Modern Principles of MacroEconomics 6e Tyler Cowen, Alex Tabarrok (Test Bank All Chapters, 100% Original Verified, A+ Grade) Chapter 1 1. Recall Chapter 1's opening story about the British sea captains and the convicted felons. In what way were incentives used to solve the problem of the high mortality rate on board the ships? a. Payment (to ship captains) was to be offered for each prisoner that was taken aboard the ships. b. Payment (to ship captains) was made independent of the regulations passed for prisoner welfare. c. Regulations were passed so that prisoners could get better food, water, and medical care. d. Payment (to ship captains) was made dependent on the survival rate of prisoners. ANSWER: d 2. Recall Chapter 1's opening story about the British sea captains and the convicted felons. Instead of paying the sea captains for each prisoner placed on board the ships in Great Britain, an economist suggested: a. paying for each prisoner who walked off the ship in Australia. b. paying for food and water to reduce the costs of caring for prisoners during the transit. c. doing nothing, since the suggested change would not matter. d. that new regulations be passed to require prisoner safety and health. ANSWER: a 3. In his book The Wealth of Nations, Adam Smith claimed that individuals: a. always act in an altruistic way. b. always consider the effect of their actions on others. c. are motivated by self-interest. d. are not concerned with resources. ANSWER: c 4. According to the story that opens the chapter, paying captains of prisoner transport ships for each convict who arrived in Australia instead of for each convict who boarded the ship: a. made no difference. b. saved the lives of hundreds of convicts. c. increased the volume of slave trafficking. d. shows that people care more about morality than about their self-interest. ANSWER: b 5. Several states offer rebates on the purchase of electric vehicles. This practice highlights the idea of: a. self-interest. b. trade-offs. c. incentives. d. thinking on the margin. ANSWER: c 6. Every day, people who work as servers serve meals to people at restaurants all over the world. These people work for our benefit because: a. people think on the margin. b. trade-offs are everywhere. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 1 c. they benefit from doing so. d. institutions require them to do so. ANSWER: c 7. Economists think that people are self-interested: a. only when monetary incentives are present. b. because they respond to incentives in predictable ways. c. only rarely in response to incentives. d. unless they are being altruistic. ANSWER: b 8. A basic postulate of economics is that changes in incentives influence the: a. actions of producers but not consumers. b. actions of consumers but not producers. c. choices of individuals only when they buy and sell goods in the marketplace. d. choices of individuals with regard to a wide range of activities, including those generally perceived as social or political.
ANSWER: d 9. According to economists, people respond to: a. other people. b. social interest. c. money. d. incentives. ANSWER: d 10. Adam Smith wrote, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." He meant that: a. most of us no longer get our dinner directly from the butcher, the brewer, and the baker. b. butchers, brewers, and bakers are not productive members of society. c. high-interest payments mean that no one has to work anymore. d. people work for the benefit of others because it benefits them to do so. ANSWER: d 11. Which financing method for transporting prisoners from point A to B will result in the greatest number of prisoners surviving the trip? Assume there are 50 prisoners being transported. a. The ship's captain is paid $100 by the government for every live prisoner loaded on board at point A. b. The ship's captain is paid $100 by the government for every live prisoner unloaded at point B. c. The ship's captain is paid $400 by the government for every live prisoner loaded on board at point A. d. The ship's captain is paid a flat rate of $3,000 for the trip rather than being paid per prisoner. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 1 12. Suppose a certain business wants to encourage its employees to live healthier lives. The easiest way for the business to realize this goal is to: a. give each employee $100 a month for a gym membership. b. install a gym in the office building. c. reduce health insurance benefits. d. pay a monthly bonus to employees who log an hour of exercise a week on a fitness tracker. ANSWER: d 13. Many companies pay their factory employees based on piece rates—the more employees produce, the more they earn. This practice highlights the role of: a. marginal thinking. b. incentives. c. trade-offs. d. sunk costs. ANSWER: b 14. If there were no _____, the "invisible hand" would not function as Adam Smith describes. a. money b. self-interest c. trade d. inflation ANSWER: b 15. Based on the ideas of Adam Smith, it is _____ barbers wash, cut, and style hair, but _____. a. not out of benevolence that; from their regard for their own self-interest b. out of benevolence that; also sometimes from their regard for their own self-interest c. not out of self-interest that; out of their benevolence d. from charity and good will that; only if they can charge high prices ANSWER: a 16. In the 1800s, the federal government paid railroad companies for each mile of track built. This payment scheme created incentives for railroad companies to lay track: a. between points A and B, using the most direct route. b. between points A and B, using the most indirect route. c. as slowly as possible. d. using the best materials possible. ANSWER: b 17. Adam Smith's "invisible hand" refers to the attainment of socially beneficial outcomes when: a. people pursue their own self-interest. b. people pursue the social interest. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 1 c. people pursue social justice. d. there is government control. ANSWER: a 18. Adam Smith coined the term "invisible hand" to mean a: a. physical hand that leads individuals to promote the social interest by pursuing their self-interest. b. metaphorical hand that leads individuals to promote the social interest by pursuing their self-interest. c. physical hand that leads individuals to promote their self-interest by pursuing the social interest. d. metaphorical hand that leads individuals to promote their self-interest by pursuing the social interest. ANSWER: b 19. What is the "invisible hand"? a. the idea that government economic planning tends to benefit not only the individual but also all of society b. the principle that most people should avoid economic transactions with so-called "outsiders" c. the idea that people pursuing their own self-interest benefit the public at large d. the notion that the pursuit of profit leads to the exploitation of consumers ANSWER: c 20. Adam Smith sought to explain the notion that markets align self-interest with the social interest: a. through an analysis of wealth as productivity. b. by suggesting that markets are led by an invisible hand. c. by arguing that markets are ineffective. d. by advocating government regulations. ANSWER: b 21. The idea that markets work efficiently: a. refers to the fact that self-interest can align with the social interest. b. means that trade-offs can be reduced by channeling greed toward good ends. c. suggests that there is never any need for government regulation, taxes, or subsidies. d. has been known for many centuries. ANSWER: a 22. Which of these statements reflects Adam Smith's important insight into marketplace behavior? a. Society benefits when people and firms pursue their own self-interest. b. Markets are usually an inefficient way of organizing economic activity. c. Greedy, self-interested behavior must be constrained to ensure strong economic growth. d. Trade restrictions on imported goods increase domestic employment. ANSWER: a 23. Adam Smith's metaphor of the "invisible hand" refers to the notion that: a. greed is always good when externally motivated. Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 1 b. behavior based on self-interest can benefit society. c. market incentives can lead to negative outcomes. d. markets always align self-interest with the social interest. ANSWER: b 24. When markets don't align self-interest with the social interest: a. markets will still manage to reach an efficient outcome. b. governments may improve the situation by changing incentives. c. societal costs will always exceed individual benefits. d. individual benefits will exceed societal benefits. ANSWER: b 25. If market incentives to produce are too strong, the market will end up producing: a. too much of a good. b. too little of a good. c. a quantity equal to the efficient outcome, as market incentives can never be too strong. d. zero output. ANSWER: a 26. If market incentives to produce are too weak, the market will end up producing: a. too much of a good. b. too little of a good. c. a quantity equal to the efficient outcome, as any incentive will result in economic efficiency. d. zero output. ANSWER: b 27. According to economists, socially beneficial outcomes arise whenever people pursue: a. their self-interest. b. either their self-interest or the social interest. c. their self-interest, and it aligns with the social interest. d. their self-interest, and it does not align with the social interest. ANSWER: c 28. The "invisible hand" concept is: a. always a force in market outcomes. b. never a force in market outcomes. c. frequently a force in market outcomes. d. not well understood as it relates to market outcomes. ANSWER: c 29. When the social interest aligns with self-interest: Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 1 a. the free market functions in the best interest of society. b. regulatory action can improve on the free market outcome. c. the relevant market should be banned. d. the relevant production process should be outsourced. ANSWER: a 30. When it comes to getting a college education, most people consider _____, not _____. a. the social interest; their self-interest b. the public interest; the social interest c. their costs; their benefits d. their self-interest; the social interest ANSWER: d 31. Government can help to align self-interest with the social interest by: a. enacting policies that increase incentives to work and trade. b. decreasing international trade. c. promoting charity work. d. banning free markets. ANSWER: a 32. Suppose that you do not study for your economics course but still earn a good grade. This is an example of a bad institution because: a. your school is not very selective; anyone can get in. b. your self-interest in not studying conflicts with the social interest of having people who understand economics. c. your school has a reputation of training excellent economists. d. sometimes the "invisible hand" is absent, not just invisible. ANSWER: b 33. During the COVID-19 pandemic, many state governors instituted stay-at-home orders to prevent the spread of the illness. This illustrates the idea that: a. greed is bad. b. markets align self-interest with the social interest. c. the government can sometimes improve market outcomes. d. incentives are not always important. ANSWER: c 34. Which of these choices BEST illustrates the concept of Adam Smith's "invisible hand"? a. Etsy creates a website for an artist who sells their artwork to a collector in another country. b. A fishery is depleted due to overfishing. c. The government requires car owners to have their vehicles' emissions tested each year. d. A factory that provides much-needed employment is built on the site of the only children's playground in town. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 1 ANSWER: a 35. Which of these is an example of self-interest that promotes the social interest? a. A factory spills chemicals into a nearby river. b. The prime minister of Canada restricts trade in lumber with the United States. c. The Cincinnati Reds beat the Atlanta Braves. d. An entrepreneur creates a crowd-funding website to provide funding for a public school's fine arts program. ANSWER: d 36. Self-interest aligns with the social interest when: a. one company gains a monopoly over a precious metal used in high-tech products and raises its price significantly. b. an entrepreneur makes billions of dollars on a new tech product.
