilities frontier. C) a reduction in exports and employment. D) a higher per capita level of real consumption. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 46 Copyright © 2021 Pearson Education, Inc.

6) Restrictions on imports A) eventually reduce exports, too. B) enhance economic welfare by encouraging more exports. C) are the quickest way for a country in recession to start on a path of economic recovery. D) usually have no long-run effects on an economy. Answer: A Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 7) One economic truism is that any nation's restriction of imports will ultimately lead to A) an increase in exports. B) a reduction in exports. C) an economic upswing. D) an increase in GDP. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 8) The basic proposition in international trade is that A) trade is determined by absolute advantage. B) in the long run, imports are paid for by exports. C) everyone is made better off by free trade. D) fair trade is more important than free trade. Answer: B Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

9) In the long run, imports are paid for by A) investment. B) exports. C) dollars. D) gold or other universally accepted monies. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 10) One way to reduce exports is to A) base trade on comparative advantage. B) base trade on opportunity costs. C) trade with poor countries. D) restrict imports. Answer: D Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 11) Restrictions on imports A) usually have no permanent effects on an economy. B) is the best way to increase exports. C) protect United States jobs. D) eventually reduce exports. Answer: D Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

12) Import restrictions A) can protect United States jobs in the protected industry, which increases economic welfare of the country as a whole. B) can protect United States jobs in the protected industry but will also lead to job reductions in other export industries. C) hurt people who work in importing companies, but makes consumers better off. D) cannot protect American jobs in any sector of the economy. Answer: B Diff: 3 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 13) Restricting imports A) can protect United States jobs in the protected industry, which increases economic welfare of the country as a whole. B) can protect United States final goods and services in the protected industry and makes consumers better off. C) can protect United States final goods and services in the protected industry and increase economic welfare of the country as a whole. D) can protect United States jobs in the protected industry but will also lead to reductions in U.S. output and income. Answer: D Diff: 3 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 14) When U.S. residents buy products that were made in Japan, then ultimately the Japanese want A) yen. B) dollars. C) Japanese goods. D) goods, including U.S.-made goods. Answer: D Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

15) During the Great Depression, many industrial countries tried protecting domestic jobs by raising tariffs. Economic theory would suggest that the result would be A) success for only the countries that raised tariffs first. B) success for firms that had a comparative advantage in manufactured goods rather than agricultural goods. C) reduced exports and volume of trade for everyone. D) increased incomes in the countries that pursued this policy. Answer: C Diff: 3 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 16) It has been suggested that in order to protect U.S. jobs we need to restrict foreign competition by restricting imports. A) This is a sound economic statement since the U.S. will still export protecting U.S. jobs. B) This is a sound economic statement since U.S. firms will have to increase output to make up for the lack of imports leading to increase employment in the U.S. C) This is not a sound economic statement since employment in the U.S. does not depend on imports and exports. D) This is not a sound economic statement since import restrictions lead to a reduction in employment in the export industries of the U.S. Answer: D Diff: 3 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 17) If in the long run, imports are paid for by exports, then A) any restriction of imports ultimately reduces exports. B) any restriction of imports ultimately expands exports. C) any restriction of imports has no impact on exports. D) any restriction of exports has no impact on imports. Answer: A Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

18) If in the long run, any government policy that increases exports A) also increases imports. B) decreases imports. C) has no impact on imports. D) makes imports become negative. Answer: A Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 19) Which of the following statements is FALSE? A) When it comes to overall productive efficiency, compared to Japan, Germany and the rest of the European Union, the United States lags far behind. B) Sophisticated financial systems have given U.S. productive efficiency a boost. C) The United States' international competitive position has been helped by its long history of widespread entrepreneurship. D) Economic restructuring and investments in information technology have added to productive efficiency in the United States. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 20) The standard of living in a nation depends on A) how well its economy functions relative to other countries. B) the size of the country, with larger nations always doing better than smaller ones. C) how well the economy functions within that country. D) whether or not its currency is adopted as the world's monetary standard. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

21) One reason that U.S. exports of commercial services have increased steadily over the past 25 years is that A) European and Asian nations have shown little interest in developing their own commercial services sectors. B) the United States has made significant investments in new information technologies. C) the U.S. government owns and operates most of the economy's service sector. D) the U.S. economy operates like one big corporation. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 22) Which of the following is consistent with international trade theory? A) The United States needs trade restrictions to stay competitive. B) The United States has been falling behind Europe and Japan because its economy is too open. C) The standard of living within a country is a function of the economic strength of the economy and not of its relative position. D) A country should strive for comparative advantage in manufacturing. Answer: C Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 23) A new industry develops, and our government wants to protect it from foreign competition. Which one of the following arguments would appropriately describe this type of protection? A) national security B) cartelization C) infant industry D) protecting American jobs Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

24) Which of the following is an argument against free trade? A) protecting infant industries B) protecting against dumping C) protecting domestic jobs D) all of these Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 25) Selling a good abroad below the price charged in the home market, or at a price below the cost of production is called A) dumping. B) import substitution. C) a quota. D) a tariff. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 26) One problem with the infant industry argument is that A) the protection is typically never removed, creating a domestic monopoly. B) it fails to protect domestic industries from foreign competition. C) it must be approved by the IMF and the World Bank. D) it must be approved by the Federal Reserve Board. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

27) The infant industry argument suggests that A) a country requires tariff protection when it has no comparative advantage in the production of any good. B) a country requires protection against unfair trade practices. C) an industry may require temporary tariff protection until the industry matures. D) the industry has no potential and must be protected to survive. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 28) The infant industry argument has a normative economic basis because A) clearly, all industries need to be protected. B) protected industries are selected on a factual basis. C) the government must decide which industries should be protected. D) political corruption is the only deciding factor. Answer: C Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 29) An assumption behind the infant industry argument for tariff protection is that A) foreign competitors are selling output below average cost. B) the domestic industry will be facing an upward adjustment in its average cost. C) the domestic industry will eventually gain comparative advantage in producing the good. D) the market needs additional competition to satisfy consumer demand. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

30) For infant industry tariff protection to be valid requires that A) the tariff must be allowed to last forever. B) only industries that currently are producing efficiently should be protected. C) government officials must predict which industries will eventually be able to compete with more established foreign producers. D) the industries protected must have substantial monopoly power in the absence of foreign competition. Answer: C Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 31) When one country "dumps" some of its products in another country, it A) increases the aggregate level of employment in the importing country, thereby depressing that nation's market wages. B) also exports new technology to the importing nation and thereby indirectly boosts the importing nation's real GDP. C) sells its products abroad at a price lower than the price in the home market or lower than the cost of production. D) also exports pollution-causing technologies and thereby creates environmental hazards in the receiving country. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 32) Dumping occurs when, in a foreign market, a good is sold A) below its cost of production or below the price in that market. B) at a discount below the list price. C) below its nominal price. D) at a price above the equilibrium price. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

33) Dumping typically occurs as long as the foreign producer sells its output at a price A) above its total costs. B) below its average total costs but above its average variable costs. C) below its average variable costs. D) above its average fixed costs but below its total variable costs. Answer: B Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 34) Dumping typically occurs because A) the exporting country raises its prices to increase profits. B) the exporting country usually is experiencing a recession and has excess production. C) the importing country is experiencing a recession. D) the importing country has assessed significant tariffs. Answer: B Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 35) Dumping is considered a practice that seriously harms domestic producers because A) the quality of the dumped good is superior to that of the importing country. B) it allows the exporting country to use poor quality materials. C) it establishes a price that cannot be met by domestic producers. D) it discriminates between wealthy and poor countries. Answer: C Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

36) Dumping is defined as A) selling a good abroad at prices above the costs of the firms in the foreign countries. B) exporting goods that are of inferior quality. C) selling a good abroad at prices below its cost of production or below the price charged in the home market. D) exporting goods that are sources of pollution. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 37) Governments sometimes subsidize domestic industries. When this occurs A) the governments also impose tariffs on imports to protect the industries even more. B) the subsidized industries have an advantage in international markets relative to nonsubsidized industries. C) firms cannot be guilty of dumping because their prices are not below their costs. D) the subsidized industries sell less in international markets because it is more profitable to sell domestically. Answer: B Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 38) Which of the following is NOT a true statement regarding free trade? A) Free trade promotes specialization and efficient production. B) Free trade generally reduces the domestic prices of imports. C) Free trade may stimulate economic growth through export sales. D) Every individual in a country gains short-term benefits from free trade. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

39) Free trade policies may lead to A) a decrease in world output. B) price increases in world markets. C) some labor sectors experiencing some short-term job loss. D) none of these. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 40) U.S. job losses cited by anti-trade critics A) are mostly a short-term problem in isolated industries. B) are non-existent. C) affect only capital-intensive U.S. industries. D) are mostly due to poor training by U.S. firms. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 41) Using trade restrictions to protect special interests such as the U.S. auto industry A) results in lower prices for U.S. auto consumers. B) raises the prices that U.S. consumers must pay for autos. C) is a very cost-efficient way of dealing with trade problems. D) is the best long-term solution for threatened U.S. jobs. Answer: B Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

42) According to the text, economists David Gould, G.L. Woodbridge, and Roy Ruffin examined the data on the relationship between increases in imports and the rate of unemployment. They found that A) free trade leads to increased unemployment. B) there is not a causal link between increases in imports and the rate of unemployment. C) increases in imports always precede increases in unemployment by a period of 6 months to one year. D) increases in unemployment always precede increases in imports by a period of 6 months to one year. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 43) The infant industry argument says that A) tariffs should be imposed to allow a new industry in a country to get established. B) dumping should be allowed in order to establish a presence of an industry that has previously not had a presence in another country. C) countries should produce and trade goods according to their comparative advantage. D) imports should target new products from other countries to take advantage of the transmission of new ideas. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 44) The contention that tariffs should be imposed to protect from import competition an industry that is trying to get started is A) a basic argument for free trade. B) the infant industry argument. C) dumping. D) a voluntary restraint agreement. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

45) The argument that tariffs should be imposed when a foreign government provides financial assistance to its producers is A) a national defense concern. B) the infant industry argument. C) dumping. D) to counter foreign subsidies. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 46) The argument a tariff on imported goods produced by an unlimited industry could benefit the members of the domestic union is A) the national defense argument. B) the protect domestic jobs argument. C) the infant industry argument. D) the dumping argument. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 47) The contention that domestic unions tend to want to restrict foreign competition with tariffs is A) a national defense concern. B) the infant industry argument. C) dumping. D) to protect domestic jobs. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

48) The contention that specific sensitive domestic technologies must not be traded freely is A) a national defense concern. B) the infant industry argument. C) dumping. D) to protect domestic jobs. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 49) All of the following are arguments against free trade EXCEPT A) the infant industry argument. B) dumping. C) comparative advantage. D) the need to protect American jobs. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 50) The infant-industry argument for tariff protection is that tariffs should be imposed to protect from competition A) industries that are essential if a country is to become an industrial nation. B) industries needed for national defense. C) industries that cannot compete with foreign competitors at this point in time, but will be able to once they gain some size and experience. D) industries that can compete with foreign competitors at this point in time and are deemed essential by the government. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

51) One argument against free trade is the A) comparative advantage argument. B) absolute advantage argument. C) considerate advantage argument. D) infant industry argument. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 52) If the infant industry argument is used to protect an industry that has already matured, then A) consumers lose because they will pay a price for a product that is above the world price. B) consumers lose because they will pay a price for a product, which is less than the world price. C) stockholders lose because the firm cannot compete with other firms. D) no one loses. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 53) For the infant-industry argument for tariffs to be appropriate, it is necessary that A) the industry be deemed essential by the government. B) the government can identify which industries will eventually be able to compete with more established foreign producers. C) only industries that currently are operating efficiently will be protected. D) the country has access to the most modern production techniques. Answer: B Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

54) During the 1960s, U.S. steel firms argued they needed tariff protection because Germany and Japan were using new mills to make steel since their old mills were destroyed in World War II. Essentially, this argument is a form of the A) infant-industry argument. B) anti-dumping argument. C) countering foreign subsidies argument. D) national defense argument. Answer: A Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 55) A rationale used for tariff protection by some is that A) the country wants to practice international price discrimination. B) the country finds its cost of producing their products higher than in other countries. C) imports are produced by firms that received subsidies from their governments. D) imports are produced by firms that are more efficient than domestic producers are. Answer: C Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 56) Dumping is A) selling a good abroad in huge quantities at a very low price. B) exporting goods that are sources of pollution. C) exporting goods that are of inferior quality relative to the goods sold in the domestic market. D) selling a good abroad at a price below cost or below the price charged in the domestic market. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

57) Selling a good abroad below the price charged in the home market is A) a basic argument for free trade. B) the infant industry argument. C) dumping. D) a voluntary restraint agreement. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 58) When a firm sells its good abroad below the cost of producing the good the firm is A) using the concept of comparative advantage. B) dumping. C) taking advantage of the infant industry argument. D) taking advantage of absolute advantage. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 59) Dumping is A) international price discrimination. B) international monopolistic pricing. C) collusive behavior among producers in different countries. D) selling goods produced with government approval. Answer: A Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

60) Country X subsidizes industry A. A worldwide recession has hit and Country X has decided to export Good A worldwide, selling the product for less than it costs to produce it. This is A) the infant industry argument. B) comparative advantage argument. C) dumping. D) a regional trade bloc. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 61) Governments sometimes subsidize domestic industries. When this occurs A) the governments will not impose tariffs. B) the subsidized sell less in international markets because it is more profitable to sell at home. C) the subsidized industries have an advantage on international markets relative to nonsubsidized firms. For this reason, other countries often impose tariffs on the subsidized imports. D) the subsidized industries have an advantage on international markets relative to nonsubsidized firms. However, this is not an argument for imposing tariffs and tariffs would violate international agreements. Answer: C Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 62) Some argue that U.S. workers cannot compete with cheap labor from many developing nations. This A) is true and is a justification for tariffs to protect domestic jobs. B) is true and it is has been found that tariffs in these cases can save thousands of jobs and benefit the economy. C) is true but the benefits of free trade are still such that tariffs should not be placed on these industries. D) is not true, as evidenced by the fact that the United States carries on a lot of trade with countries that have lower wages. Answer: D Diff: 3 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