c. commercial fishers deplete a valuable fish stock. d. a paper mill emits carcinogenic toxins near a residential area. ANSWER: b 37. You may choose not to get the new COVID booster because the market for COVID boosters: a. aligns your personal interest in getting a booster with the public's interest that you get one. b. disincentivizes people from getting boosters. c. does not align your personal interest in getting a booster with the public's interest that you get one. d. is fraudulent, a corrupt institution created by the pharmaceutical companies that produce the boosters. ANSWER: c 38. The length of time and cost of bringing a new drug to market leads to: a. drug lag and drug loss. b. drug lag but not drug loss. c. drug loss but not drug lag. d. market efficiency. ANSWER: a 39. When the unemployment rate falls, college enrollment tends to: a. rise. b. remain the same. c. fall. d. defy prediction. ANSWER: c 40. The great economic problem is how to arrange our scarce resources to: a. provide the most profit possible. b. meet the basic needs of all people. c. satisfy as many of our wants as possible. Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 1 d. prevent them from being completely depleted. ANSWER: c 41. Scarcity: a. is when a resource is completely used up. b. is when there isn't enough to satisfy all our wants. c. happens only in a few economies around the world. d. can be fixed with good economic policy. ANSWER: b 42. The opportunity cost of a choice is: a. the value of the opportunities lost. b. the net value of the opportunities gained. c. the difference between the benefits and costs of the choice. d. sometimes positive and sometimes negative. ANSWER: a 43. In the market for pharmaceuticals, the issue of "drug lag" illustrates which of these ideas? a. The longer a drug is tested for safety, the lower the opportunity cost in terms of lives lost. b. If a drug is not tested for safety, it might kill more people. c. Because of the higher cost of testing a drug, it takes longer to make it, and more lives are lost. d. Lives are being lost because safe drugs that are still in the testing stage have not yet been approved. ANSWER: d 44. In the market for pharmaceuticals, the issue of "drug loss" illustrates which of these ideas? a. The longer a drug is tested for safety, the lower is the opportunity cost in terms of lives lost. b. If a drug is not tested for safety, it might kill more people. c. Because of the higher cost of testing a drug, fewer drugs are made, and more lives are lost. d. Lives are being lost because safe drugs that are still in the testing stage have not been approved. ANSWER: c 45. What you give up to obtain an item is called your: a. opportunity cost. b. explicit cost. c. true cost. d. direct cost. ANSWER: a 46. Opportunity costs are important because: a. monetary costs are higher than opportunity costs. b. only monetary costs should be considered when making choices. Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 1 c. they determine how to make the world more productive. d. people change their behavior when opportunity costs change. ANSWER: d 47. The opportunity cost of a choice is the: a. opportunity of using the same money to buy something else that is cheaper. b. money cost that a person does not have to pay when doing something. c. money that a buyer has to pay for an item. d. value of the next best opportunity forgone. ANSWER: d 48. Estimates suggest that tens of thousands of people have died because the FDA withheld beta-blockers from the market while testing them to determine whether they were safe and effective. This is an example of: a. drug lag. b. drug loss. c. bureaucratic incompetence. d. market failure. ANSWER: a 49. According to economists, when the FDA raises the approval requirements for new drugs: a. everyone will benefit and be better off. b. society will potentially lose a new drug approval. c. everyone but the drug makers will lose. d. people will only demand more drug testing. ANSWER: b 50. If the FDA enacts more stringent pharmaceutical drug tests, two costs of this policy would be drug: a. lag and drug lapse. b. lapse and drug misallocation. c. loss and drug lag. d. misallocation and drug loss. ANSWER: c 51. Mark Zuckerberg dropped out of college and founded Facebook. His opportunity cost of attending college was: a. tuition, the cost of books, and room and board. b. tuition, the cost of books, and a low-paying job. c. tuition, the cost of books, and the income from his Facebook pursuits. d. only the income from his Facebook pursuits. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 1 52. When the opportunity cost of a choice decreases: a. individuals are more likely to choose that same option. b. individuals are less likely to choose that same option. c. the marginal benefits of that choice increase as well. d. the marginal benefits of that choice decrease. ANSWER: a 53. During a recession, we expect the opportunity cost of attending college to: a. rise. b. fall. c. remain the same. d. rise and then fall. ANSWER: b 54. Quitting your current job to work full-time at your profitable new business is MOST likely a direct application of the principle of: a. gains from trade. b. specialization. c. thinking on the margin. d. opportunity cost. ANSWER: d 55. In an effort to prevent the spread of COVID-19, many state governors requested that businesses shut down, in accordance with stay-at-home orders. This policy caused many businesses to lay off their employees. What concept does this example illustrate? a. trade-offs b. marginal pollution c. sunk costs d. public provision ANSWER: a 56. The opportunity cost of winning a free ticket to the World Series worth $885 and choosing to attend the game is: a. zero, since the ticket was free. b. priceless, if the person really loves baseball. c. at least $885, the lost market value of selling the ticket, and the time needed to go. d. zero, if the person would rather go to the game than do anything else. ANSWER: c 57. You must decide whether to work this afternoon or study for your biology test. Your decision highlights the following "Big Idea" in economics. a. Institutions Matter Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 1 b. Incentives Matter c. Economics Is Fun d. Trade-offs Are Everywhere ANSWER: d 58. Why do you think researchers sometimes find a positive relationship between the unemployment rate and college enrollment rates? a. The opportunity cost of attending college rises during economic booms, leading to higher college enrollment rates. b. The opportunity cost of attending college rises during recessions, leading to higher college enrollment rates.
c. The opportunity cost of attending college falls during recessions, leading to higher college enrollment rates. d. The opportunity cost of attending college falls during economic booms, leading to higher college enrollment rates.
ANSWER: c 59. The opportunity cost of attending college is: a. tuition and books. b. travel expenses, tuition, and books. c. the psychic costs of brain-fatigue from studying. d. lost wages from not working full-time. ANSWER: d 60. Each of these ideas is central to economics EXCEPT: a. "good institutions can eliminate economic trade-offs." b. "people react to incentives." c. "specialization and trade benefit everyone." d. "prices rise when the government prints too much money." ANSWER: a 61. As the FDA uses _____ time and resources to ensure the safety of new drugs, _____. a. more; more people will die from taking unsafe drugs b. less; fewer people will die waiting for access to life-saving medicine c. more; fewer people will die waiting for access to life-saving medicine d. less; fewer people will die from taking unsafe drugs ANSWER: b 62. During the Middle Ages, expensive castle-based warfare was the dominant method of conflict. Warfare was also the main function of government. Which reason BEST explains why few universities were built during this time? a. The lack of professors meant there was no incentive to create universities. b. The opportunity cost of building universities was fewer castles. c. There were no benefits to attending college at the time. Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 1 d. Local rulers did not care about long-term growth. ANSWER: b 63. Most people do not buy the safest car they can find. Why not? a. Other factors matter besides safety, such as comfort, cost, and fuel economy. b. People do not take the time to understand the safety features of cars. c. Consumers are unaware of the risks of different cars. d. The statement is false. People do buy the safest car they can find. ANSWER: a 64. Some people take jobs that are dangerous, but such jobs pay well. For example, oil rig workers make $78,000 per year on average. Why? a. Oil rig workers accept the danger in exchange for higher salaries. b. Oil rig workers do not understand the dangers of their work. c. Oil rig workers are assessing the opportunity cost of the danger of the job. d. Oil rig workers only care about the positive characteristics of the job. ANSWER: a 65. Fluctuations in graduate school enrollment positively correlate with fluctuations in unemployment. What is the MOST likely reason? a. The opportunity cost of going to graduate school is high when jobs are difficult to find. b. When jobs are easy to find, there are strong incentives to go to grad school. c. The opportunity cost of going to graduate school is low when jobs are hard to find. d. Even if you have a job, the salary will be so low that going to graduate school is worth the effort. ANSWER: c 66. Manuel insists that he places infinite value on his life. Stefan is suspicious of this claim and points out to Manuel that he sometimes eats ice cream when broccoli would be much better for him. What Big Idea is Stefan invoking? a. Trade Makes People Better Off: Manuel could not make his own ice cream, though he could grow his own broccoli; Manuel must be trading for ice cream. b. Incentives Matter: No one is paying Manuel to be healthy.
c. Think on the Margin: "Infinite value" is too much to be on the margin. d. Trade-offs Are Everywhere: Gaining some enjoyment is worth giving up some safety. ANSWER: d 67. Why is it less costly to attend college during a recession? a. Tuition is much lower during recessions. b. The opportunity cost is higher during recessions because there are more labor market opportunities. c. The opportunity cost is lower during recessions because there are fewer labor market opportunities. d. Colleges give out better grades during recessions, so the opportunity cost is lower. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 1 68. Why might the FDA err on the side of "overtesting" pharmaceutical drugs rather than use a level of testing that is economically efficient? a. Dangerous side effects are more important than drug loss and drug lag. b. Dangerous side effects are less important than drug loss and drug lag. c. Drug lag and drug loss are not significant concerns in the case of most pharmaceutical drugs. d. Dangerous side effects are not relevant in most pharmaceutical drug cases. ANSWER: a 69. What should happen to crime rates when the unemployment rate rises? a. Crime rates should fall because the economic gains to property crime will be lower when incomes are lower. b. Crime rates should rise because the opportunity cost of crime (i.e., getting a legitimate job) has fallen. c. Crime rates should fall because the opportunity cost of crime (i.e., getting a legitimate job) has risen. d. Crime rates should rise because the trade-offs have been eliminated. ANSWER: b 70. In the two hours between classes, a student can do one of the three things. Ranked from most to least desirable, they are: (1) chat with friends, (2) study economics, or (3) eat lunch. This student's opportunity cost of chatting with friends is: a. the total value of studying economics and eating lunch. b. the value of studying economics. c. the value of chatting with friends. d. nothing because students do not pay their friends to chat with them. ANSWER: b 71. Over the weekend, Bella can do one of three things. Ranked from most to least desirable, they are: (1) go to the beach, (2) study economics, or (3) work. Bella's opportunity cost of going to the beach is the: a. value of studying economics and working. b. value of studying economics. c. value of going to the beach. d. value of working. ANSWER: b 72. How is the unemployment rate related to the opportunity cost of college? a. As the unemployment rate increases, the opportunity cost of attending college falls because fewer
opportunities for employment exist. b. As the unemployment rate decreases, the opportunity cost of attending college falls, since it becomes easier to pay for tuition when employed. c. As the unemployment rate increases, the opportunity cost of attending college increases because fewer people are giving up the opportunity of working to attend college. d. As the unemployment rate increases, the opportunity cost of attending college increases because more people are giving up the opportunity of working to attend college.
ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 1 73. The opportunity cost of committing a crime and spending five years in jail: a. is the same for everyone. b. is higher for people who are employed than for the unemployed. c. is zero because the costs of jail are paid for by the government. d. equals one's fines and legal fees. ANSWER: b 74. Dinah quits her administrative job, which pays $50,000 a year, to finish her four-year college degree. Her annual college expenses are $11,000 for tuition, $1,900 for books, and $2,500 for food. The opportunity cost of attending college for the year is $: a. 15,400. b. 12,900. c. 65,400. d. 62,900. ANSWER: d 75. Air travel from Chicago to Los Angeles costs $800 and takes four hours. A bus ticket between the cities costs $100 and takes 104 hours. Other things equal, the minimum value of one's time that would induce a rational individual to fly rather than drive would be $: a. 1 per hour. b. 7 per hour. c. 12 per hour. d. 120 per hour. ANSWER: b 76. You are given a ticket to a Garth Brooks concert worth $150. You value the ticket at only $100, sell it to a friend for $100, and attend a Chris Stapleton concert for $175. The opportunity cost of attending the Chris Stapleton concert is $: a. 25 worth of alternative goods and services. b. 75 worth of alternative goods and services. c. 175 worth of alternative goods and services. d. 275 worth of alternative goods and services. ANSWER: c 77. On June 13, 2011, writer Sebastian Anthony at Extreme Tech wrote, "During the two days that the Les Paul [Google] doodle was online, those 740 million visitors spent 26 seconds more on the Google home page than normal. That's a total of almost 10.7 million work hours spent playing with the Les Paul Google Doodle. Assuming the average Google user earns $25/hour, the doodle cost companies around the world $268 million in lost productivity." Mr. Anthony's mistake is that he is overestimating opportunity costs. In particular, he is assuming that: a. people have no incentive to work. b. all those work hours would have been spent working if not for the doodle. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 1 c. none of the Google visitors sleep. d. workers are not making marginal decisions. ANSWER: b 78. The economists William Stanley Jevons, Carl Menger, and Leon Walras are credited with: a. explaining the limitations of monetary policy. b. formulating the theory of comparative advantage. c. developing the concept of opportunity cost. d. starting the "marginal revolution." ANSWER: d 79. What is meant by the term "marginal revolution"? a. public disdain toward the institution of marginal tax rates b. the transformation in economic thought that occurred with the discovery of marginal thinking c. the institution of the death penalty for drug dealers d. the effect of policies on crime ANSWER: b 80. What is thinking on the margin? a. making decisions that are of noneconomic importance b. making choices based on historical precedents c. making choices that ignore the marginal benefits, but not the marginal costs, of some activity d. making choices by comparing the additional benefits and additional costs from doing a little bit more of some activity
ANSWER: d 81. Deciding whether to study an additional hour for an exam by comparing the additional benefits to the additional costs of an extra hour of study is an example of: a. the social interest. b. the invisible hand. c. marginal thinking. d. the power of trade. ANSWER: c 82. When deciding whether to undertake an activity, economists compare the: a. total cost of the activity with the total benefit. b. total benefit of the activity with the total cost of production. c. additional cost of the activity with the additional benefit. d. average cost of the activity with the total benefit. ANSWER: c 83. A student at a party deciding whether to stay a few more minutes is: Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 1 a. thinking on the margin. b. increasing the rate of unemployment. c. aligning their self-interest with the social interest. d. paying high interest rates. ANSWER: a 84. Economists believe that people make decisions by: a. comparing marginal costs with marginal benefits. b. thinking about costs but not benefits. c. thinking about benefits but not costs. d. comparing total costs with total benefits. ANSWER: a 85. An example of a marginal decision is deciding whether to: a. invest half your savings in Google or Microsoft. b. buy one more apple or one more banana. c. commit your life to economics or biology. d. study for 5 hours or for 10 hours. ANSWER: b 86. All of these are decisions made on the margin EXCEPT: a. eating dessert at a restaurant. b. budgeting $10,000 to buy a new car. c. buying new shoes to go with your new clothes. d. reading for one more hour before going to sleep. ANSWER: b 87. Decreasing one's driving speed when one sees a police cruiser is an application of the principle of: a. gains from trade. b. returns from specialization. c. marginal thinking. d. opportunity cost. ANSWER: c 88. If the costs of studying for your economics test for 30 more minutes are lower than the benefits, you should: a. continue to study. b. quit studying. c. not study in the first place. d. study for another hour. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 1 89. A grocery store is running a "buy-one-get-another-at-one-half-off" promotion on a dozen doughnuts. So the first dozen is $6, and the second would be $3. A person would buy the second dozen if their marginal benefit from the second dozen doughnuts is: a. greater than $3. b. greater than $6. c. greater than $9. d. less than $3. ANSWER: a 90. What is a plausible economic explanation of why Braille "dots" are commonly found on drive-up automatic teller machines, even though blind customers are unlikely to use them? a. Blind people must be able to use such machines because the Americans with Disabilities Act requires it. b. The marginal benefit of providing keypads with the Braille dots exceeds the marginal cost of making them. c. The marginal cost of making keypads with the Braille dots is less than the marginal cost of making them without the Braille dots. d. There is no economic concept that explains why the keypads have Braille dots.
ANSWER: b 91. Suppose your teacher finishes class 30 minutes early on the day before an exam. They indicate that you may leave, or you may stay on for an optional study period that will last for the remaining 30 minutes of the scheduled class time. You should: a. always choose to stay for the study period, since you have already paid for the class time. b. choose to stay only if you like the instructor, since the value obtained is higher than if you disliked the instructor. c. choose to stay only if the benefits gained from the extra study session exceed the cost of another 30 minutes in class. d. choose to stay for the study session only if you do not plan to study on your own for the exam.