63) Which of the reasons given for tariff protection make consumers better off by generating lower prices? A) infant industry argument B) protecting U.S. jobs argument C) anti-dumping argument D) None provide lower prices for domestic consumers. Answer: D Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 64) Suppose an industry receives protection from the government in the form of tariffs. A number of years later, it is observed that the quantity supplied by domestic firms had decreased and that the domestic price was substantially greater than the world price. We could conclude that A) the tariff had been imposed to counteract dumping and had been successful. B) removal of the tariff would actually cause domestic output to increase and price to fall. C) the tariff had been imposed to protect an infant industry and that the industry still needed protection. D) removal of the tariff would cause domestic output to fall even further and the price to fall to consumers. Answer: D Diff: 3 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 65) The idea that tariffs should be imposed to protect new and developing industries is referred to as A) the start-up argument. B) the infant industry argument. C) the incubator business theory. D) the new markets theory. Answer: B Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

66) The argument that with initial protection an industry will eventually become competitive is called the A) national security argument. B) strategic bargaining argument. C) the trade adjustment assistance argument. D) infant industry argument. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 67) The argument that a tariff has to be imposed in order to protect any industry just getting started until it gets large enough to be competitive internationally is the A) start-up industry argument. B) infant industry argument. C) baby industry argument. D) fledgling industry argument. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 68) The argument that trade in high-tech equipment can facilitate the implementation of advanced military technology in countries that may become strategic opponents later on is the A) national security argument. B) infant industry argument. C) protecting domestic jobs argument. D) environmental and safety argument. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

69) The argument that many critics of free trade have suggested that genetic engineering of plants and animals could lead to accidental production of new diseases is the A) national security argument. B) infant industry argument. C) protecting domestic jobs argument. D) environmental and safety argument. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 70) A problem with the infant industry argument is that A) it is too restrictive in targeting new industries to protect. B) it does not protect the most important new industries in a country. C) it is almost impossible to eliminate the tariff once the industry matures. D) it allows infant industries to mature so that tariffs can be eliminated. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 71) According to the infant-industry argument, protection should be withdrawn from an infant industry when the companies in the industry A) are listed on the domestic stock exchange. B) become profitable. C) double their sales revenues. D) reach a sufficient size to compete with foreign firms. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

72) Protection of a new industry until it becomes strong enough to compete is called A) the national defense argument. B) the government indirect tax argument. C) the leveling-the-playing-field argument. D) the infant-industry argument. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 73) The infant-industry argument is often criticized because A) it is difficult to determine which industry merits protection. B) it reduces government revenues in the short term. C) it reduces the employment rate. D) it reduces labor productivity in the short term. Answer: A Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 74) Protection of new products from global competition is known as A) the infant-industry argument. B) dumping. C) a quota. D) protection of domestic jobs. Answer: A Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

75) The selling of a good or service abroad at a price below what is charged in the home market or below the cost of production is referred to as A) recycling. B) a quota. C) dumping. D) a tariff. Answer: C Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 76) The selling of a good or service abroad at a price below production costs is A) marginal cost selling. B) price discrimination. C) price differentiation. D) dumping. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 77) If a good sells for $10 domestically and the same good sells for $7 abroad, then this firm is engaging in A) marginal cost selling. B) price discrimination. C) price differentiation. D) dumping. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

78) If it costs a firm $10 to produce a good and the same good sells for $7 abroad, then this firm is engaging in A) profit maximization. B) price discrimination. C) price differentiation. D) dumping. Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 79) In international trade the term "dumping" means A) price discrimination by domestic producers. B) selling goods in a foreign market for a price less than on the home market. C) selling goods in a home market for a price less than on the foreign market. D) selling goods on the black market to avoid paying taxes. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 80) Arguments in support of protectionism (and against free trade) include all of the following EXCEPT A) new and troubled industries need to be protected until they acquire sufficient strength to compete equally against their foreign counterparts. B) jobs at home should be protected from cheap foreign labor. C) protectionism increases total domestic consumption possibilities. D) national security interests require that nations retain the ability to produce vital materials at home and avoid dependence upon potential enemies. Answer: C Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

81) Which of the following is NOT an argument against free trade? A) infant-industry argument B) protecting domestic job argument C) countering foreign subsidies argument D) comparative advantage argument Answer: D Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 82) All of the following are arguments in favor of restricting trade EXCEPT A) comparative advantage. B) protecting domestic jobs. C) protecting emerging industries. D) dumping. Answer: A Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 83) When a good is put onto the global market at a price below the cost to produce it, this is known as A) the infant-industry argument. B) dumping. C) a quota. D) protection of domestic jobs. Answer: B Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 84) Why is it impossible to make everyone better off in the long run by imposing import restrictions? Answer: In the long run, any import restriction in one nation ultimately reduces its exports because foreign residents will be less able to purchase goods shipped from that nation. Fewer exports from that nation lead to a decline in employment in its export industry. Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 72 Copyright © 2021 Pearson Education, Inc.

85) "It is possible to restrict imports and still maintain a fixed level of exports." Do you agree or disagree? Why? Answer: Disagree. If people sell fewer imports to the United States they have less dollars with which to buy United States exports. Since imports ultimately are paid for by exports, a restriction on imports will reduce exports, at least in the long run. Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 86) Discuss the relationship between U.S. competitiveness relative to other countries and standards of living in the United States. Answer: There is very little relationship between U.S. competitiveness and the American standard of living. First, the United States is not in competition with other countries even though U.S. firms may compete with firms in other countries. Second, trade is mutually beneficial, so improvements in productivity in one country can make people better off in another country. The standard of living in the United States is a function of how well the U.S. economy functions within the country and not relative to other countries. Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 87) "The United States has fallen behind Japan and most of Europe in terms of competitiveness." Do you agree or disagree? Why? Answer: Disagree. According to the Institute for Management Development, the United States leads the industrial countries in international competitiveness. Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 88) Explain the infant industry argument. Answer: The infant industry argument is an argument for tariff protection for a domestic industry that is relatively new. If there are economies of scale or benefits from experience, the industry may not have a chance to develop and secure either experience or economies of scale if they face competition from established foreign firms. The argument is that after a period of time, the industry would be able to compete without tariff protection. Diff: 1 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 73 Copyright © 2021 Pearson Education, Inc.

89) What is the relationship between imports and unemployment? Answer: There is no causal link between imports and unemployment. In many cases unemployment falls when imports increase. Industries that have lost the most employment over the last forty years have been industries that were protected by tariffs and quotas. Protecting one industry usually means some export industry will see a decline. Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 90) What must a government know for the infant industry argument to be a valid reason for imposing tariffs? Answer: The government must be able to determine what industries will eventually be able to survive without protection, but cannot survive initially without protection. Hence, they would need to know a great deal about technology in the industry, input prices, world demand for the good, and many other things. Diff: 2 Topic: 31.2 Arguments against Free Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 31.3 Ways to Restrict Foreign Trade 1) Import restrictions due to the imposition of tariffs by the U.S. government A) will ultimately cause inefficient resource allocation in the United States. B) will lead to lower incomes in the economy of U.S. trade partners. C) will lead to a decline in the quantity of the product consumed in the United States. D) All of these are likely to occur. Answer: D Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

2) One way tariffs differ from quotas is that A) tariffs produce revenues for the importing country's government. B) quotas produce revenues for the exporting country's government. C) tariffs produce no revenues but set limits on the imported items. D) tariffs are applied only on raw materials. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 3) In general, who will benefit as the result of a tariff? I. Domestic producers II. Domestic consumers III. The domestic government A) I only B) II only C) both I and III D) both II and III E) I, II, and III are correct. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 4) Quotas and tariffs both serve the purpose of A) increasing foreign trade. B) restricting foreign trade. C) causing domestic producers to lose revenues. D) lowering prices on imported goods. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

5) A quota is A) a tariff imposed on goods that are dumped in the country. B) a law that prevents ecologically damaging goods from being imported into a country. C) a market-imposed balancing factor that keeps prices of imports and exports in equilibrium. D) a government-imposed restriction on the quantity of a specific good that can be imported. Answer: D Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 6) An import quota specifies A) the amount of funds that can be paid for any imported good. B) the amount of taxes that must be paid on any imported good. C) the maximum amount of an item that may be imported during a specified period. D) the minimum amount of an item that may be imported during a specified period. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 7) If a country voluntarily agrees to have its companies import more goods from another country, the country has A) a voluntary import expansion (VIE) agreement. B) a voluntary restraint agreement (VRA). C) a mandated tariff. D) a mandated agreement. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

8) Tariffs to limit imports to "protect U.S. jobs" will also A) stimulate exports. B) limit exports. C) decrease import prices. D) reduce domestic production of import-threatened products. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 9) The Uruguay round of GATT (1993) talks A) reduced trade barriers and tariffs. B) increased trade barriers and tariffs. C) lowered some trade barriers but increased tariffs. D) left tariffs and trade barriers unchanged. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 10) Since the 1930s, overall tariff rates in the United States have A) increased. B) decreased. C) remained unchanged. D) become very unstable, changing week to week. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

11) A tariff is A) a subsidy on domestically produced goods. B) the difference between the world market price and the domestic price when a group of firms in an industry collude successfully. C) a tax on imported goods. D) a government imposed restriction on the quantity of a specific good that can be imported into the country and sold. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 12) The General Agreement on Tariffs and Trade is an international agreement A) to establish the North American continent as a free trade area. B) to encourage peaceful settlements of trade disputes, but has no particular point of view about the desirability of higher or lower tariffs. C) to encourage world trade by lowering tariffs and other trade barriers. D) to make all tariffs illegal. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 13) If protective import-restricting tariffs are imposed by a country, in the majority of cases that nation's consumers end up A) paying a higher price for the good than they otherwise would. B) paying a lower price for the good than they otherwise would. C) consuming more of the good than they otherwise would. D) having a higher standard of living than they otherwise would. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

14) If protective import-restricting tariffs are imposed by a country, in the majority of cases that nation's producers end up A) receiving a higher price for the good than they otherwise would. B) receiving a lower price for the good than they otherwise would. C) producing less of the good than they otherwise would. D) receiving a lower profit for the domestic good than they otherwise would. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 15) If protective import-restricting quotas are imposed by a country, in the majority of cases that nation's consumers end up A) paying a lower price for the good than they otherwise would. B) consuming more of the good than they otherwise would. C) having more consumption choices than they otherwise would. D) consuming less of the good than they otherwise would. Answer: D Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 16) If protective import-restricting quotas are imposed by a country, all of the following groups benefit EXCEPT A) domestic producers in the affected industry. B) domestic consumers in the affected industry. C) employees of domestic producers in the affected industry. D) importers that are able to obtain the rights to sell imported items in the affected industry. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

17) If protective import-restricting tariffs are imposed by a country, in the majority of cases that nation's consumers end up A) paying a lower price and consuming more of the good than they otherwise would. B) paying a lower price and consuming less of the good than they otherwise would. C) paying a higher price and consuming less of the good than they otherwise would. D) paying a higher price and consuming more of the good than they otherwise would. Answer: C Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 18) A quota is A) a government-imposed restriction on the quantity of a specific good that can be imported into a country. B) a tariff imposed on goods that are dumped into the home country. C) a tariff imposed on goods that are subsidized by their domestic governments and exported to other countries. D) a tariff based on the value of the imported good. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 19) A government-imposed restriction on the quantity of a specific good that another country is allowed to sell in the U.S. is A) a regional trade bloc. B) an import quota. C) a voluntary import expansion. D) a voluntary restraint agreement. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

20) The maximum amount of a good that may be imported during a specified period of time is A) an infant industry agreement. B) an import quota. C) dumping. D) comparative advantage. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 21) The effect of an import quota is A) to shift the supply curve up by the amount of the quota. B) to lead to a decrease in demand. C) to make the supply curve vertical at the amount of the quota. D) to make the supply curve horizontal at the amount of the quota. Answer: C Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 22) The effect of a quota is to A) increase quantity supplied and lower price. B) increase quantity supplied and increase price. C) increase demand for the good and increase price. D) reduce quantity supplied and raise price. Answer: D Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

23) Voluntary restraint agreements are A) a type of tariff in which the tax is a fixed amount per unit of good imported. B) a type of tariff in which the tax is based on the value of the good. C) a type of quota that actually benefits the firms facing the restrictions. D) a type of quota agreed to "voluntarily" in order to prevent more severe protection of another type. Answer: D Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 24) An official agreement with another country to restrict the quantity of its exports to the U.S. is A) a regional trade bloc. B) the quota system. C) a voluntary import expansion. D) a voluntary restraint agreement. Answer: D Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 25) A voluntary import expansion involves a A) country agreeing to import more from another country. B) country agreeing to reduce its trade barriers. C) country agreeing to an import quota. D) firm agreeing to expand output. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

26) An official agreement with another country in which it agrees to import more from the United States is A) a regional trade bloc. B) the quota system. C) a voluntary import expansion. D) a voluntary restraint agreement. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 27) A tariff is A) a government-imposed restriction on the quantity of a specific good that can be imported into the country. B) a tax on imported goods. C) a subsidy on domestically produced goods. D) a voluntary agreement to restrict exports. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 28) The effects of a tariff are A) reduced quantity supplied overall, reduced quantity supplied by domestic producers, and a lower price. B) reduced quantity supplied overall, increased quantity supplied by domestic producers, and a higher price. C) reduced quantity supplied overall, decreased quantity supplied by domestic producers, and a lower price. D) identical to the effects of a quota, except that the price of the good is higher. Answer: B Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

29) A difference between a quota and a tariff is that A) a tariff generates a higher price than a quota does. B) a tariff generates a greater reduction in exports. C) a quota increases profits of domestic producers more than a tariff does. D) the government collects revenues from a tariff, which does not happen with a quota. Answer: D Diff: 3 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 30) A tariff placed on a foreign good will A) reduce the price of a competing domestic good. B) increase the price of a competing domestic good. C) increase the quantity sold of both the foreign and competing domestic good. D) reduce the quantity sold of both the foreign and competing domestic good. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

31) Refer to the above figures. A tariff is placed on a foreign good. Which figure represents the situation in the domestic market for the foreign good? A) Panel A B) Panel B C) Panel C D) Panel D Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 32) Refer to the above figures. A tariff is placed on a foreign good. Which figures represents the situation in the domestic market for a competing domestic good? A) Panel A B) Panel B C) Panel C D) Panel D Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

33) Refer to the above figures. A quota is placed on a foreign good. Which figure represents the situation in the domestic market for a competing domestic good? A) Panel A B) Panel B C) Panel C D) Panel D Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 34) The General Agreement on Tariffs and Trade is an international agreement A) that outlaws all tariffs but permits quotas. B) to encourage world trade by lowering tariffs and other trade barriers. C) to encourage world trade by lending resources to developing countries. D) between the United States and Japan that has never been ratified, resulting in several trade wars with Japan. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 35) An international agreement established in 1947 to further world trade by reducing barriers and tariffs is the A) World Trade Organization. B) European Union. C) General Agreement on Tariffs and Trade. D) North American Free Trade Agreement. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

36) The trend in current tariff laws is to A) raise tariffs on foreign goods. B) keep tariffs the same. C) lower tariffs on foreign goods. D) abolish tariffs all together. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 37) A tariff is a A) legal limit on sales of a foreign product in the domestic market. B) regulation of the quality of a foreign product sold in the domestic market. C) tax on sales of a foreign product in the domestic market. D) voluntary limit on sales of a foreign product in the domestic market. Answer: C Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 38) A legal limit on the amount of sugar imported into the United States is A) a tariff. B) a subsidy. C) a quota. D) a voluntary import restriction. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 39) A government-imposed restriction on the quantity of a good that can be imported is A) an embargo. B) a protective tariff. C) a quota. D) a health restriction. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 87 Copyright © 2021 Pearson Education, Inc.