ANSWER: c 92. Suppose you have ordered a value meal at a local fast-food restaurant. The cashier asks if you would like to upgrade your meal to a larger portion. In order to make an efficient decision, you should compare the: a. total cost of the upgraded meal versus the total benefits received. b. additional cost of the larger meal versus the additional benefits received. c. total cost of the larger meal versus the additional cost to the restaurant. d. benefits of the smaller meal versus the additional benefits obtained from consuming the upgraded meal. ANSWER: b 93. If the costs of staying at a party a few more minutes are higher than the benefits, you should: a. stay longer. b. leave the party. c. never have attended the party in the first place. d. have thrown your own party. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 1 94. If the costs of studying for your economics test for 30 more minutes are higher than the benefits, you should: a. continue to study. b. quit studying. c. not study in the first place. d. study for another hour. ANSWER: b 95. When deciding how much to study for an economics class, students should study until the: a. total benefits exceed the total costs. b. total costs equal the total benefits. c. marginal benefits exceed the marginal costs. d. marginal costs exceed the marginal benefits. ANSWER: d 96. When deciding whether to eat more food at a buffet, diners should eat until the: a. total benefit exceeds the total cost. b. total cost equals the total benefit. c. marginal benefit exceeds the marginal cost. d. marginal cost exceeds the marginal benefit. ANSWER: d 97. A high-school graduate deciding to go to college makes that decision by: a. comparing the total income earned per year after graduating from college with the total cost of going to
college. b. comparing the additional income earned per year after graduating from college with the additional cost of going to college. c. thinking about the benefit to society if she goes to college.
d. following what her friends do. ANSWER: b 98. Suppose a customer at a restaurant is deciding whether to order dessert. Marginal thinking means that the customer should compare the: a. total benefit from the entire meal and dessert with the additional cost of the dessert. b. total benefit from the entire meal and dessert with the total cost of the meal and dessert. c. additional benefit from the dessert with the additional cost of the dessert. d. marginal benefit from the meal with the marginal cost of the dessert. ANSWER: c 99. A customer at a fast-food restaurant may choose to order a burger for $4.00 and fries for $1.50 or order a value meal (that includes the burger, fries, and a drink) for $6.00. What is the marginal cost of the drink if the customer orders the value meal? Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 1 a. $6.00 b. $1.50 c. $0.00 d. $0.50 ANSWER: d 100. At Cordless Cellular Phone Services, an unlimited cell phone plan costs $50 per month and has unlimited minutes, texts, and data. What is the marginal fee for the 1,000th minute used? a. $0.50 b. $0 c. $0.05 d. $0.10 ANSWER: b 101. An automobile gets 40 miles per gallon, and a gallon of fuel costs $4.00. What is the marginal fuel cost for a typical mile of driving with this vehicle? a. $0.05 b. $0.10 c. $0.15 d. $0.20 ANSWER: b 102. The average tax on a professor's income of $100,000 is 18%, and the marginal tax rate above $100,000 is 45%. If the professor teaches during the summer and earns an additional $10,000 (bringing their total earnings for the year to $110,000), how much of the summer income do they keep after paying taxes? a. $4,500 b. $1,800 c. $6,300 d. $5,500 ANSWER: d 103. Joe runs a landscaping business. He knows that providing landscaping services costs him $100 per hour on average, while the cost of providing such services is $150 per hour after 5 PM (due to overtime pay, reduced productivity, and the added wear and tear on his equipment). A potential client offers Joe $130 per hour to provide services but needs him to provide the services after 5 PM, due to circumstances at the property. a. Joe should take the job, since $130 exceeds his average cost of production. b. Joe should take the job, since he is making a $30 profit per hour. c. Joe should decline the job, since he would lose $150 per hour worked on the job. d. Joe should decline the job, since he would lose $20 per hour worked. ANSWER: d 104. A person has a comparative advantage in activity X when that person's: Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 1 a. opportunity cost of performing that activity is very high. b. ability to perform that activity exceeds that of all other people. c. government negotiates a favorable trade agreement. d. opportunity cost is lower for them than for their trading partners. ANSWER: d 105. The real power of trade lies in people's ability to: a. get things they can't produce. b. get the lowest price possible. c. increase their consumption. d. specialize and increase production. ANSWER: d 106. One benefit of trade is that it: a. increases the division of knowledge because trade makes people more self-sufficient, producing more of what they consume. b. allows for increased specialization and mass-production techniques that lower per unit costs of production.
c. lowers productivity, leading to greater domestic employment. d. decreases economies of scale, making production more efficient. ANSWER: b 107. When two people voluntarily trade with each other: a. one person will be better off, and the other person will be worse off. b. both of them will be better off. c. both of them will be worse off. d. whether they will be better off or worse off depends on how they negotiate with each other. ANSWER: b 108. Patterns of specialization and trade are explained by: a. the principle of comparative advantage. b. the principle of absolute advantage. c. people's productivity. d. government control and regulation. ANSWER: a 109. When Angel has a comparative advantage over Blake in cooking: a. the opportunity cost of cooking is higher for Angel than for Blake. b. the opportunity cost of cooking is lower for Angel than for Blake. c. Angel can cook faster than Blake can. d. Blake can cook faster than Angel can. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 1 110. When Asha has a comparative advantage over Jabari in welding: a. the opportunity cost of welding is higher for Asha than for Jabari. b. the opportunity cost of welding is lower for Asha than for Jabari. c. Asha can weld faster than Jabari can. d. Jabari can weld faster than Asha can. ANSWER: b 111. It makes sense for Martha Stewart to hire another person to do her ironing because: a. she never learned how to iron. b. her opportunity cost of ironing is the same as that of the person she hires. c. her opportunity cost of ironing is lower than that of the person she hires. d. her opportunity cost of ironing is higher than that of the person she hires. ANSWER: d 112. Trade increases production by allowing us to take advantage of: a. economies of scale. b. economies of scope. c. realism. d. pluralism. ANSWER: a 113. Trade enables us to increase production through: a. specialization. b. mercantilism. c. idealism. d. internalization. ANSWER: a 114. Self-sufficiency: a. is the key to prosperity. b. is not a popular idea. c. limits prosperity. d. means being able and willing to trade. ANSWER: c 115. Which of these statements is TRUE about trade? a. Everyone can benefit from trade, even people who trade with someone from a foreign country. b. Comparative advantage is based on specializing in products that have a high opportunity cost of production. c. If a person can do everything better than anyone else, there is no reason for that person to trade with others. d. Trade makes one party better off but the other party worse off, so there is no net gain to society. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 1 116. Without trade, we would be able to produce: a. all of the products we enjoy now with trade. b. nothing. c. less than we do now. d. more than we do now. ANSWER: c 117. As the United States becomes more productive in manufacturing chemicals and pharmaceutical drugs, the opportunity cost of producing other items such as textiles _____, leading to _____ demand for foreign textiles. a. increases; increased b. decreases; increased c. increases; decreased d. decreases; decreased ANSWER: a 118. The better Martha Stewart is at running her business the: a. higher is her opportunity cost of ironing her own shirts. b. lower is her opportunity cost of ironing her own shirts. c. more it makes sense for her to iron her own shirts because she will have more time. d. more it makes sense for her to spend her time away from her business. ANSWER: a 119. What factor is responsible for ending malaria in the United States? a. inflation b. wealth c. the gold standard d. yardstick competition ANSWER: b 120. Which of these helped the MOST to bring an end to malaria in the United States? a. government aid to the poor b. climate change c. economic growth d. spending on health care ANSWER: c 121. Which of these BEST explains why economists want to understand the determinants of economic wealth? a. Economists, like everyone else, are self-interested. b. As overall wealth increases, the distribution of wealth tends to become more equal. c. Higher levels of wealth tend to generate better health and human rights outcomes across countries. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 1 d. The determinants of economic wealth are easier to study than the determinants of economic growth. ANSWER: c 122. One of the effects of economic growth is: a. a higher rate of infant mortality. b. less leisure time. c. a lower level of reported happiness. d. better sanitation and health outcomes. ANSWER: d 123. How are wealth and economic growth related? a. Increased wealth leads to economic growth. b. Economic growth leads to increased wealth. c. Wealth and economic growth are negatively related. d. Economic growth causes resource depletion and reduces a society's wealth. ANSWER: b 124. The historical rise in living standards of American workers is primarily a result of: a. the influence of labor unions in America. b. tariff protections imposed by the American government. c. the enactment of minimum wage laws in America. d. the rise in American productivity. ANSWER: d 125. Countries with higher GDP per capita tend to score higher on ratings of: a. happiness. b. inequality. c. incidence of malaria. d. autocracy. ANSWER: a 126. Wealth eliminated malaria in the United States in part by enabling: a. the construction of indoor spaces that have shielded Americans from mosquitoes. b. better drainage, removal of mosquito-breeding sites, and the spraying of insecticides. c. the development of a vaccine against malaria. d. greater nutrition, so that people can better ward off the disease. ANSWER: b 127. Wealth leads to higher living standards by: a. enabling a society to afford life-improving resources. b. providing people with a stronger sense of self-worth. Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 1 c. eliminating the psychological dysfunction that plagues poor societies. d. making democratic institutions and the rule of law seem more attractive to people. ANSWER: a 128. Countries with _____ have _____ infant survival. a. greater wealth; higher b. greater wealth; lower c. higher productivity; lower d. higher productivity; higher ANSWER: a 129. Wealthy countries tend to have _____ physical capital per worker and _____ human capital per worker. a. little; a lot of b. a lot of; little c. a lot of; a lot of d. no; a lot of ANSWER: c 130. Today, GDP per capita in South Korea is _____ than in North Korea. a. much less b. slightly less c. slightly greater d. much greater ANSWER: d 131. In 1950, GDP per capita in South Korea was _____ GDP per capita in North Korea. a. 10 times less than b. two times less than c. roughly equal to d. two times greater than ANSWER: c 132. South Korea became much richer than North Korea as a result of: a. foreign aid from the United States. b. a different cultural background. c. a different language. d. its economic system and incentives. ANSWER: d 133. North Korea and South Korea were equally poor in 1950, but today South Korea is _____ than North Korea. Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 1 a. much richer b. slightly richer c. slightly poorer d. much poorer ANSWER: a 134. Which of these BEST characterizes rich countries? a. many workers b. significant levels of human and physical capital per worker c. strong government restrictions on private property rights d. closed markets and the use of the latest technology ANSWER: b 135. What institutions foster the appropriate incentives for economic growth? a. regulated labor and credit markets, and unions b. communal property rights and the absence of a profit–loss system c. a dependable legal system, property rights, and competitive and open markets d. production and export quotas, and supply and demand ANSWER: c 136. An economy in which entrepreneurs are free to experiment with new ideas and bring innovative products to the market will: a. facilitate economic growth but not affect living standards. b. boost living standards and facilitate economic growth. c. boost living standards but hinder economic growth. d. suppress living standards but facilitate economic growth. ANSWER: b 137. Among the most powerful institutions for supporting good incentives is: a. government price controls. b. monopolies. c. legal limits on excessive profits. d. property rights. ANSWER: d 138. Each of these incentivizes innovation and facilitates economic growth EXCEPT: a. government regulations. b. a dependable legal system. c. political stability. d. property rights. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 1 139. A dependable legal system and competitive, open markets: a. shape incentives that facilitate economic growth. b. reduce liberty and other freedoms. c. bring about honest government and political stability. d. increase inefficiencies. ANSWER: a 140. Entrepreneurial activity is encouraged by: a. good institutions. b. opportunity costs. c. economic growth. d. trade-offs. ANSWER: a 141. Macroeconomists place great importance on incentives to produce new ideas because new ideas: a. create possibilities for economic activity and growth that otherwise would not exist. b. contribute positively to people's moral development. c. provide new subject matter for economists to analyze. d. enable companies to exploit workers and consumers more intensively. ANSWER: a 142. Institutions that promote economic growth include: a. policies that provide incentives for people to produce and trade. b. government control of markets. c. income redistribution from the rich to the poor. d. the provision of goods and services to citizens by the government. ANSWER: a 143. Ideas: a. will run out some day. b. are not depleted when they are used. c. are not an important factor in economic growth. d. occur at the same rate no matter what. ANSWER: b 144. Institutions that support economic growth are those that: a. encourage consumption and discourage savings. b. give the government more control over what is produced and how it is produced. c. require companies to act in the social interest. d. provide incentives for entrepreneurs to take risks and innovate. Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 1 ANSWER: d 145. Which of these BEST explains why firms develop new ideas for production techniques and product features? a. They are interested in sharing their new ideas with the world. b. They are interested in making a profit. c. It will be in the social interest. d. It will make their customers happy. ANSWER: b 146. If North Korea and South Korea were both equally poor in 1950, why has South Korea developed so much faster than North Korea since then? a. The two countries have different linguistic, cultural, and historical backgrounds. b. North Korea's economic system is characterized by incentives to invest and innovate. c. South Korea has maintained a more market-based economic system. d. South Korea began with a higher per capita GDP. ANSWER: c 147. A National Geographic Channel special, Inside North Korea, reported on Dr. Sanduk Ruit's humanitarian mission to North Korea, one of the poorest countries in the world. Over a 10-day period, he performed 1,000 relatively straightforward eye surgeries to remove blindness due to cataracts. Why is it not surprising that North Korea doesn't have doctors to perform this surgery? a. North Korea specializes in other things and trades for medical services. b. North Korea is too poor to afford qualified eye doctors. c. The "invisible hand" allocates resources to other areas. d. North Korea's economy is too dynamic—with many booms and busts—to provide such medical services. ANSWER: b 148. Research spearheaded by Dr. Norman Borlaug in the 1950s and 1960s led to the development of high-yield wheat that is now used all over the world. It was so successful that some credit Borlaug with saving more than 1 billion people from dying of starvation. What quality do ideas have that makes this claim so credible? a. They don't require many resources to develop, just careful thought. b. They create incentives, transform human behavior, and allow people to pursue their own self-interest. c. They are intangible, allowing them to easily be improved upon. d. They aren't depleted when they are used, allowing them to spread quickly and without limit. ANSWER: d 149. The Great Depression was: a. a natural manifestation of competitive markets. b. cut short because of well-thought-out monetary policy. c. to date, the worst economic period in U.S. economic history. d. about as severe as the 2008–2009 recession. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 1 ANSWER: c 150. In a recession, generally: a. unemployment increases. b. employment increases. c. wages decrease, and unemployment increases. d. wages increase, and unemployment increases. ANSWER: c 151. During the Great Depression, the U.S. unemployment rate exceeded: a. 35%. b. 30%. c. 25%. d. 20%. ANSWER: d 152. During the Great Depression, U.S. national output fell by: a. 35%. b. 30%. c. 25%. d. 20%. ANSWER: b 153. The Great Depression: a. was the normal response of an economy to changing economic conditions. b. could not have been lessened with appropriate monetary policy. c. generated unemployment rates of more than 20%. d. was not an important economic event. ANSWER: c 154. Which of these statements is TRUE? a. The Great Depression, despite its name, was a minor economic downturn characterized by minimal
unemployment. b. The Great Depression refers to the severe economic downturn that occurred during the nineteenth century.
c. The Great Depression would have been less severe if the Federal Reserve had acted more appropriately. d. Well-functioning economies grow at a constant rate and do not experience booms and busts. ANSWER: c 155. Booms and busts refer to: a. fluctuations in economic activity over time. b. the theory of the second best. c. decreases in a nation's economic growth over time. Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 1 d. monetary inflation and deflation caused by the central bank. ANSWER: a 156. Two types of policy used by the government to affect economic conditions are: a. acceleration and recalibration policy. b. recalculation and normalization policy. c. fiscal and monetary policy. d. passive and active policy. ANSWER: c 157. Monetary and fiscal policies: a. can reduce the severity of economic busts. b. have been proven to be ineffective and are no longer used during recessions. c. work only during times of rapid inflation. d. are tools used during economic booms but not economic busts. ANSWER: a 158. Economists have discovered that economic booms and busts: a. are needless and can be eliminated. b. should be encouraged because they help make people better off. c. can be moderated but not eliminated. d. cause people to specialize so that they become more productive. ANSWER: c 159. Most developed countries: a. have stopped growing. b. grow at an unsteady rate. c. grow at a steady rate. d. grow at an increasing rate. ANSWER: b 160. Economic booms and busts: a. can be moderated but not avoided. b. can be avoided by cultivating institutions that foster growth. c. do not occur, since the economy always grows at a constant pace. d. occur only if countries have bad institutions. ANSWER: a 161. All booms and busts: a. are part of an economy's normal response to changing economic conditions. b. are avoidable. Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 1 c. are caused by the weather. d. affect the rate of economic growth. ANSWER: d 162. Monetary and fiscal policy: a. can make matters worse if poorly used. b. are useless. c. can prevent all recessions. d. are all-powerful. ANSWER: a 163. Which of these explains why economic booms and busts cannot be avoided? a. The effects of fiscal and monetary policies will never be completely understood. b. The time lags of both fiscal and monetary policies make eliminating boom–bust cycles impossible. c. Economic booms and busts could be avoided if politicians would put good economics ahead of good politics. d. The economy is regularly hit by unanticipated shocks. ANSWER: d 164. In Zimbabwe, the government's sustained _____ in the _____ money caused the country's severe inflation. a. decrease; demand for b. decrease; supply of c. increase; supply of d. increase; demand for ANSWER: c 165. Inflation is a(n): a. decrease in the general level of prices. b. increase in a price of a good. c. increase in the general level of prices. d. increase in the prices of goods in a particular classification, like food or energy. ANSWER: c 166. According to Milton Friedman, "Inflation is always and everywhere: a. a capitalist problem." b. a communist problem." c. a monetary phenomenon." d. caused by haphazard technological growth." ANSWER: c 167. The _____ has the power to regulate the money supply in the United States. a. Federal Reserve Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 1 b. president c. Senate d. House of Representatives ANSWER: a 168. From 2007 to 2009, the inflation rate in Zimbabwe could be characterized as: a. negative. b. zero. c. positive but low. d. positive and high. ANSWER: d 169. The Zimbabwean government printed money as fast as it could for years. As a result: a. prices fell rapidly in Zimbabwe. b. the Zimbabwean economy grew rapidly. c. Zimbabwe experienced mild inflation. d. Zimbabwe experienced very drastic inflation. ANSWER: d 170. Milton Friedman argued that: a. prices need to be regulated and set by the government to prevent inflation. b. general price level increases result from the government printing too much money. c. inflation is a phenomenon of capitalist economies. d. appropriate antitrust policy can prevent businesses from causing inflation. ANSWER: b 171. The central bank of the United States is known as the: a. Federal Reserve. b. Central Bank of the United States. c. Central Reserve Union. d. Federal Central Bank. ANSWER: a 172. The central bank of the United States is: a. the Senate. b. the Department of Treasury. c. the Federal Reserve. d. Wall Street. ANSWER: c 173. Inflation can be defined as: Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 1 a. a general rise in the level of output in an economy. b. the boom–bust cycle of an economy. c. the rise and fall of the general level of prices in an economy. d. an increase in the general level of prices in an economy. ANSWER: d 174. An increase in the general price level is: a. depreciation. b. appreciation. c. deflation. d. inflation. ANSWER: d 175. Inflation: a. is a decrease in the general level of prices. b. is an increase in the general level of prices. c. makes it easier to determine the real values of goods, services, and investments. d. is a rare problem in macroeconomics. ANSWER: b 176. Central banking in the United States refers to: a. the operation of the Federal Reserve in its attempts to affect the economy. b. how commercial banks interact with one another to earn more profits. c. the federal government's control of the U.S. banking system. d. how banking decisions are centralized in New York City. ANSWER: a 177. Inflation is primarily caused by: a. businesses raising their prices in response to increasing energy prices. b. the government printing too much money. c. misguided fiscal policy. d. economic downturns in GDP. ANSWER: b 178. Most economists believe that an increase in the supply of money results in: a. a decrease in the demand for goods and services. b. higher unemployment in the short run. c. higher inflation in the long run. d. no change in the economy. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 1 179. Inflation is bad for an economy because it: a. causes an increase in the demand for goods and services. b. leads to higher employment and wages. c. makes it hard for people to determine the real values of goods, services, and investments. d. makes people feel richer. ANSWER: c 180. Inflation occurs largely as a result of: a. the government having a large debt. b. a shortage in the supply of goods or services. c. the government printing too much money. d. a recession. ANSWER: c 181. Which of these would be the MOST likely to cause inflation? a. massive increases in government spending b. sustained increases in the money supply c. increases in interest rates d. a decline in the purchasing power of the dollar ANSWER: b 182. When people spend more money without an increase in the supply of goods, prices: a. must rise. b. must fall. c. may rise or fall. d. must stay the same. ANSWER: a 183. In Zimbabwe, price increases of 150,000% per year were caused by: a. the country's unsustainable trade deficit. b. marginal tax rates as high as 90%. c. large increases in the money supply. d. deregulated prices. ANSWER: c 184. Inflation typically arises from a(n): a. sufficiently rapid contraction of the money supply. b. constant money supply. c. sufficiently rapid increase in the money supply. d. increase in the price level. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 1 185. What is one cause of inflation? a. a persistent rise in prices b. the inability of production to keep up with spending c. decreased spending by people and the government d. economic growth without monetary growth ANSWER: b 186. A policymaker wants to reduce inflation. In order to make an intelligent decision about how to do so, the policymaker: a. should use a simple rule: once inflation is gone, it will always be gone. b. needs to know the causes of inflation, for example, the government printing too much money. c. should find out if people are really better off as a result of the inflation. d. should realize that inflation can be reduced without any costs. ANSWER: b 187. In an episode of DuckTales (a Disney cartoon starring Scrooge McDuck) entitled "Dough Ray Me," one of the characters invents a duplicating machine. Other characters then use the machine to duplicate money at a massive rate. What would you expect to happen in this scenario? (And indeed, the episode does show this happening.) a. More people would save money. b. The government would print more money. c. There would be massive inflation. d. Wages would fall. ANSWER: c 188. Which statement is correct regarding the Federal Reserve? a. Most economists believe that the Federal Reserve does more good than harm. b. The Federal Reserve has developed the ability to manage the economy with great precision. c. Its control of the money supply is not connected to the performance of the economy. d. The Federal Reserve's decisions immediately impact the economy's unemployment rate. ANSWER: a 189. Which statement explains why the Federal Reserve has a tough job? a. There are lags in the effects of monetary policy, and economic conditions continuously change. b. Legally, the Federal Reserve cannot change the supply of money; it can only make recommendations to the president. c. It takes a long time for Congress to agree on a policy.
d. The Federal Reserve can change the supply of money, but that doesn't affect spending or the rate of unemployment.
ANSWER: a 190. Decisions made by the Federal Reserve sometimes negatively impact the economy because: Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 1 a. the economy is weakened when the Fed uses monetary policy. b. the government uses money inefficiently when it comes to fiscal policy. c. the Fed finds that forecasting economic conditions is easy but that controlling the money supply is difficult. d. too much money or too little money might induce inflation or unemployment due to bad timing. ANSWER: d 191. The Federal Reserve conducts monetary policy by: a. altering the amount of government spending. b. manipulating the money supply. c. regulating companies whose activities have harmful social effects. d. setting prices and wages. ANSWER: b 192. The main objective of a central bank is to: a. supply the right amount of money to keep the economy stable. b. supply as much money as it can to help the economy grow. c. supply the government with the money it needs to operate. d. make sure every citizen has the amount of money they want to have. ANSWER: a 193. If the central bank creates too much money, _____ will result. If the central bank doesn't create enough money, an economic _____ will result. a. deflation; boom b. inflation; boom c. deflation; slowdown d. inflation; slowdown ANSWER: d 194. If the Fed reduces the money supply to fight inflation, it could inadvertently: a. cause very drastic inflation. b. put the economy into a recession. c. cause wages to rise, putting upward pressure on prices. d. cause a decrease in spending, putting upward pressure on prices. ANSWER: b 195. If the Fed increases the money supply to bring the economy out of recession, it could inadvertently: a. cause high inflation. b. put the economy into a depression. c. cause profits to plummet. d. cause the real value of the dollar to rise, making U.S. goods and services uncompetitive in global markets. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 1 196. A bachelor's degree in economics is: a. valuable for one's personal growth but not financially rewarding. b. can help you land a government job but not a business job. c. one of the best-paying degrees offered at U.S. colleges. d. valuable exclusively if your goal is to teach at the college level. ANSWER: c 197. You can utilize the principles of economics to analyze: a. industrialized economies but not developing ones. b. all economies. c. economies with capitalist but not socialist systems. d. poor economies but not rich ones, as only the former are characterized by scarcity. ANSWER: b 198. You can apply economic analysis: a. to financial transactions only. b. to any decision that involves a trade-off, except for ordinary decisions one makes in everyday life. c. exclusively to transactions that involve the exchange of money for goods or services. d. to any decision that involves a cost and a benefit, including many common decisions one makes in everyday life.