40) An import quota will make the supply curve for the imported good A) perfectly inelastic. B) perfectly elastic. C) unitary elastic. D) negatively sloped. Answer: A Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 41) A legal restriction on the amount of a good that can be imported into a country is known as a A) voluntary restraint agreement. B) tariff. C) quota. D) Domestic Protection Restraint (DPR). Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 42) A government-imposed restriction on the quantity of a specific good that may be imported to and sold in the United States is called a A) tariff system. B) quota system. C) reverse-trade system. D) union trade system. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

43) A VRA is an example of A) a "voluntary" quota. B) a tariff. C) an illegal foreign good. D) an illegal foreign tariff. Answer: A Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 44) A tariff is a tax on A) all exported goods imposed by the WTO. B) imported goods. C) shipping containers. D) foreign exchange transactions. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 45) When a tariff is imposed, the supply curve for the imported good A) shifts downward and to the right. B) shifts upward and to the left. C) does not change. D) becomes perfectly inelastic. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 46) When a tariff is imposed, the demand curve for the domestic good A) shifts downward and to the right. B) shifts upward and to the left. C) shifts upward and to the right. D) shifts downward and to the left. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 89 Copyright © 2021 Pearson Education, Inc.

47) A tax placed on imports is known as A) voluntary restraint agreement. B) tariff. C) quota. D) infant industry. Answer: B Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 48) Trade restrictions tend to make domestic products A) cheaper because they do not have to compete with foreign goods. B) cheaper because they do have to compete with foreign goods. C) more expensive because they have to compete with foreign goods. D) more expensive because they do not have to compete with foreign goods. Answer: D Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 49) An agreement with another country in which it agrees to import more from the United States is called a A) voluntary restraint agreement (VRA). B) voluntary import expansion (VIE). C) very favorable treatment (VFT). D) vertical agreement on trade (VAT). Answer: B Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

50) The highest tariff rates of the twentieth century in the United States arose as a result of which law? A) the Robinson-Patman Act B) the Tariff of Abominations Act C) the Wheeler-Lea Act D) the Smoot-Hawley Act Answer: D Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 51) The law that created the high level of tariffs in United States in the 1930s is A) the GATT Act. B) the World Trade Act. C) the Smoot-Hawley Act. D) the Tariffs Agreement Act. Answer: C Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 52) In comparing tariffs and quotas, we know that A) neither raises revenues for the federal government. B) both raise revenues for the federal government. C) tariffs raise revenues for the federal government, while quotas do not. D) quotas raise revenues for the federal government, while tariffs do not. Answer: C Diff: 1 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

53) The two groups that benefit the most from quotas are A) the importers who have the right to import the restricted good and the domestic producers of the restricted good. B) the domestic consumers of the restricted good and the domestic producers of the restricted good. C) the domestic consumers of the restricted good and the foreign producers of the restricted good. D) the importers who have the right to import the restricted good and the domestic consumers of the restricted good. Answer: A Diff: 3 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 54) What is GATT and what happened to tariff rates as a result of GATT? Answer: GATT is the General Agreement on Tariffs and Trade. It is an international agreement established after World War II to encourage world trade by reducing barriers and tariffs. U.S. tariff rates have fallen from over 30 percent on average to around 5 percent, although this may overstate the reduction of trade barriers since voluntary export restraints have been used in recent years. Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 55) What are the effects of a tariff on a good? Answer: A tariff taxes the imports of a good, which tends to reduce the quantity of imports and raise price. Due to the higher price, the domestic quantity supplied of the good increases and the domestic quantity demanded decreases. The increase in quantity supplied will be less than the decrease in quantity supplied by imports because of the reduction in quantity demanded. Consumers are worse off while domestic suppliers of this good are better off. Diff: 2 Topic: 31.3 Ways to Restrict Foreign Trade Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

31.4 International Trade Organizations 1) The World Trade Organization is a successor organization to the A) United Nations. B) World Bank. C) International Court of Justice. D) GATT. Answer: D Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 2) According to the text, approximately how many countries are members of the WTO? A) 12 B) 131 C) 164 D) 302 Answer: C Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 3) Which of the following is NOT an example of a regional trade bloc? A) the North American Free Trade Agreement B) the European Union C) the Asian-Pacific Trade Agreement D) Mercosur Answer: C Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

4) The most important international trade organization is A) the World Bank. B) the World Trade Organization. C) the International Monetary Fund. D) the European Union. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 5) The North American Free Trade Agreement and the European Union are examples of A) defense treaties. B) regional trade blocs. C) labor agreements designed only for industrialized countries. D) agriculturally based economies. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 6) A significant advantage to being a member of a trade bloc is A) higher tariff collections from member countries. B) reduced or eliminated tariffs among member countries. C) reduced tariff rates only for the largest member countries. D) None of these; there is no economic advantage to a trade bloc. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

7) Which of the following is the situation in which a nation shifts its international trade from nations outside a regional trade bloc to nations within the bloc? A) trade diversion B) trade deflection C) trade retention D) protectionism Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 8) Which of the following is the situation in which firms outside a trade bloc shift the final assembling process of partially assembled products into a member nation of the bloc and then export the finished products to other nations within the bloc? A) trade diversion B) trade deflection C) trade retention D) rules of origin Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 9) Which of the following would increase the total amount of trade in the world? A) trade diversion B) trade deflection C) trade retention D) rules of origin Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

10) Trade diversion results in A) an increase in the total amount of trade in the world. B) a decrease in the total amount of trade in the world. C) no change in the total amount of trade in the world. D) either an increase or decrease in the amount of trade in the world, depending on where trade takes place. Answer: C Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 11) The net effect of regional trade agreements has been A) an increase in the total amount of trade in the world. B) a decrease in the total amount of trade in the world. C) no change in the total amount of trade in the world. D) either an increase or decrease in the amount of trade in the world, depending on where trade takes place. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 12) Which of the following are regulations that nations in regional trade blocs establish to delineate product categories eligible for trading preferences? A) trade quotas B) trade tariffs C) rules of law D) rules of origin Answer: D Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

13) The World Trade Organization A) was set up to increase tariffs among nations. B) was set up to negotiate exchange rates between countries. C) was set up to decrease tariffs among nations. D) handles trade disputes among its member nations. Answer: D Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 14) The successor organization to GATT that handles trade disputes among its member nations is the A) World Trade Organization. B) European Union. C) General Agreement on Tariffs and Trade. D) North American Free Trade Agreement. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 15) A group of nations that grants member special trade privileges is A) North American Free Trade Agreement. B) The World Bank. C) General Agreement on Tariffs and Trade. D) World Trade Organization. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

16) The European Union started out as a A) regional trade agreement. B) union of nations with identical currency. C) union of nations where the same language was spoken. D) union of nations with identical tariffs. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 17) Because of NAFTA, the U.S. shifts some of its imports from Japan to Mexico (a member of NAFTA). This is an example of A) trade deflection. B) trade diversion. C) protectionism. D) rules of origin. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 18) To avoid tariffs, a Chinese firm moves its final assembly line to Mexico and then ships the final products to Canada. This is an example of A) trade deflection. B) trade diversion. C) protectionism. D) rules of origin. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

19) To avoid trade restrictions, a U.S. firm moves its final production process to Ireland and then ships the final products to the United Kingdom. This is an example of A) trade deflection. B) trade diversion. C) protectionism. D) rules of origin. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 20) Some nations avoid the effects of trade deflection in a trade bloc by enforcing A) trade deflection. B) trade diversion. C) quotas. D) rules of origin. Answer: D Diff: 2 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 21) U.S. automakers have an interest to make it more difficult for European competitors to locate assembly plants in Canada or Mexico and thereby ship finished automobiles to the United States duty-free. This is an example of A) trade deflection. B) trade diversion. C) quotas. D) rules of origin. Answer: D Diff: 2 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

22) The international agreement signed in 1947 to promote world trade by reducing tariffs and other barriers to international trade was called A) GATT. B) NAFTA. C) WTO. D) Bretton-Woods agreement. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 23) The successor organization to GATT, created in 1995, is the A) WTO. B) EU. C) NAFTA. D) FDIC. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 24) The WTO replaced the GATT in A) 1900. B) 1945. C) 1960. D) 1995. Answer: D Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

25) An international agreement from 1947 designed to lower tariffs was A) the General Agreement on Tariffs and Trade. B) the World Trade Organization. C) the World Agreement on Tariffs and Trade. D) the Trade and Tariff Agreement. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 26) The successor to GATT in 1995 is A) the World Agreement on Tariff and Trade. B) the World Trade Organization. C) the World Trade Agreement. D) the World Trade and Tariff Organization. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 27) The organization that settles trade disputes between countries is the A) World Bank. B) World Trade Organization. C) International Monetary Fund. D) United Nations. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 28) The WTO A) is an affiliate of the World Bank. B) is an organization created to oversee NAFTA. C) was established to resolve trade disputes among member nations. D) provides low interest loans to member nations to help develop their export industries. Answer: C Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 101 Copyright © 2021 Pearson Education, Inc.

29) The World Trade Organization A) was established to settle trade disputes within the European Union. B) is another name for the IMF. C) was established to resolve disputes arising under world trade rules. D) increases world trade by providing interest rate subsidies to foreign borrowers who buy U.S. exports on credit. Answer: C Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 30) Groups of nations that grants members trade privileges are called A) local trade protectionists. B) trade settlements. C) regional trade blocs. D) allies. Answer: C Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 31) Mercosur is a trade agreement between nations A) in Southeast Asia. B) in South America. C) in South Africa. D) in Southern Europe. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

32) In 1990, there were 50 bilateral agreements and regional trade agreements between countries. Today there are A) more than 230 of these agreements. B) 30 of these agreements. C) more than 10,000 of these agreements. D) none of these agreements remaining. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 33) Suppose a new EU member begins substituting its imports from non-EU members to other EU members. This is an example of A) trade diversion. B) trade deflection. C) free trade. D) trade detection. Answer: A Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 34) Suppose a Chinese firm moves its final assembly line to France and then ships the final products to other members of the EU trading bloc. This is an example of A) trade diversion. B) trade deflection. C) trade restriction. D) trade detection. Answer: B Diff: 1 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

35) Trade deflection is an act that A) decreases the amount of international trade in the world. B) increases the amount of international trade in the world. C) has no impact on the amount of international trade in the world. D) is illegal among all countries in the world. Answer: B Diff: 2 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 36) Why do free trade proponents applaud successful trade deflection? A) It circumvents trade restrictions within regional trade blocs. B) It increases trade restrictions within regional trade blocs. C) It promotes more rules of origin laws. D) It decreases incentives for trade diversion. Answer: A Diff: 2 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking 37) Why do free trade proponents dislike rules of origin in trade agreements? A) It decreases the amount of international trade in the world. B) It increases the amount of international trade in the world. C) It decreases incentives for trade diversion. D) It increases incentives for trade deflection. Answer: A Diff: 2 Topic: 31.4 International Trade Organizations Learning Outcome: Micro-8: Describe how supply, demand, and other forces influence international trade AACSB: Analytical thinking

Economics Today, 20e (Miller) Chapter 32 Exchange Rates and the Balance of Payments 32.1 The Balance of Payments and International Financial Flows 1) The balance of payments is A) the value of goods and services bought and sold in the world market. B) a summary record of a country's economic transactions with foreign residents and governments. C) a summary record of a country's purchases and sales of goods and services in the world market. D) the value of merchandise goods bought and sold in the world market. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 2) A system of accounts that measures the transactions of goods, services, income, and financial assets between domestic households, businesses, and governments and residents of the rest of the world during a specific time period is the A) capital account. B) current account. C) balance of payments. D) balance of trade. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 3) Net unilateral transfers would appear in a nation's A) current account. B) capital account. C) official reserve transaction account. D) financial account. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