ANSWER: d 199. Economists believe that people are self-interested all the time. a. True b. False ANSWER: b 200. People are rational and sometimes respond in unpredictable ways to incentives. a. True b. False ANSWER: b 201. People are often irrational and respond in unpredictable ways to incentives. a. True b. False ANSWER: b 202. Economists think that no one is ever self-interested. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 1 203. Economists think that people behaving in their self-interest is bad for society. a. True b. False ANSWER: b 204. Economists believe that people will not respond to nonmonetary incentives, like love or status. a. True b. False ANSWER: b 205. In addition to monetary incentives, economists also believe people respond to incentives like fame, power, reputation, and love. a. True b. False ANSWER: a 206. Economists argue that self-interested people respond only to monetary incentives. a. True b. False ANSWER: b 207. Because people instinctively act in their self-interest, markets will often produce outcomes in line with the social interest. a. True b. False ANSWER: a 208. Markets align self-interest with the social interest as long as the government doesn't interfere. a. True b. False ANSWER: b 209. Under the right conditions, markets align self-interest with the social interest, but sometimes government intervention is necessary. a. True b. False ANSWER: a 210. An example of a case in which free markets do not align self-interest with the social interest is pollutionemitting production. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 1 ANSWER: a 211. An example of Adam Smith's "invisible hand" is self-interested businesspeople developing a better keyboard for the blind in hopes of making large profits. a. True b. False ANSWER: a 212. The opportunity cost of attending college includes tuition, room and board, the cost of meals, and the lost opportunity to make money at a job. a. True b. False ANSWER: b 213. The opportunity cost of playing two hours of Fortnite is the value of the opportunity lost from the two hours of playing outside. a. True b. False ANSWER: a 214. With careful planning, we can usually get something that we like without having to give up something else that we like. a. True b. False ANSWER: b 215. In a large class, each student's opportunity cost of taking an exam is likely to be the same. a. True b. False ANSWER: b 216. One student's opportunity cost of studying for an exam may be lost work time, while another's may be lost time for playing video games. a. True b. False ANSWER: a 217. The FDA faces societal trade-offs when it decides how safe drugs need to be before allowing patients to use them. For example, if the FDA raises the cost of testing for drug safety, some safe drugs will never be developed, and people will die unnecessarily. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 1 218. A student spends four years in college. College tuition, fees, and room and board cost $10,000 per year. This student's opportunity cost of attending college is $10,000. a. True b. False ANSWER: b 219. Marginal thinking was simultaneously described by three economists—William Stanley Jevons, Carl Menger, and Adam Smith. a. True b. False ANSWER: b 220. A marginal change is a small incremental adjustment to an existing plan of action. a. True b. False ANSWER: a 221. The term "marginal" in economics means "additional." a. True b. False ANSWER: a 222. When deciding whether to eat a second piece of pizza, you should compare the total benefit of the two pieces of pizza with the total cost. a. True b. False ANSWER: b 223. One of the Big Ideas in economic thinking is that there is an incentive to do something if the total benefit is greater than the total cost. a. True b. False ANSWER: b 224. One of the Big Ideas in economic thinking is that there is an incentive to do something if the marginal benefit is greater than the marginal cost. a. True b. False ANSWER: a 225. The general manager of a major league baseball team reasons that hiring an all-star-caliber third baseman would allow the team to win 13 more games per season, generating more fan interest and higher ticket sales. Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 1 The estimated increase in ticket and merchandise sales is $10.5 million per year, but it would cost the team $12 million per year to hire an all-star-caliber third baseman. If the general manager employs marginal cost–benefit thinking, they will not hire the all-star-caliber third baseman. a. True b. False ANSWER: a 226. The economics of trade depends on whether trading partners live in the same country and share the same language and religion. a. True b. False ANSWER: b 227. Everyone can benefit from trade through increased specialization, division of knowledge, and productivity. a. True b. False ANSWER: a 228. While trade has many benefits, the division of knowledge is a negative outcome of trade. a. True b. False ANSWER: b 229. Two people can benefit from trade if they live in the same country but not if they live in different countries. a. True b. False ANSWER: b 230. The theory of comparative advantage concludes that people can produce more by specializing than by doing everything themselves. a. True b. False ANSWER: a 231. Greater emphasis on self-sufficiency and trading less with foreign countries would increase incomes and living standards in the United States. a. True b. False ANSWER: b 232. Less emphasis on self-sufficiency and trading more with other nations will increase incomes and living standards in the United States. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 1 a. True b. False ANSWER: a 233. By trading in free markets, firms and consumers benefit, but workers do not. a. True b. False ANSWER: b 234. A country's wealth is uncorrelated with the status of women's rights and political liberty in that country. a. True b. False ANSWER: b 235. America was so poor in past centuries that even George Washington caught malaria. a. True b. False ANSWER: a 236. Because of their low incomes, about a million people in the United States die of malaria each year. a. True b. False ANSWER: b 237. While economic growth does increase the quality of life, the trade-off is that life expectancy is now shorter than in the past. a. True b. False ANSWER: b 238. People in developing countries are more vulnerable to illness and disease than people in developed countries mainly because they lack the ability to pay for preventative interventions. a. True b. False ANSWER: a 239. People in wealthier economies tend to lead richer and more fulfilled lives. a. True b. False ANSWER: a 240. Understanding economic growth is one of the most important tasks of economics. Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 1 a. True b. False ANSWER: a 241. Understanding economic growth is not important in economics, but understanding wealth is. a. True b. False ANSWER: b 242. South Korea is an example of a country that has adopted good institutions for promoting economic growth. a. True b. False ANSWER: a 243. To be wealthy, a country needs lots of physical and human capital per worker, which, in turn, depends on a system of private property rights, political stability, a just legal system, honest government, and competitive and open markets. a. True b. False ANSWER: a 244. If two countries are initially at the same level of development, the existence of well-functioning markets in one country can allow it to develop faster than the other. a. True b. False ANSWER: a 245. The environment BEST suited for economic growth is one with well-functioning competitive markets, property rights, and creativity in firms. a. True b. False ANSWER: a 246. Monetary and fiscal policies are among a government's tools for mitigating economic fluctuations. a. True b. False ANSWER: a 247. The Federal Reserve acted quickly and appropriately to diffuse the Great Depression. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 1 248. During the Great Depression, the unemployment rate rose above 20%. a. True b. False ANSWER: a 249. During the Great Depression, the unemployment rate rose above 35%. a. True b. False ANSWER: b 250. A period marked by falling wages, falling national output, and rising unemployment is called a recession. a. True b. False ANSWER: a 251. Economies MUST experience both booms and busts. All economists can do is work to limit the extent of economic fluctuations. a. True b. False ANSWER: a 252. Monetary and fiscal policies have the potential to make a recession worse. a. True b. False ANSWER: a 253. Monetary and fiscal policies can improve unemployment and GDP during a recession. a. True b. False ANSWER: a 254. Modern economic understanding allows us to avoid economic booms and busts, although political constraints prevent the needed policies from being implemented. a. True b. False ANSWER: b 255. High inflation in Zimbabwe in 2009 was the result of the Zimbabwean government printing too much money. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 1 256. When the government decreases the supply of money, there is an increase in the general level of prices. a. True b. False ANSWER: b 257. Central banks can cause inflation. a. True b. False ANSWER: a 258. If sustained over the long run, excess money printing by the government causes high inflation and economic crisis. a. True b. False ANSWER: a 259. A drawback of inflation is that it creates a lot of uncertainty about prices. a. True b. False ANSWER: a 260. Inflation makes it more difficult to figure out the real values of goods and services. a. True b. False ANSWER: a 261. During the period of dramatic inflation in Zimbabwe, if you had 1 trillion Zimbabwean dollars, you still were not very rich. a. True b. False ANSWER: a 262. Inflation increases the value of money by increasing the purchasing power of money. a. True b. False ANSWER: b 263. If there is high inflation, individual households will be hurt, but economic disruptions on a national level will not result. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 1 264. Most economists believe that the Federal Reserve does more good than harm to the U.S. economy. a. True b. False ANSWER: a 265. The Federal Reserve's attempts to combat recessions and high unemployment could result in higher inflation. a. True b. False ANSWER: a 266. The Federal Reserve has a dual mandate to promote maximum employment and stable prices. This can be hard because attempts to reduce unemployment can cause more inflation. a. True b. False ANSWER: a 267. The study of economics increases your understanding of the distant past, present events, and future possibilities. a. True b. False ANSWER: a 268. Among other things, an understanding of economics can help you better manage your finances. a. True b. False ANSWER: a 269. One of the limitations of economics is that the principles of economics apply only to the American economic system and not to foreign economies. a. True b. False ANSWER: b 270. The Fed's decisions: a. are always right. b. affect the economy immediately. c. often take months for their effects to be felt in the economy. d. never help to avoid recessions. ANSWER: c 271. Which of these quotes from the text captures what makes central banking difficult? Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 1 a. "No one can foresee the future." b. "We cannot avoid all recessions." c. "Markets, however, do not always align self-interest with the social interest." d. "In some situations, the Fed must accept a certain amount of either inflation or unemployment." ANSWER: a 272. Because people instinctively act in the social interest, markets will produce outcomes that are in the social interest. a. True b. False ANSWER: b 273. There are 10 Big Ideas in Chapter 1. List four of them. ANSWER: The 10 Big Ideas in Chapter 1 are: 1. Incentives matter 2. Good institutions align self-interest with the social interest 3. Trade-offs are everywhere 4. Think on the margin 5. Trade makes people better off 6. Wealth and economic growth are important 7. Institutions matter 8. Economic booms and busts cannot be avoided but can be moderated 9. Inflation is caused by increases in the supply of money 10. Central banking is a hard job
274. In his book The Wealth of Nations, Adam Smith explained, "It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest." Explain what Adam Smith meant by this. Be sure to tie your explanation to one or more of the Big Ideas in economics discussed in the text. ANSWER: Adam Smith was referring to how the butcher, the brewer, and the baker are all motivated by incentives. They do not cut meat, brew drinks, or bake bread out of the goodness of their own heart, but because they are pursuing their selfinterest. The interest in their cases being their livelihoods. They have these jobs so that they can sustain their own lives, and by doing their jobs we have an easier access to our own dinners. Their self-interest aligns with the social interest; by working jobs in pursuit of their self-interest to have means to live, others are able to have easier access to food.