4) A country's balance of payments shows a A) detailed record of the import and export of services for the country. B) detailed record of the country's imports. C) summary record of international financial assistance received by the country. D) summary record of a country's economic transactions with foreign residents and governments over a year. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 5) The balance of trade is defined as A) the difference between the value of goods and services exported and the value of goods and services imported. B) the difference between the value of goods exported and the value of goods imported. C) the difference between the value of services exported and the value of services imported. D) none of these. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 6) Which of the following is NOT a deficit item on a country's balance of payments? A) gold sales to foreigners B) imports C) a personal gift to a foreign individual D) none of these Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

7) Which of the following is an example of a surplus item on the balance of payments? A) private gifts to foreign residents B) public gifts to foreign residents C) interest receipts from foreign residents D) purchases of gold from foreign residents Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 8) Which of the following is a deficit item on the balance of payments? A) exports of merchandise B) foreign tourist dollars spent domestically C) sales of gold to foreigners D) purchases of foreign assets Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 9) In the balance of payments, any transaction that leads to a receipt by a resident of a country is a A) minus item. B) debit item. C) surplus item. D) deficit item. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

10) An example of a transaction that will be a surplus item on the U.S. balance of payments is A) a U.S. resident purchasing Japanese rice wine. B) a German subsidiary's plant in Alabama purchasing parts from the main plant in Frankfurt. C) a gift of corn from the U.S. government to India. D) a tourist from France buying a ticket to fly from New York to Chicago on United Airlines. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 11) An example of a deficit item on the U.S. balance of payments is A) the sale of a spark plug made by a U.S. firm in Michigan to a Nissan plant in Tennessee. B) the purchase of Chinese yuan by a U.S. firm. C) a deposit in a bank in Chicago by the government of Saudi Arabia. D) the payment of a dividend by a Japanese firm to a U.S. family. Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 12) Which of the following is a deficit item on the U.S. balance of payments accounts? A) A U.S. firm sells a product to a Mexican firm. B) An Italian tourist in Miami purchases a beach ball. C) A Spaniard buys 100 shares of Alphabet stock. D) A U.S. resident buys a mobile device in China. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

13) In the balance of payments, which of the following is TRUE of the sum of the capital account balance, the current account balance, and the official reserve transactions account balance? A) This sum is either positive or negative, depending on whether the sum of all surplus and deficit items associated with cross-border transactions is positive or negative. B) This sum must always be zero, because the sum of all surplus and deficit items associated with cross-border transactions must equal zero. C) This sum is positive only if the U.S. government operates with a budget surplus. D) This sum is positive only if the U.S. government operates with a budget deficit. Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 14) Suppose a country has a current account surplus and that there is no intervention by finance ministries or central banks. This current account surplus indicates that the country has A) a deficit in its financial account. B) a surplus in its financial account. C) the official reserve transactions balance is positive. D) the official reserve transactions balance is negative. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 15) The largest portion of any nation's current account is typically A) imports and exports. B) gold sales. C) the sale of U.S. assets. D) foreign currency reserves. Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

Country A—2020 Transactions (billions of dollars)

16) In the above table, the merchandise trade balance for Country A is ________ billion dollars. A) +100 B) -150 C) +150 D) -100 Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 17) In the above table, the trade balance on goods and services for Country A is ________ billion dollars. A) +25 B) -100 C) +100 D) -25 Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 18) In the above table, the fact that there is a minus sign before the number for unilateral transfers means that A) Country A has significant inflation. B) Country A imported more goods than it exported. C) Country A received more in foreign aid than it gave in foreign aid. D) Country A gave more to foreign residents than foreign residents gave to Country A. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 6 Copyright © 2021 Pearson Education, Inc.

19) In the above table, the balance on the current account for Country A is ________ billion dollars. A) -35 B) -75 C) +75 D) -200 Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 20) In the above table, the balance on the financial account for Country A is ________ billion dollars. A) -80 B) +35 C) +80 D) -35 Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 21) All of the following would be considered a current account transaction EXCEPT the A) importing of services. B) exporting of goods. C) importing of capital. D) importing of goods. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

22) Which of the following would contribute to a positive trade balance for a country? A) having tourists visit the country B) importing textiles C) having foreign residents buy the government bonds of the country D) importing financial services Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 23) When there is a current account deficit, it is likely that A) exports exceed imports for the country. B) the country is an exporter of capital. C) the financial account has a surplus. D) the country has a budget surplus. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 24) Current account transactions are payments that are related to the purchase or sale of A) financial instruments only. B) both goods and services. C) goods only. D) services only. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

25) Unilateral transfers are A) transactions that take place within the geographic boundaries of a country. B) gifts from residents of one country to foreign residents. C) transactions that take place across geographic boundaries but in which both participants are citizens of the same country. D) government transactions that involve reserves. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 26) If the current account is in deficit, we know that A) the merchandise trade balance is also in deficit. B) the merchandise trade balance is in surplus. C) the financial account is in surplus. D) there is a statistical discrepancy in the surplus. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 27) When a Chinese company builds an auto plant in the United States, the immediate result of this Chinese investment in the United States is a ________ item in the U.S. ________ account. A) surplus; current B) surplus; financial C) deficit; current D) deficit; financial Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

28) Which of the following transactions leads to an inflow of funds on the U.S. financial account? A) A U.S. resident purchases a share of stock on the Hong Kong exchange. B) A U.S. resident sells wheat to an African nation. C) A resident of China purchases U.S. government bonds. D) A resident of Mexico visits the United States. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 29) The major factor affecting a nation's balance of payments is A) an increase in its rate of unemployment. B) its rate of inflation relative to the rate of inflation of its trading partners. C) a change in the productivity of its labor. D) its stock market movements. Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 30) An increase in a country's rate of inflation is apt to A) reduce its imports and improve its trade balance. B) lower its nominal rate of interest and encourage an inflow of capital. C) worsen its balance of trade and balance of payments. D) decrease demand for the country's currency. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

31) A reduction in a country's rate of inflation should A) increase its imports. B) increase its exports. C) lead to a negative trade balance. D) lead to an outflow of SDRs. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 32) The U.S. balance of payments status may improve when A) the inflation rate increases in the United States relative to other countries. B) political instability in other countries increases. C) the world demand for U.S. products falls. D) the American government increases its spending on foreign aid. Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 33) A nation's balance of payments can be affected by A) the country's inflation rate relative to other nations' inflation rates. B) the country's population increases relative to other nations' populations. C) per capita GDP relative to other nations' per capita GDP. D) none of these. Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 34) The balance of trade is A) the difference between exports and imports of goods and services. B) the difference between exports and imports of services. C) the summary record of a country's economic transactions with foreigners in a year. D) none of these. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 11 Copyright © 2021 Pearson Education, Inc.

35) When the balance of trade is in balance, we know with certainty that A) the value of all debit transactions equals the value of all credit transactions. B) the value of exports of goods equals the value of imports of goods. C) the value of capital exports equals the value of capital imports. D) the value of exports of goods and services equals the value of imports of goods and services. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 36) When the value of exports exceeds the value of imports then A) changes in productivity will occur. B) international trade is in balance. C) the country is running a trade deficit. D) the country is running a trade surplus. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 37) For the United States, suppose the value of exported goods is greater than the value of imported goods. This implies that A) the domestic currency will depreciate. B) the dollar price of foreign currency will increase. C) the country is running a deficit in its balance of trade. D) the country is running a surplus in its balance of trade. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

38) A summary of a country's economic transactions with foreign residents and governments is called the A) current account balance. B) financial account balance. C) balance of trade. D) balance of payments. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 39) The balance of payments is A) a summary record of the financial transactions of a country's government with foreign governments. B) a summary record of a country's imports and exports of goods with foreign residents and governments. C) a summary record of a country's economic transactions with foreign residents and governments. D) a summary record of a country's purchases and sales of goods and services in the world market. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 40) A record of all transactions between households, firms, and the government of one country and the rest of the world is the A) balance of trade. B) balance of payments. C) International Monetary Fund. D) government budget. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

41) A U.S. family flies from Boston to Shanghai on a China Airlines plane. This transaction is A) considered an export of service in the U.S balance of payment accounts. B) a deficit item in the balance of payment accounts of China. C) Both of these are correct. D) None of these. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 42) Which of the following is included in both the balance of trade and the balance of payments? A) exports B) earnings on domestic assets owned by foreign residents C) international capital movements D) earnings by domestic residents on assets located abroad Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 43) Any transaction that leads to a payment by a country's residents or government is a(n) A) debt. B) asset. C) deficit item. D) surplus item. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 44) In the balance of payments, a deficit item is any transaction A) that leads to a receipt by a resident of a country or its government. B) that leads to a payment by a resident of a country or its government. C) that is an export of a good or service. D) that makes residents of a country worse off. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 14 Copyright © 2021 Pearson Education, Inc.

45) In the balance of payments, any transaction that leads to a receipt by a resident of a country or its government is a(n) A) asset. B) minus item. C) deficit item. D) surplus item. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 46) Judy has just bought a car that is made in Germany. As far as the U.S. balance of payments is concerned this purchase is a(n) A) accounting identity. B) special draw. C) surplus item. D) deficit item. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 47) A citizen of Mexico who has lived in El Paso, New Mexico, during the past three years has just sent $100 to relatives in Mexico for Christmas. This transaction is A) counted in the U.S. balance of payments as a current account item. B) counted in the U.S. balance of payments as a surplus item. C) counted in the U.S. balance of payments as an export item. D) none of these. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

48) A surplus item is A) the import of goods or services that is not needed by residents of a country. B) the import or export of products that are by-products of the manufacturing of export goods. C) any transaction that leads to a receipt by a resident of a country or its government. D) any transaction that leads to a payment by a resident of a country or its government. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 49) Someone in Mexico has just ordered a U.S.-made automobile to be exported to Mexico. In the U.S. balance of payments, this purchase is a(n) A) accounting identity. B) special draw. C) surplus item. D) deficit item. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 50) In the balance of payments, all of the following are deficit items EXCEPT A) imports of merchandise. B) funds placed in foreign depository institutions. C) sales of dollars to foreigners. D) tourism expenditures abroad. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

51) An example of a transaction that will be a surplus item on the U.S. balance of payments is A) the purchase of Alphabet stock by a German resident. B) the purchase of a BMW by an American. C) a Nissan plant in Tennessee buying parts from the main plant in Japan. D) a gift of cotton from the United States government to Egypt. Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 52) An example of a deficit item on the U.S. balance of payments is A) the sale of a carburetor made in Michigan to a Honda plant in Ohio. B) a deposit in a bank in New York by a British firm. C) a U.S. resident flies from New York to Rome on British Airways. D) the payment of a dividend from a Canadian firm to an American living in Maine. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 53) An accounting identity A) ensures that all balances will be in equilibrium. B) is useless in analyzing balance of payments since one cannot tell from the identity whether an equilibrium exists or not. C) ensures a balance but does not ensure an equilibrium. D) applies only to plans of economic agents and not to their actual actions. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

54) An accounting identity is A) when the balance of payments is running a surplus or deficits. B) when the balance of trade is in surplus or deficit. C) an expression of values that are equivalent by definition. D) special drawing rights. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 55) Ahmed is working and is spending more than he is earning by using his savings to make up the difference. Which of the following statements is TRUE? A) Ahmed is in equilibrium since he pays all of his bills. B) Ahmed is in disequilibrium. C) By using savings, Ahmed is using special drawing rights. D) By using savings, Ahmed has caused the balance of payments to go into a deficit situation. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 56) To know whether a particular situation for a family, business, or government involves an equilibrium or not, one must A) understand the circumstances fully. B) determine whether the accounts are in balance. C) determine whether the credits equal the debits. D) determine whether a particular portion of the accounts are in balance or not. Answer: A Diff: 3 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

57) Which of the following is NOT a category in the U.S. balance of payments account? A) current account B) past-due account C) financial account D) official reserve transactions account Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 58) In international trade, all payments and gifts that are related to the purchase or sale of both goods and services are referred to as the A) current account. B) financial account. C) labor account. D) official reserve transactions account. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 59) The current account is A) the reserve assets created by the International Monetary Fund for countries to use in settling international payment obligations. B) the price of one nation's currency in term of the currency of another country. C) a category of the balance of payments transactions that measures flows of real and financial assets. D) a category of the balance of payments transactions that measures the exchange of merchandise, the exchange of services, and unilateral transfers. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

60) Current account transactions are all payments that are related to the purchase or sale of A) goods only. B) services only. C) goods and services only. D) goods and services excluding government purchases. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 61) The largest portion of any nation's balance of payments current account is the A) importing and exporting of merchandise goods. B) importing and exporting of services. C) importing and exporting of gold. D) importing and exporting of capital goods. Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 62) An example of an import of a service in the U.S. balance of payments would be when A) a U.S. resident purchases a Japanese stereo. B) a Norwegian traveling in the United States rides a trolley car in San Francisco. C) a U.S. resident buying insurance from a firm in Toronto. D) a U.S. firm purchases 100 shares of a Dutch firm. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

63) Which of the following statements is TRUE about the role that service exports and imports have in the balance of payments? A) Service exports and imports are not included in the balance of payments because it is impossible to transport a service to another country. B) Service exports and imports are included in the balance of payments in the labor account. C) Service exports and imports are included in the balance of payments in the official reserve transactions account. D) Service exports and imports are included in the balance of payments in the current account. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 64) Unilateral transfers are A) transactions that take place across national boundaries but in which both transactions are citizens of the same country. B) government transactions that use gold and other official reserves. C) gifts from a resident of one country to a resident in a foreign country. D) the payments of interest to residents of another country. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 65) Jane has just sent a gift that was made in the U.S. to her relatives in Italy. As far as the balance of payments is concerned this gift will A) have no influence on the balance of payments since it was made in the U.S. B) be part of the capital account since the gift is a physical item. C) be considered an export since it has left the U.S. D) be part of the current account as a unilateral transfer. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

66) When there is a negative entry for unilateral transfers in the balance of payments, it means that A) there must be an offsetting positive sign in the financial account. B) U.S. residents gave more to foreign residents than foreign residents gave to U.S. residents. C) U.S. residents purchased less services from foreign countries than foreign countries purchased from U.S. residents. D) U.S. residents purchased more services from foreign countries than foreign countries purchased from U.S. residents. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 67) Which of the following statements is TRUE about the role of gifts given to U.S. citizens from foreign residents? A) Gifts are not included in the balance of payments because of the nature of the gift. B) Gifts are only included in the balance of payments if the gift is given to a government official. C) Gifts are included in the balance of payments. D) Gifts given to U.S. citizens are not included in the balance of payments but gifts given to foreigners are included. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 68) The effect that a gift given to a U.S. citizen from a foreign resident will have on the balance of payments is to A) increase the current account balance. B) have no effect on the balance of payments if the gift was made in the U.S. C) have no effect on the balance of payments if the gift was made by a foreign country. D) decrease the balance of payments. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

69) In the balance of payments, the buying and selling of real and financial assets is represented in A) current account. B) financial account. C) labor account. D) official reserve transactions account. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 70) The financial account is A) the reserve assets created by the International Monetary Fund for countries to use in settling international payment obligations. B) the price of one nation's currency in term of the currency of another country. C) a category of the balance of payments transactions that measures flows of real and financial assets. D) a category of the balance of payments transactions that measures the exchange of merchandise, the exchange of services, and unilateral transfers. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 71) Financial account transactions occur A) when an U.S. company purchases goods from a foreign company. B) because of cross-border flows of financial assets. C) when you move money from one U.S. bank to another U.S. bank. D) when an U.S. citizen purchases stock in an U.S. corporation. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

72) A resident of the U.S. just purchased a share of stock on the London stock market. As far as the U.S. balance of payments this purchase will A) have no influence on the balance of payments since stock is not a good or service. B) be entered as a unilateral transfer in the current account. C) be entered in the financial account. D) require special drawing rights. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

73) Refer to the above table. The balance of trade is A) $1000. B) -$665. C) +$335. D) -$155. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 74) Refer to the above table. The current account balance is A) $140. B) $155. C) $170. D) -$45. Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 24 Copyright © 2021 Pearson Education, Inc.

75) Refer to the above table. The financial account balance is A) 0. B) -$260. C) -$200. D) -$155. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge

76) Based on the transactions in the above table, what is the change in the U.S. balance of merchandise trade? A) $11,000 B) $29,700 C) -$30,000 D) -$31,000 Answer: B Diff: 3 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 77) Based on the transactions in the above table, what is the change in the U.S. financial account? A) $9,800 B) $10,000 C) -$20,000 D) -$20,200 Answer: C Diff: 3 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge

78) Based on the transactions in the above table, what is the change in the U.S. current account balance? A) $30,000 B) $31,000 C) -$32,500 D) -$32,700 Answer: A Diff: 3 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 79) Suppose the current account of a country is initially in balance. A new transaction occurs so that the current account is now in surplus. Official reserve balance is maintained before and after the transaction occurs. From this, we know that A) the balance of trade is now in surplus. B) the balance of goods and services is now in surplus. C) the financial account is now in deficit. D) the government must make official reserve transactions. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 80) If there are no interventions by finance ministers or control banks in the international market, then A) the current account and the capital account must sum to zero. B) the current account will be greater than the financial market. C) the capital market will be greater than the current account. D) the capital market will equal the current account. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

81) An increase in the inflation rate of one country relative to another country will probably cause A) an increase in exports for the inflating country. B) a balance of trade deficit for the inflating country. C) a current account surplus for the inflating country. D) an increase in the amount of official reserves held by the inflating country's central bank. Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 82) The United States' balance of payments is likely to improve when A) there is an increase in political instability in other countries. B) the inflation rate in the United States rises relative to other countries. C) the American government increases its spending on foreign aid. D) American people want to invest more in foreign countries. Answer: A Diff: 3 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 83) When there is political instability in another country, the United States can expect A) an increase in the financial account balance due to an increase in the current account. B) an increase in the financial account balance due to the movement of assets to the U.S. C) a decrease in the balance of payments due to a decrease in official reserve transactions. D) a decrease in the balance of payments due to a decrease in the demand for goods and services. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

84) The difference between the exports and imports of goods in a country is referred to as the A) balance of payments. B) balance of trade. C) balance of power. D) exchange rate. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 85) The difference between exports and imports of goods is the A) balance of trade. B) balance of payments. C) balance of accounts. D) balance of paying. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 86) If the United States exports $250 billion worth of goods and imports $420 billion worth of goods A) the balance of payments will be -$170 billion. B) the balance of trade will be -$170 billion. C) the balance of trade will be $670 billion. D) the official reserve transaction will be $170 billion. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

87) The total of all economic transactions between a nation and the rest of the world is referred to as the A) balance of payments. B) balance of trade. C) balance of power. D) exchange rate. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 88) Which of the following items is NOT a deficit item in the balance of payments? A) imports of merchandise B) sales of domestic assets to foreigners C) purchases of gold from foreigners D) military spending abroad Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 89) The balance of payments consists of the A) current account, capital account, and gold flows. B) current account, official reserve transactions account, and monetary account. C) current account, capital account, and official reserve transactions account. D) capital account, official reserve transactions account, and recent account. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

90) If the inflation rate in China is higher than the inflation rate in the United States A) there will be an increase in U.S. imports from China. B) there will be an increase in Japanese exports to the United States. C) there will be no change is U.S. imports from China. D) there will be a decrease in U.S. imports from China. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 91) Which of the following is NOT a deficit item on the international accounts balance sheet for a country? A) imports of merchandise B) military spending abroad C) purchases of foreign currency D) exports of merchandise Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 92) If residents of the United States give more gifts to relatives abroad than they receive, unilateral transfers will be A) positive. B) unaffected. C) negative. D) zeroed out. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

93) All of the following are surplus items in the balance of payments EXCEPT A) purchases of foreign assets. B) exports of merchandise. C) foreign tourist expenditures. D) funds deposited in this country by foreign residents. Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 94) All of the following are deficit items in the balance of payments EXCEPT A) purchases of foreign assets. B) imports of merchandise. C) foreign tourist expenditures. D) purchases of foreign currency. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 95) The sum of the current account, the capital account, and the official reserve transaction account is A) always positive. B) always negative. C) positive when exports are greater than imports. D) zero. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

96) If you go to Europe to work and send funds home to your family living in the United States, this is known as a A) service import. B) merchandise import. C) service export. D) unilateral transfer. Answer: D Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 97) The financing of U.S. export transactions, ceteris paribus A) reduces U.S. interest rates. B) reduces the amount of foreign currency held by the Fed. C) reduces U.S. GDP. D) increases the amount of foreign currency held by U.S. banks. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 98) The financing of U.S. import transactions, ceteris paribus A) reduces U.S. interest rates. B) increases the amount of foreign currency held by the Fed. C) increases U.S. GDP. D) decreases the amount of foreign currency held by U.S. banks. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

99) In a nation's balance of payments, the current account includes A) the changes in the official reserve transaction account. B) the purchases of foreign assets. C) the balance of the trade account, the balance of the services account, and net unilateral transfers. D) all of these. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 100) A nation's balance in balance of payments account A) is always a positive number. B) is always a negative number. C) is always equal to zero. D) is the sum of the absolute numbers of the current account balance and financial account balance. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 101) Which of the following combinations is plausible for a nation's balance of payments? (All numbers in billions.) A) current account = 10, financial account = 0 B) current account = -40, financial account = -40 C) current account = -50, financial account = -50 D) current account = 50, financial account = -50 Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

102) Which of the following is a surplus item in the U.S. current account? A) The U.S. government reduces the tariff rates on some imported goods. B) IBM pays dividends to British shareholders. C) Finn vodka becomes more popular in the United States. D) U.S. firms export more farm products to China. Answer: D Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 103) Which of the following is a deficit item in the U.S. current account? A) Toyota builds a new plant in California. B) Many U.S. residents who previously had not traveled abroad decide to make Mexico a tourist destination. C) A Saudi Arabian prince builds six new homes in California. D) Sony buys a new film studio in Florida. Answer: B Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking Hypothetical Data for Nation X in Billions of Local Currency

104) Refer to the above table. Nation X has a balance of trade A) deficit of 50 billions. B) surplus of 50 billions. C) deficit of 10 billions. D) surplus of 10 billions. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

105) Refer to the above table. Nation X has a current account A) deficit of 15 billions. B) surplus of 15 billions. C) deficit of 60 billions. D) surplus of 60 billions. Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 106) Refer to the above table. The overall balance of payments of Nation X is A) +15 billions. B) -15 billions. C) 0. D) +30 billions. Answer: C Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 107) Suppose that there is a current account deficit of $250 billion and a financial account surplus of $250 billion. It can be concluded that the A) overall balance of payments is not balanced. B) overall balance of payments is balanced. C) overall balance of payments equals $500. D) overall balance of payments is more than $250. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge

108) If the United States has a trade deficit with China, then China must have A) a trade surplus with countries other than the United States. B) a trade surplus with the United States. C) a trade deficit with countries other than the United States. D) a trade deficit with the United States. Answer: B Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 109) All of the following are surplus items on the balance of payments accounts EXCEPT A) U.S. residents purchases of gold from foreign residents. B) foreign tourists spending funds in the United States. C) exports of merchandise. D) sales of U.S. dollars to foreign residents. Answer: A Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 110) All of the following are deficit items in the balance of payments accounts EXCEPT A) U.S. residents purchases of gold from foreign residents. B) U.S. tourists spending funds in Europe. C) exports of merchandise. D) U.S. purchases of foreign companies' stocks and bonds. Answer: C Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

111) Suppose U.S. interest rates fall. This reduction in U.S. interest rates will cause which of the following to occur? A) an outflow of capital from the United States B) no change in foreign investment in the United States C) an increase in the value (appreciation) of the U.S. dollar D) an inflow of capital to the United States Answer: A Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 112) How are deficit and surplus items determined in the balance of payments? Answer: Any transaction that leads to a payment by a country's residents or government is a deficit item and any transaction that leads to a receipt by a country's residents or government is a surplus item. Diff: 1 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 113) Distinguish between the balance of payments and the balance of trade. Answer: The balance of payments is a summary record of a country's economic transactions with foreign residents and governments over a year. As such, it takes into consideration all types of transactions. The balance of trade refers only to the value of goods and services bought and sold in the world market. The balance of trade makes up a portion of the balance of payments. Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 114) "When the balance of payments sums to zero is the only situation in which there is an equilibrium." Do you agree or disagree? Why? Answer: Disagree. The balance of payments are always in balance because of double-entry bookkeeping. The methods used to pay for imports may or may not be an equilibrium. Some ways of financing international transactions can persist indefinitely while others cannot. Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

115) Suppose there was a substantial increase in political instability in the rest of the world. What would be the effects on the U.S. current account? Explain. Answer: Increased instability in the rest of the world would lead to capital flight out of the unstable areas. This will mean the capital account balance will be more in surplus and the current account balance more in deficit. Diff: 3 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 116) Explain the two categories of balance of payments transactions. Answer: Current account transactions relate to sales and purchases of goods and services. These include goods, services, and unilateral transfers. The financial account consists of transactions involving financial assets. The sum of the current account and the financial account is zero. Diff: 3 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 117) Suppose the U.S. inflation rate falls while the inflation rate among the members of the European Monetary Union (EMU) holds constant. Other things equal, what will happen in the balance of payments accounts? Answer: The lower inflation rate in the U.S. relative to the EMU makes U.S. goods and services a little cheaper, increasing exports and decreasing imports. The current account balance will improve. Diff: 2 Topic: 32.1 The Balance of Payments and International Financial Flows Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 32.2 Deriving the Demand for and Supply of Foreign Exchange 1) Exchanging dollars for euros to pay a computer manufacturer in Belgium would occur A) in the foreign exchange market. B) at the Federal Reserve. C) at the European Central Bank. D) in the letter of credit market. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 38 Copyright © 2021 Pearson Education, Inc.

2) The foreign exchange rate describes the A) balance of trade. B) balance of payments. C) law of comparative advantage. D) price of foreign currency in terms of domestic currency. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 3) Changes in which of the following will cause a change in exchange rates? A) real interest rates B) consumer preferences C) perceptions of economic and political stability D) all of these Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 4) If the exchange rate is such that $1 equals 20 Mexican pesos, then the price of a peso is A) $2. B) $1. C) $0.20. D) $0.05. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge

5) Suppose that the current exchange rate between the dollar and peso is $1 equals 10 pesos. If a firm in Mexico wanted to purchase $100,000 worth of U.S. televisions, how many pesos must they exchange? A) 10,000 pesos B) 100,000 pesos C) 1,000,000 pesos D) 11,000,000 pesos Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 6) Suppose that the current exchange rate between the dollar and peso is $1 equals 11 pesos. If the exchange rate changes to $1 equals 9 pesos, which of the following is TRUE? A) The dollar appreciates but the peso values of U.S. exports stay the same. B) The dollar appreciates and U.S. exports become cheaper. C) The peso appreciates and U.S. imports from Mexico become cheaper. D) The peso depreciates and U.S. imports from Mexico become cheaper. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 7) Assume that $1 equals 100 yen (¥). A Japanese visitor to the United States wants to pay her $100 hotel bill. How many yen should she exchange in order to have enough dollars to pay the bill? A) ¥0.01 B) ¥10 C) ¥1,000 D) ¥10,000 Answer: D Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge

8) Checking exchange rates, you find $1 equals 0.75 euros. Then the price of 1 euro is A) $0.80. B) $0.75. C) $1.33. D) $7.5. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 9) Every transaction concerning the exportation of U.S. goods constitutes a A) demand for dollars, with no effect on markets for foreign currencies. B) supply of foreign currency, with no effect on the market for dollars. C) supply of foreign currency and demand for dollars. D) demand for foreign currency and a supply of dollars. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 10) Flexible exchange rates exist when A) no one knows what the true value of a currency is. B) governments and central banks spend foreign reserves to prop up an exchange rate at a certain level. C) exchange rates are determined by forces of supply and demand. D) speculators bet that a currency will soon be depreciated. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

11) Exchange rates that are allowed to fluctuate in the open market in response to changes in supply and demand are known as A) fixed exchange rates. B) gold exchange rates. C) flexible exchange rates. D) IMF exchange rates. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 12) Assume there is an increased demand in the United States for Australian wines. If all other factors are held constant, this will result in A) an increase in the U.S. dollar exchange rate for Australian dollars. B) an appreciation of the U.S. dollar. C) a movement along the demand curve for Australian wine. D) a decrease in the par value of the Australian dollar. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 13) One source of the supply of dollars in the foreign exchange market is A) U.S. companies importing foreign goods. B) foreign citizens buying U.S. goods. C) SDRs being converted into dollars. D) the U.S. Mint buying dollars from the Bank of England. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

14) Flexible exchange rates are determined by A) the government of the exporting country. B) the government of the importing country. C) the forces of supply and demand. D) the IMF. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 15) Under a flexible exchange rate system, a decrease in the value of a domestic currency in terms of foreign currencies is referred to as A) an appreciation. B) a depreciation. C) a devaluation. D) a revaluation. Answer: B Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 16) The demand for foreign currency in the United States is a A) direct demand. B) derived demand based on the demand for U.S. products. C) derived demand based on the demand for foreign products. D) direct demand based on the demand for U.S. dollars. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

17) Suppose the exchange rate was $0.50 for one British pound. If the exchange rate falls to $0.20 for one pound, we would expect to see A) more exports to the U.K. since the price of the pound has risen. B) fewer exports to the U.K. since the price of the pound has risen. C) more U.S. imports from the U.K. since the price of the pound has fallen. D) more U.S. exports since the price of the dollar has fallen. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 18) In a flexible exchange rate system, which of the following would NOT cause the U.S. dollar to depreciate relative to the British pound? A) a decrease in demand for British goods in the United States B) an increase in demand for British goods in the United States C) a decrease in British demand for U.S. exports D) a shift to the left in the supply of British goods to the United States Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 19) An increase in the value of a domestic currency in terms of other currencies is known as A) an appreciation. B) a depreciation. C) a flexible exchange rate. D) a discount rate. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

20) The supply of U.S. dollars on foreign exchange markets is A) determined directly by open market operations at the Federal Reserve Bank. B) derived from the demand for U.S. products by foreigners. C) derived from the supply of U.S. goods. D) derived from the demand by United States for imported goods and services. Answer: D Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 21) What happens if the Brazilian real appreciates relative to the U.S. dollar? A) Brazilians will buy fewer U.S. goods, which generates an increase in the quantity supplied of dollars. B) The quantity demanded of reals increases as U.S. residents want to buy more Brazilian products. C) The quantity of reals supplied increases because the lower price (in reals) for U.S. goods induces Brazilians to buy more U.S. products. D) The U.S. Federal Reserve Bank increases the supply of dollars to the world economy. Answer: C Diff: 3 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 22) Under a flexible exchange rate system, an increase in the value of the U.S. dollar in terms of other currencies is referred to as A) a depreciation of the U.S. dollar. B) an appreciation of the U.S. dollar. C) a monetizing of the U.S. dollar. D) a devaluation of the U.S. dollar. Answer: B Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

23) Which of the following would NOT increase British exports to the United States? A) an appreciation of the U.S. dollar B) a depreciation of the British pound C) an appreciation of the British pound D) an increase in British demand for U.S. exports Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

24) In the above figure, the equilibrium exchange rate between U.S. dollars and British pounds is A) A. B) B. C) C. D) W. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

25) A depreciation of the U.S. dollar relative to the euro would tend to A) increase U.S. imports from Germany. B) increase U.S. exports to Germany. C) decrease U.S. exports to Germany. D) increase both U.S. imports from Germany and U.S. exports to Germany. Answer: B Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 26) As the dollar price of a euro falls, A) U.S. residents will purchase fewer French imports. B) the quantity of euros supplied will increase. C) French goods will be less expensive to U.S. residents. D) French residents will increase their purchases of U.S. assets. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 27) As the dollar price of the euro increases, A) the demand for euros will increase. B) the price of French goods will fall for U.S. residents. C) French residents will purchase more U.S. goods. D) U. S. residents will increase their travel to France. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

28) When the dollar price of a British pound is $0.75, it is correct to state that an American traveling in England will receive ________ pounds per dollar. A) 1.33 B) 0.75 C) 75 D) 1.25 Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 29) When a dinner in Bulgaria costs 120 Bulgarian levas, it will cost a U.S. resident ________ dollars, if the exchange rate is 1.2 Bulgarian levas to the dollar. A) $10 B) $100 C) $120 D) $150 Answer: B Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 30) Under a flexible exchange rate system, an increase in the value of a domestic currency in terms of other currencies is referred to as A) an appreciation. B) a depreciation. C) a devaluation. D) a revaluation. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge

31) If the foreign exchange rate for 1 Hungarian forint is 0.5 cent, then A) a dinner priced at 400 forints will cost $20. B) a wine that sells for 600 forints will cost $3,000. C) a Big Mac hamburger priced at 50 forints will cost $1. D) a hotel room renting for 40,000 forints will cost $200. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 32) Demand for the Brazilian real is A) determined by how well the real maintains its value. B) a function of the Brazilian banking system. C) derived from the supply of U.S. dollars. D) derived from the demand for Brazilian goods. Answer: D Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 33) An increase in the U.S. interest rate will most likely A) reduce the attractiveness of investment in the United States. B) lead to a decrease in the value of the U.S. dollar. C) lead to an inflow of funds to the United States and an appreciation of the dollar. D) provide a stimulus to U.S. export industries. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

34) The market in which households, firms and governments buy and sell national currencies is known as A) the foreign exchange market. B) standard drawing rights. C) the exchange rate. D) flexible exchange rates. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 35) The foreign exchange market is A) a market in which exchange rates are allowed to fluctuate in the open market in response to changes in supply and demand. B) the increase in the exchange value of one nation's currency in terms of an other nation. C) a market in which households, firms, and governments buy and sell national currencies. D) the decrease in the exchange value of one nation's currency in terms of another nation. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 36) Kate has just decided to order a laptop computer that is made in China. She needs to convert U.S. dollars for Chinese yuan. This conversion takes place in the A) International Monetary Fund. B) target zone. C) foreign exchange markets. D) SDRs. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

37) Exchange rates that are allowed to fluctuate in response to changes in supply and demand is known as A) the foreign exchange markets. B) standard drawing rights. C) fixed exchange rates. D) flexible exchange rates. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 38) The price of one currency in terms of another currency is called A) foreign reserves. B) the foreign exchange rate. C) the foreign trade deficit. D) the balance of payments. Answer: B Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 39) The price of one currency in terms of another is the A) price of gold. B) price of a SDR. C) foreign exchange rate. D) price of foreign stock. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

40) If the foreign exchange rate is 70 cents for one Swiss franc, then A) a car that costs 40,000 francs will cost $7,143.00. B) a wine that costs 200 francs will cost $14.00. C) a clock that costs 500 francs will cost $350.00. D) a house that costs 100,000 francs will cost $700,000.00. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 41) If the foreign exchange rate is one dollar for 10 South African rand, then how many dollars are needed to purchase an item that costs 100 rand? A) 0.01 B) 10 C) 100 D) 1,000 Answer: B Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Application of knowledge 42) The demand for Canadian maple syrup by a U.S. store is also a A) demand for Canadian dollars. B) demand for SDRs. C) supply of U.S. dollars. D) supply of Canadian dollars. Answer: A Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

43) Every transaction concerning the importation of goods into the United States constitutes a A) supply of foreign currency with no effect on the market for the dollar. B) demand for dollars with no effect on markets for foreign currencies. C) supply of foreign currencies and a demand for dollars. D) demand for foreign currencies and a supply of dollars. Answer: D Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 44) Every transaction concerning the exportation of goods from the United States constitutes a A) supply of foreign currency with no effect on the market for the dollar. B) demand for dollars with no effect on markets for foreign currencies. C) supply of foreign currencies and a demand for dollars. D) demand for foreign currencies and a supply of dollars. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 45) If the price of the Brazilian real is $0.1 and a U.S. resident purchases a Brazilianmanufactured item for 10,000 real, there will be A) a quantity demanded of 10,000 real and a quantity supplied of $10,000. B) a quantity demanded of 10,000 real and a quantity supplied of $1,000. C) a quantity demanded of 10,000 real, but we cannot determine the effect in the market for dollars. D) a quantity supplied of 10,000 real as well as a quantity demanded of 10,000 real. Answer: B Diff: 3 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

46) The term "flexible exchange rates" refers to A) a situation in which exchange rates are allowed to fluctuate in the open market in response to changes in supply and demand. B) the increase in the exchange value of one nation's currency in terms of an other nation. C) a nation in which households, firms, and governments buy and sell national currencies. D) the decrease in the exchange value of one nation's currency in terms of another nation. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 47) Under flexible exchange rates, the exchange rate is set by A) the International Monetary Fund. B) the U.S. Federal Reserve's Board of Governors. C) the intersection of demand and supply curves in the currency markets. D) negotiations among central banks of the major industrial powers. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 48) Flexible exchange rates occur when A) speculators bet that a currency will soon depreciate. B) governments and central banks spend foreign exchange to prop an exchange rate at a certain level. C) no one knows the true value of a currency. D) exchange rates are determined by forces of supply and demand. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

49) Suppose the U.S. dollar price of the Japanese yen decreases. Given this information, which of the following is correct? A) The dollar has appreciated. B) The dollar has depreciated. C) The yen has appreciated. D) The yen price of the dollar decreased. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 50) An appreciation of a nation's currency is A) a situation in which exchange rates are allowed to fluctuate in the open market in response to changes in supply and demand. B) the increase in the exchange value of one nation's currency in terms of an other nation. C) a nation in which households, firms, and governments buy and sell national currencies. D) the decrease in the exchange value of one nation's currency in terms of another nation. Answer: B Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 51) A depreciation of a nation's currency is A) a situation in which exchange rates are allowed to fluctuate in the open market in response to changes in supply and demand. B) the increase in the exchange value of one nation's currency in terms of an other nation. C) a nation in which households, firms, and governments buy and sell national currencies. D) the decrease in the exchange value of one nation's currency in terms of another nation. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

52) A U.S. automobile dealer has ordered a fleet of Japanese cars worth 10 million yen. The terms of payment is C.O.D. (cash on delivery). At the time the order was placed, the exchange rate was 100 yen per U.S. dollar. When the fleet arrived the exchange rate had become 200 yen per U.S. dollar. A) This change in the foreign exchange rate will hurt the U.S. importer. B) This change in the foreign exchange rate will hurt the Japanese exporter. C) This change in the foreign exchange rate will benefit the U.S. importer. D) This change in the foreign exchange rate will benefit the Japanese exporter. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 53) The supply of dollars in foreign exchange markets is A) determined by the Federal Reserve System. B) determined by the U.S. Comptroller of the Currency. C) determined by the U.S. demand for foreign goods. D) a function of the international banking system. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 54) If the dollar used to buy 120 yen and now buys 100 yen, there has been A) a decrease in the demand for yen. B) depreciation of the yen. C) depreciation of the dollar. D) appreciation of the dollar. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

55) If the dollar used to buy 100 yen and now buys 360 yen, there has been A) appreciation of the dollar. B) depreciation of the dollar. C) appreciation of the yen. D) an increase in special drawing rights. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 56) If people in the United States buy more of a foreign good when its price falls, then A) the demand curve for U.S. dollars will slope up. B) the supply curve for U.S. dollars will slope up. C) the exchange rate will increase when there is inflation. D) fixed exchange rates will make foreign exchange markets more efficient. Answer: B Diff: 3 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 57) An appreciation of the U.S. dollar relative to the Japanese yen causes A) a lower dollar-price of Japanese goods which induces the U.S. to increase their purchasing of Japanese goods. B) the quantity demanded of U.S. dollars to increase because the Japanese want to buy more U.S. goods. C) the Japanese to buy more U.S. goods, causing the dollars to appreciate further. D) the U.S. to buy less Japanese goods, causing the U.S. to depreciate. Answer: A Diff: 3 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

58) An increase in the U.S. demand for Japanese yen causes A) an increase in the dollar price of a yen. B) an increase in the yen price of a dollar. C) an increase in the demand for U.S. goods. D) a decrease in the supply of yen. Answer: A Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

59) Refer to the above figure. Suppose E is the original equilibrium. A decrease in the U.S. demand for Japanese-made goods will lead to A) a depreciation of the yen and a decrease in the quantity of yen sold per week. B) a depreciation of the yen and an increase in the quantity of yen sold per week. C) an appreciation of the yen and an increase in the quantity of yen sold per week. D) an appreciation of the yen and a decrease in the quantity of yen sold per week. Answer: A Diff: 3 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

60) Refer to the above figure. Suppose E is the original equilibrium. Japanese residents have decreased their demand for U.S. goods. This will lead to A) a depreciation of the yen and an increase in the quantity of yen sold per week. B) a depreciation of the yen and a decrease in the quantity of yen sold per week. C) an appreciation of the yen and a decrease in the quantity of yen sold per week. D) an appreciation of the yen and an increase in the quantity of yen sold per week. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 61) Refer to the above figure. Suppose E is the original equilibrium. An increase in the demand for dollars will be reflected in this figure by A) an increase in the demand for yen as both imports and exports increase. B) a decrease in the demand for yen as the U.S. balance of payments improves. C) an increase in the supply of yen as Japan tries to buy more U.S. goods. D) a decrease in the supply of yen as Japan is able to pay less for U.S. goods. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 62) Which of the following will cause an increase in the demand for the Venezuelan currency, the Venezuelan bolivar? A) Real interest rates in Venezuela fall. B) U.S. residents change preferences in favor of goods produced in the United States. C) Real interest rates in the United States increase. D) none of these Answer: D Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

63) If the U.S. interest rate, adjusted for people's expectation of inflation, increases sharply relative to the rest of the world, then A) there will be a decrease in the demand for dollars in foreign exchange markets. B) there will be no change in the demand for dollars in foreign exchange markets but there will be an increase in demand for foreign currency. C) the dollar will appreciate. D) the dollar will depreciate. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 64) A market in which national currencies are traded by households, firms and governments, is referred to as a(n) A) foreign exchange market. B) fed funds market. C) international reserves market. D) gold certificate market. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 65) The price of one nation's currency in terms of the currency of another nation is called the A) IMF rate. B) fed funds ratio. C) exchange rate. D) discount rate. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

66) If the exchange rate measured in euros per dollar increases, then A) the dollar depreciates relative to the euro. B) the euro appreciates relative to the dollar. C) the euro depreciates relative to the dollar. D) neither currency appreciates or depreciates. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 67) A market in which businesses, households, and governments buy and sell national currencies is A) the foreign exchange market. B) the currency exchange market. C) the money exchange market. D) the dollar exchange market. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 68) Assume the following exchange rates for today: $1=140 yen and 1 Danish krone = $0.10. We can conclude A) 1 yen = 280 kr. B) 1 yen = 14 kr. C) 1 kr. = 28 yen. D) 1 kr. = 14 yen. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

69) One source of the supply of dollars in the world is A) the purchase of U.S. exports by foreign residents. B) the sale of U.S. domestic assets to foreigner residents. C) U.S. imports of foreign merchandise. D) U.S. sales of gold to foreigner residents. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 70) The exchange rate for a foreign currency that is determined by supply and demand is A) a fixed exchange rate. B) a controlled exchange rate. C) a constrained exchange rate. D) a flexible exchange rate. Answer: D Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 71) An increase in the market clearing exchange value of the home nation's currency in terms of the currency of another nation is a home currency A) appreciation. B) depreciation. C) devaluation. D) revaluation. Answer: A Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

72) A decrease in the market clearing exchange value of the home nation's currency in terms of the currency of another nation is a home currency A) appreciation. B) revaluation. C) depreciation. D) devaluation. Answer: C Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 73) If the Mexican peso appreciates against the U.S. dollar, A) Mexican exports will become cheaper in the United States. B) Mexican exports will become more expensive in the United States. C) U.S. exports will become more expensive in Mexico. D) there will be no change in the price of Mexican imports in the United States. Answer: B Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 74) If the Japanese yen depreciates against the U.S. dollar, A) the price of Japanese imports to the United States decreases. B) the price of United States exports to Japan decreases. C) the price of Japanese imports from the United States will decrease. D) there is no change in the price of Japanese exports to the United States. Answer: A Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

75) In July 2020, $1 was worth 45 Indian rupees and in July 2020, $1 was worth 55 Indian rupees. We can therefore conclude that A) the Indian rupee depreciated. B) the Indian rupee appreciated. C) the U.S. dollar has depreciated. D) the value of the U.S. dollar has fluctuated. Answer: A Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 76) In the market for euros, the demand for euros (€) is A) downward sloping, because at lower dollar prices for the euro, U.S. residents will buy more European goods and services. B) upward sloping, because at higher dollar prices for the euro, U.S. residents will buy more European goods and services. C) upward sloping, because at higher dollar prices for the euro, Europeans will buy more U.S. goods and services. D) horizontal, because dollar prices of euros and euro prices of dollars are directly related. Answer: A Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 77) In the market for euros, the supply of euros (€) is A) downward sloping, because lower dollar prices of euros mean that U.S. goods are cheaper to Europeans. B) downward sloping, because higher dollar prices of euros mean that U.S. goods are cheaper to Europeans. C) upward sloping, because higher dollar prices of euros means that U.S. goods are cheaper to Europeans. D) upward sloping, because lower dollar prices of euros means that U.S. goods are cheaper to Europeans. Answer: C Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

78) In foreign exchange markets, who demands dollars and who supplies dollars? Answer: Foreign residents buying U.S. goods, services, or assets demand dollars and U.S. residents buying foreign goods, services, or assets supply dollars. In foreign exchange markets, the supply of dollars is a demand for foreign currency and the supply of a foreign currency is a demand for dollars. Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 79) Why does the demand curve for Japanese yen slope down? Answer: The demand for Japanese yen is derived from the demand for Japanese goods and services. The lower the price of the yen, the more Japanese goods and services that U.S. residents will desire to import. So, the quantity of Japanese yen demanded will increase as the price of the yen falls. Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 80) What does it mean when the dollar appreciates? What does it mean when the dollar depreciates? Answer: If the dollar appreciates with respect to another currency, a dollar buys more units of the other currency than before. The opposite is true for a depreciation—a dollar buys less of the other currency than before. Diff: 1 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 81) Why does the supply curve of Japanese yen slope up? Answer: Japanese residents supply yen when they want to buy U.S. goods and services. The higher the price of the yen, the lower the Japanese price for the dollar. So, as the yen price of the dollar falls, Japanese residents demand more dollars and supply more yen. Diff: 2 Topic: 32.2 Deriving the Demand for and Supply of Foreign Exchange Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

32.3 Determining Foreign Exchange Rates 1) An increase in the demand for the Brazilian real induces A) an increase in the demand for Brazilian goods. B) a decrease in the supply of dollars. C) an increase in the real price of a dollar. D) an increase in the dollar price of a real. Answer: D Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

2) In the above figure, which of the following is a possible explanation for the reduction in the equilibrium value of the European euro from P2 to P1? A) an increase in demand for French automobiles B) the European central bank's decision to buy euros on the world market C) a decrease in the price of California wines, assuming that French wines and California wines are substitutes D) an increase in the price of California wines, assuming that French wines and California wine are substitutes Answer: C Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

3) In the above figure, suppose the value of the European euro is P1 and U.S. demand for French wine declines. The effect on the euro can be shown by A) an increase in the value of the euro to P2. B) the excess demand of euro equal to Q3 - Q1. C) the decrease in the value of the euro to P0. D) a shift in the demand for euros from D1 to D0, but no change in the value of the euro. Answer: C Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 4) The Japanese yen will appreciate against the dollar if A) U.S. residents demand more Japanese goods. B) U.S. residents demand fewer Japanese goods. C) Japanese residents demand more U.S. goods. D) none of these Answer: A Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 5) If there is an outward shift in U.S. demand for French goods, the result will be A) a decrease in the dollar price of a euro. B) an inward shift in French demand for U.S. goods. C) a decrease in euros traded. D) an increase in the dollar price of a euro. Answer: D Diff: 1 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

6) Which of the following will lead to a depreciation of the U.S. dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. interest rates C) a decrease in British demand for U.S. assets D) a decrease in U.S. demand for British goods Answer: C Diff: 1 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 7) If U.S. residents boycotts French goods, this will A) reduce the demand for euros in the foreign exchange market. B) increase the demand for euros in the foreign exchange market. C) cause the euro to appreciate. D) have no effect on the euro. Answer: A Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 8) Which of the following will lead to an appreciation of the U.S. dollar against the British pound? A) an increase in British demand for U.S. imports B) an increase in U.S. demand for British imports C) an increase in British interest rates D) a decrease in British demand for U.S. assets Answer: A Diff: 1 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

9) Under a flexible exchange rate system, one factor that does NOT directly affect rates of exchange is A) changes in the inflation rate in each country. B) changes in productivity in each country. C) changes in gold holdings in each country. D) changes in economic stability in each country. Answer: C Diff: 1 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 10) All of the following are market determinants of exchange rates EXCEPT A) changes in productivity in one country relative to another. B) changes in real interest rates in one country relative to another. C) changes in product preferences between countries. D) changes in the relative prices of goods and services within a country. Answer: D Diff: 1 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 11) If the United States looks more economically and politically stable relative to the rest of the world, this will A) decrease the demand for dollars. B) increase the demand for dollars. C) have no effect on the demand for dollars. D) stop all trading between the currencies of the United States and other countries. Answer: B Diff: 1 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

12) Other things being constant, if the U.S. real rate of interest exceeds that of its trading partners, we expect A) political instability in the United States. B) a worsening of the U.S. balance of payments. C) an appreciation of U.S. currency. D) that a "dirty float" will emerge. Answer: C Diff: 1 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 13) The demand for dollars will increase when A) real interest rates in the United States fall. B) U.S. labor productivity increases relative to the world. C) the world is perceived as more stable than it used to be. D) U.S. residents develop a taste for more imported products. Answer: B Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

14) In the diagram above, which of the following could cause a movement from point E' to point E? A) Japanese residents' incomes rise, so they increase their purchases of U.S. goods. B) The dollar depreciates, inducing Japanese residents to buy more U.S. goods. C) U.S. residents' incomes rise, so they increase their purchases of Japanese goods. D) The dollar depreciates, inducing U.S. residents to buy more Japanese goods. Answer: C Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 15) Refer to the above figure. Suppose the equilibrium moves from E' to point E. An event that could have caused this movement is A) an increase in the real interest rate in the United States. B) an increase in U.S. productivity. C) an increase in the perceived stability of the U.S. economy. D) an increase in demand for Japanese-produced goods by U.S. residents. Answer: D Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

16) The demand curve for Japanese yen will shift to the right when A) there is a decrease in demand for Japanese-made goods in the United States. B) there is no change in the demand for Japanese-made goods in the United States. C) there is a decrease in the demand for U.S.-made goods in Japan. D) there is an increase in the demand for Japanese-made goods in the United States. Answer: D Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 17) When a Mexican resident buys a ukulele from a U.S. producer, there is a(n) A) increase in the supply of dollars in the foreign exchange market. B) decrease in the supply of dollars in the foreign exchange market. C) increase in the demand for dollars in the foreign exchange market. D) decrease in the demand for dollars in the foreign exchange market. Answer: C Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 18) When a Japanese resident buys a good or service from a U.S. producer, there is a(n) A) increase in the supply of yen in the foreign exchange market. B) decrease in the supply of yen in the foreign exchange market. C) increase in the demand for yen in the foreign exchange market. D) decrease in the demand for yen in the foreign exchange market. Answer: A Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

19) When numerous Japanese companies buy $100,000,000 worth of goods or services from U.S. producers, ceteris paribus, there will be A) appreciation in the value of the yen against the dollar. B) depreciation in the value of the yen against the dollar. C) depreciation of the dollar against the yen. D) no change in values of the currencies. Answer: B Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 20) If interest rates in Sweden go up relative to the rest of the world, the A) demand for Swedish currency will fall. B) demand for Swedish currency will rise. C) supply of Swedish currency will fall. D) supply of Swedish currency will rise. Answer: B Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 21) Which of the following will cause a change in the exchange rate? A) changes in real interest rates B) changes in consumer preferences C) changes in the perception of economic stability D) all of these Answer: D Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

22) If there is an increase in the demand for U.S. automobiles, the A) demand for dollars will fall. B) demand for dollars will rise. C) supply of dollars will fall. D) supply of dollars will rise. Answer: B Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 23) If there is an unrest in Europe that threatens the economic stability of Turkey, the A) demand for the Turkish currency will fall. B) demand for the Turkish currency will rise. C) supply of the Turkish currency will fall. D) supply of the Turkish currency will rise. Answer: A Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 24) If there is an unrest in Turkey, and Turkish investors purchase U.S. securities, the A) demand for the Turkish currency will stay the same. B) demand for the Turkish currency will rise. C) supply of the Turkish currency will fall. D) supply of the Turkish currency will rise. Answer: D Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

25) Use the above figure. At equilibrium, the exchange rate is A) 1 euro = $1.25. B) $0.80 = 1.25 euro. C) $1 = 1.25 euro. D) $1 = 8 euros. Answer: C Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 26) Use the above figure. A rightward shift of the demand curve, ceteris paribus, would result in A) dollar depreciation. B) dollar appreciation. C) euro depreciation. D) reducing the equilibrium quantity of euros. Answer: A Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 27) Use the above figure. A leftward shift of the supply curve, ceteris paribus, would result in A) euro depreciation. B) dollar appreciation. C) dollar depreciation. D) increasing the equilibrium quantity of euros. Answer: C Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 75 Copyright © 2021 Pearson Education, Inc.

28) Use the above figure. A leftward shift in the demand curve, ceteris paribus, would result in A) a dollar appreciation. B) a dollar depreciation. C) a euro appreciation. D) increasing the equilibrium quantity of the euro. Answer: A Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 29) Using the above figure. A rightward shift of the supply curve, ceteris paribus, would result in A) dollar appreciation. B) euro appreciation. C) dollar depreciation. D) decreasing the equilibrium quantity of euros. Answer: A Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 30) Suppose economic stability in the United States increases. This will tend to cause which of the following to occur? A) The demand for U.S. dollars will rise in the foreign exchange market. B) The supply of U.S. dollars will rise in the foreign exchange market. C) The demand for euros will rise in the foreign exchange market. D) Nothing will change in the foreign exchange market. Answer: A Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

31) If interest rates in the European Union decrease A) the demand for U.S. dollars will fall in the foreign exchange market. B) the supply of U.S. dollars will fall in the foreign exchange market. C) the demand for euros will fall in the foreign exchange market. D) nothing will change in the foreign exchange market. Answer: C Diff: 2 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 32) Suppose the foreign exchange market is in equilibrium. Then, the U.S. government increases borrowing, causing American interest rates to increase. What will happen to the price of the Japanese yen? Why? Answer: The higher U.S. interest rates induce foreign residents, including Japanese residents, to increase their demand for U.S. securities, which causes the demand for dollars to increase. This is equivalent to an increase in the supply of yen. Holding the demand for yen constant, an increase in supply implies the dollar price of the yen falls and the quantity demanded increases. The Japanese yen is now relatively cheaper, and U.S. residents buy more of them. Diff: 3 Topic: 32.3 Determining Foreign Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 32.4 Fixed Versus Floating Exchange Rates 1) Under the gold standard, because all currencies had values fixed in units of gold, A) exchange rates were effectively fixed. B) there were no exchange rates. C) exchange rates were set to a crawling peg. D) none of these Answer: A Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

2) With a pure gold standard A) a nation may not pursue an independent monetary policy. B) an inflow of gold will reduce the money supply of a country. C) there will be a tendency for reducing world trade. D) a balance of payments deficit or surplus does not occur. Answer: A Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 3) The gold standard is A) a type of floating exchange rate system. B) a type of managed flexible exchange rate system. C) a type of fixed exchange rate system. D) a currency exchange system without exchange rates. Answer: C Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 4) An important problem with the gold standard was that A) it was too complicated and restricted business activity. B) a country did not have control of its domestic monetary policy. C) exchange rates tended to fluctuate a great deal, making it difficult for businesses to make long-run plans. D) one country could easily manipulate the system to its advantage and the disadvantage of other countries. Answer: B Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

5) The United States was taken off the gold standard by A) President Lyndon Johnson. B) President Richard Nixon. C) President Ronald Reagan. D) President Jimmy Carter. Answer: B Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 6) With the Bretton Woods system of international exchange rates, A) the value of a country's currency was determined strictly by the laws of supply and demand. B) the value of a country's currency was determined by its stock of gold. C) there were fixed exchange rates, and most countries were obligated to intervene to maintain the values of their currencies within 1 percent of par value. D) a nation's balance of payments was eliminated. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 7) The International Monetary Fund was created A) in 1945 by the Bretton Woods Agreement. B) to collect money from member countries that were running balance of payments deficits. C) in 1971 when President Richard Nixon signed the Bretton Woods Agreement. D) in the aftermath of World War II to help nations move off of the gold standard. Answer: A Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

8) The gold standard is a type of A) fixed exchange rate system. B) flexible exchange rate system. C) floating exchange rate system. D) barter currency system. Answer: A Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 9) Under the gold standard, when a nation had a deficit in its balance of payments, A) interest rates would rise which would reduce foreign investment. B) interest rates would fall which would increase foreign investment. C) gold would flow to foreign residents and the domestic money supply would decrease. D) gold would flow into the country leading to an increase in the domestic money supply. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 10) Under a pure gold standard, A) the dollar is tied to gold and all other currencies are fixed relative to the dollar. B) all foreign exchanges involve gold for goods and services. C) all currencies are defined in terms of gold and these rates are fixed. D) all trade involves government agencies. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 11) A problem with the operation of the gold standard in the world economy was that A) it involved too much government intervention in the economy. B) the world economy was subject to too much inflation. C) a country did not have control of its domestic monetary policy. D) it caused the Great Depression. Answer: C Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 80

12) The international financial market moved towards equilibrium under the gold standard due to A) shifts in exchange rates caused by changes in supply and demand for foreign exchange. B) changes in interest rates. C) negotiations among central banks. D) flows of gold among countries. Answer: D Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 13) Based on the U.S. historical experience with the gold standard, we can conclude that A) the gold standard guarantees price stability but not economic stability. B) the standard guarantees economic stability but not price stability. C) the gold standard guarantees both economic and price stability. D) the gold standard guarantees neither economic nor price stability. Answer: D Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 14) The International Monetary System was established A) by the United Nations. B) by the Bretton Woods Agreement. C) by the United States, in cooperation with Great Britain. D) during the Great Depression by the League of Nations. Answer: B Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 81

15) Under the Bretton Woods system, a country could alter its exchange rate A) by changing its value relative to gold. B) whenever it determined that there was a fundamental disequilibrium. C) only when the IMF permitted due to a fundamental disequilibrium. D) under no circumstances. Answer: C Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 16) The legally established value of a country's monetary unit in terms of another under the Bretton Woods system was called the A) exchange rate. B) dirty float. C) special draw. D) par value. Answer: D Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 17) Under the Bretton Woods agreement, the officially determined value of a country's currency is referred to as its A) GDP. B) par value. C) exchange rate. D) value-to-weight ratio. Answer: B Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 82

18) At the Bretton Woods conference, all currencies were given A) a fixed value. B) a zero value. C) a par value. D) a floating value. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 19) A key objective of the gold standard was to A) create a flexible exchange rate system between countries. B) create a fixed exchange rate system between countries. C) allow nations to maintain their gold reserves. D) allow nations to tax its citizens in gold. Answer: B Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 20) When all currencies are tied directly to gold, then A) currency exchange rates throughout the world are flexible. B) currency exchange rates throughout the world are fixed. C) the world's stock of gold cannot change. D) the price of each nation's currency in terms of gold is flexible. Answer: B Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 21) The U.S. government suspended the convertibility of the dollar into gold in A) the 1930s. B) the 1950s. C) the 1970s. D) 1991, when the first Gulf War broke out. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 83

22) The United States dollar has NOT been officially convertible to gold by international traders since A) 1930. B) 1944. C) 1971. D) 1995. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 23) Which agreement was signed in 1944 with the purpose of creating a new international payment system? A) Philadelphia Accord B) Bretton Woods C) Camp David D) Tokyo Protocol Answer: B Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 24) Under the Bretton Woods Agreement, the goal of the IMF was to A) finance international transactions in gold. B) lend to countries experiencing balance of payment deficits. C) help less developed countries advertise their goods in the developed countries. D) provide oversight to the functioning of central banks in the member countries. Answer: B Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

25) One problem associated with the gold standard was that A) nations gave up control of their money supply. B) there was an incentive for individuals to hold gold at all interest rates. C) there was no fluctuation in exchange rates. D) nations could not determine their current account balances. Answer: A Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 26) Suppose a central bank tries to keep exchange rates fixed. When there is an increase in the demand for foreign goods, the central bank will most likely A) buy foreign currency in exchange for the domestic currency. B) do nothing. C) sell the domestic currency in exchange for foreign reserves. D) use foreign reserves to buy the domestic currency. Answer: D Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 27) Suppose a currency's value in the foreign exchange market is determined solely by market supply and demand without any intervention by the government authority, the currency has A) a fixed exchange rate. B) a gold standard. C) a price control in its exchange rate. D) a floating exchange rate. Answer: D Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

28) To prevent the dollar from depreciating, the U.S. central bank can try to fix the currency value of the dollar when they A) buy U.S. dollars in the foreign exchange market. B) sell U.S. dollars in the foreign exchange market. C) abandon the U.S. dollar and use another country's currency as its legal currency. D) buy foreign currencies in the foreign exchange market. Answer: A Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 29) In a fixed exchange rate system, A) market forces and the country's stock of gold determine its exchange rate. B) a central bank affects the value of a currency by changing its foreign exchange reserves. C) market forces play a role in determining the fixed value of a currency. D) the International Monetary Fund determines exchange rates. Answer: B Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 30) The use of foreign exchange reserves to keep exchange rates constant over time is called A) a fixed exchange rate system. B) the Bretton Woods system. C) barter exchange system. D) a floating exchange rate system. Answer: A Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

31) Today, the most common exchange rate arrangement in the world is A) the fixed exchange rate system. B) the gold standard system. C) the managed floating system. D) the freely floating exchange rate system. Answer: A Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 32) According to the text, over 40 percent of member nations of the International Monetary Fund have A) a fixed exchange rate. B) no separate legal currency. C) an independently floating exchange rate. D) a managed floating exchange rate. Answer: A Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 33) A nation's foreign exchange reserves consist mainly of A) excess reserves held by its banks. B) government securities of that nation. C) the legal currency of that nation. D) currencies of other nations. Answer: D Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

34) Suppose the Canadian central bank wants to keep the exchange rate of the Canadian dollar with the U.S. dollar constant over time. An increase in the demand for Canadian goods by American residents will lead the Canadian central bank to A) sell American goods in exchange for Canadian dollars. B) buy more Canadian goods with Canadian dollars. C) increase the demand for Canadian dollars in the foreign exchange market. D) increase the supply of Canadian dollars in the foreign exchange market. Answer: D Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 35) Suppose the currency price of the U.S. dollar in terms of the Japanese yen starts to fall. To prevent that from occurring, the U.S. central bank should A) use U.S. dollars to buy Japanese goods. B) use yen reserves to buy U.S. dollars in the foreign exchange market. C) sell U.S. dollars in the foreign exchange market in exchange for yen. D) buy both U.S. dollars and yen in the foreign exchange market. Answer: B Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 36) Suppose the Chinese central bank wants to keep the exchange rate of its currency value constant over time. An increase in the demand for Chinese goods by American residents will lead the Chinese central bank to A) coordinate with the U.S. central bank in order to increase the supply of the U.S. dollar in the foreign exchange market. B) increase the demand for the Chinese currency in the foreign exchange market. C) use its dollar reserves to buy the Chinese currency in the foreign exchange market. D) sell the Chinese currency in exchange for U.S. dollars in the foreign exchange market. Answer: D Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

37) If a country wants to keep the value of its currency fixed, then its central bank should A) sell domestic goods when there is an increase in the supply of its domestic currency. B) buy domestic goods when there is an increase in the supply of its domestic currency. C) sell its domestic currency when there is an increase in the supply of that currency. D) buy its domestic currency when there is an increase in the supply of that currency. Answer: D Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 38) If a central bank wants to keep the value of its home currency fixed in the foreign exchange market, then an increase in the demand for its home currency will lead the central bank to A) do nothing. B) sell its home currency. C) buy its home currency. D) sell foreign currencies. Answer: B Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 39) Assume the U.S. government wants to hold the value of the dollar at $1.00 U.S. equals 100 Japanese yen, but it finds that the value of yen is appreciating against the U.S. dollar. What would be an appropriate policy to reverse this trend? A) Buy more Japanese goods. B) Buy U.S. dollars. C) Sell U.S. dollars. D) Encourage U.S. investments abroad. Answer: B Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

40) Assume the U.S. government wants to hold the value of the dollar at $1.00 U.S. equals 7 Chinese yuan, but it finds that the value of yuan is depreciating against the U.S. dollar. What would be an appropriate policy to reverse this trend? A) Increase government spending within the U.S. B) Buy U.S. dollars. C) Sell U.S. dollars. D) Increase the money supply in the U.S. Answer: C Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 41) If a country wants to keep its exchange rate fixed, it must A) allow its currency value to vary with market supply and demand in foreign exchange markets. B) be a member of the IMF. C) vary the amount of its national currency supplied at any given exchange rate in foreign exchange markets when necessary. D) eliminate its foreign exchange reserves. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 42) Foreign exchange risk is A) a financial strategy that reduces the change of suffering losses arising from foreign exchange risk. B) an exchange rate arrangement in which a country pegs the value of its currency to the exchange value. C) the possibility that changes in the value of a nation's currency will result in variations in the market value of assets. D) active management of a floating exchange rate on the part of a country's government. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

43) The foreign exchange system that has the highest foreign exchange risk is A) the Gold Standard B) the fixed exchange rate. C) the floating exchange rate. D) the Bretton Woods system. Answer: C Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 44) A hedge is A) a financial strategy that reduces the change of suffering losses arising from foreign exchange risk. B) an exchange rate arrangement in which a country pegs the value of its currency to the exchange value. C) the possibility that changes in the value of a nation's currency will result in variations in the market value of assets. D) active management of a floating exchange rate on the part of a country's government. Answer: A Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 45) One problem that investors in foreign countries face is the possibility of a decline in the value of that foreign country's currency. Which of the following would be an effective way to offset this problem? A) Be ready to pull out at the first sign of trouble. B) Convert as many of your dollars into their dollars as possible. C) Hedge through currency swaps. D) Finance your investment outside of that country. Answer: C Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

46) Which of the following best describes exchanges rates that are determined by the demand and supply foreign exchange in the absence of official intervention? A) floating exchange rates B) the gold standard C) fixed exchange rates D) the Bretton Woods system Answer: A Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 47) Which of the following is an advantage of fixing exchange rates? A) limiting foreign exchange risk B) making residents more mobile across countries C) eliminating trade deficits D) making the prices of foreign goods more flexible in the domestic market Answer: A Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 48) A currency swap can A) make foreign goods more expensive in the domestic market. B) make the foreign exchange rate more volatile over time. C) reduce foreign exchange risk. D) make domestic goods more expensive in foreign countries. Answer: C Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

49) If an exporter wants to limit the effect of possible changes in the exchange rate on the value of her exports, then she can adopt a strategy known as A) floating. B) speculating. C) hedging. D) appreciating. Answer: C Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 50) When the supply and demand of currencies in the foreign exchange market determines their relative values, this is known as A) flexible exchange rates. B) depreciation. C) fixed exchange rates. D) appreciation. Answer: A Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 51) The possibility that changes in the value of a nation's currency will result in variations in the market value of a business's assets is referred to as A) hedge risk. B) foreign exchange risk. C) conversion risk. D) transaction risk. Answer: B Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

52) A financial strategy that reduces the chance of suffering losses arising from foreign exchange risk is referred to as A) hedging. B) foreign exchange leverage. C) conversion depletion. D) transaction mitigation. Answer: A Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 53) If a country moves from fixed to flexible exchange rates, its macroeconomic policy A) is no longer restricted. B) is restricted, as it can only use fiscal policy to achieve its economic goals. C) is restricted, as it can only use monetary policy to achieve its economic goals. D) must follow policy directives from the IMF. Answer: A Diff: 3 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking 54) Explain how the gold standard operated. Answer: Under the gold standard, each country defined their currency in terms of gold. If U.S. residents imported more than they exported, this increased the supply of dollars in the world currency market, which put downward pressure on the price of the dollar. In order to keep the price of the dollar fixed, the central bank would need to buy up dollars in the world currency market to reduce supply back to its original level. Diff: 1 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking

55) What brought about the end of the Bretton Woods Agreement? Answer: Under the Bretton Woods Agreement, the dollar was tied to gold and the exchange rates of all other currencies were fixed relative to the dollar. Countries had to maintain their exchange rate within one percent of the officially determined value. They would use dollars or other official reserves to maintain the exchange rate. The fixed exchange rate could be changed if there was a fundamental disequilibrium. Beginning in the late 1960s, the dollar was under pressure and the old IMF system ended when the dollar was devalued in 1971, followed by a floating exchange rate system in 1973. Diff: 2 Topic: 32.4 Fixed Versus Floating Exchange Rates Learning Outcome: Macro-15: Describe how government policies and exchange rates affect open economy macroeconomics AACSB: Analytical thinking