275. How do self-interested businesses benefit society? ANSWER: Self-interest businesses can benefit society by producing products or services that people in society want or need. Their self-interest is profit, the profit they get from producing the goods or services. These products are then used by people who want or need them. This is an example of when self-interest aligns with the social interest.
276. Let's assume that your favorite musician (who sells platinum records and has sold-out concerts) is a great cook. They also make splendid cakes and pies. They could sell the pies and cakes for $30 each. Why don't they spend their whole day baking and cooking? ANSWER: In this situation, the musician's opportunity cost of baking is too high. The musician can profit way more by producing music than they can by making pies and cakes. The musician is better off producing music to make money than they are making pies and cakes for money.
277. Define opportunity cost. What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today? Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 1 ANSWER: The opportunity cost of a choice is the value of the opportunities lost by making that choice. The opportunity cost of attending college is the price of tuition, books, room and board (only if you would have had a place to stay for free had you not attended college, if not then this would not be included in the opportunity cost of attending college since you would have to pay for it anyway), and the opportunity to have a full-time job. The opportunity cost of coming to class today is anything you could have done that you value instead, such as sleeping in, playing video games, hanging out with friends, watching a movie, etc.
278. Why do airlines sometimes advertise last-minute airline ticket sales at low prices? What economic principle are they applying? ANSWER: The economic principle airlines are applying is thinking on the margin. They are making a choice by thinking in terms of marginal benefits (the profits from one more customer that would otherwise just be an empty seat) and marginal costs (the extra cost of jet fuel, e.g., required to carry a heavier plane). If the airline is advertising this sale, the airline probably would benefit more from one extra passenger than it would cost them to have the extra passenger on the plane.
279. Using the marginal thinking concept, explain a student's decision to wake up and attend an 8 AM class in the winter (the student is already registered for the class). ANSWER: Marginal thinking, or thinking on the margin, is just making choices by thinking in terms of marginal benefits and marginal costs of a little bit more (or a little bit less). In this case, the student has to wake up to make it to their 8 AM class during the winter. Depending on how early the student went to sleep, they might feel inclined to sleep in longer, especially considering that they still have to arrive to class by 8 AM, so they have to wake up even earlier. The marginal cost here is the sleep missed out on or maybe activities forgone the previous night to be able to make it to the class. The benefits are the valuable class time that the student receives that can help them achieve better in the class they are taking and maybe even just starting the day earlier.
280. Why do you think economists generally support increased trade? ANSWER: Economists generally support increased trade because it makes people better off. Few of us could survive if we had to produce our own food, clothing, and shelter. We survive and prosper only because specialization through trade increases productivity. Through the division of knowledge, the sum total of knowledge increases and in this way so does productivity. Trade also allows us to take advantage of economies of scale, the reduction in costs created when goods are mass-produced.
281. Wherein lies the power of trade? ANSWER: The real power of trade is the power to increase production through specialization. Take an auto mechanic and a doctor. If the auto mechanic focuses on learning about cars and the doctor focuses on learning about health and the human body, more knowledge is gained than if both of them had to learn how to repair cars and cure illnesses. Through the division of knowledge, the sum total of knowledge increases and in this way so does productivity.
282. Using the concepts of incentives and good institutions, explain how a country might achieve economic growth. ANSWER: Among the most powerful institutions for supporting good incentives are property rights, political stability, honest government, a dependable legal system, and competitive and open markets. These institutions incentivize entrepreneurs, investors, and savers to save and invest in physical capital, human capital, innovation, and efficient organization. All of these factors are important for achieving economic growth in a country.
283. Many industrialized nations have been pumping trillions of dollars into their economies in the form of stimulus packages, tax rebates, and bailouts in order to stimulate additional consumer spending and business investment and to ward off global recession. If a large portion of these funds are obtained through the printing of new money, explain whether or not this will help or hurt these economies in the long run. ANSWER: While these programs might help the economies in the short run, in the long run these might lead to inflation, an increase in the general level of prices. When people have more money, they spend it, and without an increase in the supply of goods, prices must rise. Inflation makes people feel poorer and makes it harder for people to figure out the real values of goods, services, and investments. Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 1 284. Explain why central banking is a hard job. ANSWER: The Federal Reserve is often called on to combat recessions; however, this is not always easy to do. Usually, there is a lag, often of many months, between when the Federal Reserve makes a decision and when the effects of that decision on the economy are known. In the meantime, economic conditions have changed. The Federal Reserve is sort of shooting at a moving a target. No one can foresee the future perfectly, and thus the Federal Reserve's decisions are not always the right ones. Too much money in the economy means that inflation will result. Not enough money in the economy can lead to a recession or a slowing of economic growth. The Federal Reserve is always trying to get it "just right," but some of the time it fails. Sometimes failure is a mistake the Federal Reserve could have avoided, but other times it simply is not possible to always make the right guess about where the world is headed. Therefore, in some situations, the Federal Reserve must accept a certain amount of either inflation or unemployment.
Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 2 1. Which statement is TRUE? a. Trade makes workers in high-productivity countries less productive. b. Trade causes workers in low-wage countries to receive an even lower wage. c. Specialization and trade raise wages in both countries that are party to the trade. d. Specialization and trade raise productivity but not wages. ANSWER: c 2. Which statement is TRUE? a. Only a high-wage country can benefit by trading with a low-wage country. b. A high-wage country cannot benefit by trading with a low-wage country. c. Trade raises the wages of workers in low- and high-wage countries. d. There is an inverse relationship between productivity and wages. ANSWER: c 3. Trade creates value because: a. people get what they want. b. raw materials are transformed into finished products. c. people exchange things they value less for things they value more. d. idle resources are put to use. ANSWER: c 4. eBay creates value by: a. helping sellers trick buyers into purchasing broken items. b. moving goods like broken laser pointers from people who don't want them to people who do. c. helping people with the same preferences find each other. d. moving toys from children who want them to children who don't. ANSWER: b 5. David sells his car, which he considers worthless, to Cameron for $200. Which statement is TRUE? a. David and Cameron must have different preferences for the car. b. This trade did not create value because Cameron is buying a car that David considers worthless. c. Cameron is the only one made better off by the trade. d. David is made better off by the trade, but Cameron is made worse off. ANSWER: a 6. Matilda sells her iPhone, which she considers worthless, to Gabriel for $200. Which statement is TRUE? a. Matilda and Gabriel must have the same preferences for the iPhone. b. This trade created value because Gabriel is buying the iPhone for more than Matilda thinks it is worth. c. Matilda is the only one made better off by the trade. d. Matilda is made better off by the trade, but Gabriel is made worse off by the trade. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 2 7. Jose sells his economics textbook from last semester, which he could sell back to the bookstore for $40, to Adolfo for $150. Adolfo had planned to pay $240 for the textbook at the bookstore. Which statement is TRUE? a. Jose and Adolfo must have the same preferences for the textbook. b. This trade did not create value because Adolfo is buying the textbook for more than Jose could get from the bookstore. c. Both Jose and Adolfo are made better off by the trade.
d. Adolfo is made better off by the trade, but Jose is made worse off by the trade. ANSWER: c 8. Mark values his drum set at $800, and Ella values her guitar at $1,000. Suppose that Mark trades his drum set for Ella's guitar. a. This trade makes Ella worse off by $200. b. This trade makes Mark better off by $200. c. Mark must value Ella's guitar for at least $800, and Ella must value Mark's drum set for at least $1,000. d. This trade decreases total value by moving the guitar and drum away from people who placed a high value on them.
ANSWER: c 9. Facilitators of trade (such as Pierre Omidyar, the developer of eBay): a. may become very rich since they are creating value for many individuals. b. find it very hard to profit from their services since they are not directly involved in the trades. c. typically profit from their services only if they are able to obtain government patent rights. d. are usually seen as taking advantage of consumers. ANSWER: a 10. Trade makes people better off when: a. everyone wants the same things as other people. b. some people are less productive than others. c. people cannot specialize in certain activities. d. people have different preferences. ANSWER: d 11. Each of the 100 people receives a random item from a grocery store and assigns it a value between 1 (low) and 10 (high). They trade those items among themselves for items they prefer rather than those they randomly received and then assign a second value (again, 1 to 10) to the item that they end up with after the trading concludes. How would the sum of those values before trading compare with the sum after trading? a. The value would stay the same because no new goods were introduced. b. The value would stay the same because no one has a comparative advantage. c. After trading, value would be lower because no one can specialize. d. After trading, value would be higher because preferences are diverse. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 2 12. Which is LEAST likely to be a consequence of the division of knowledge? a. the development of the computer tablet b. a totally self-sufficient family farm c. a new delivery method for cancer-fighting drugs d. the provision of a new bike path in your community ANSWER: b 13. Only a very small portion of people who use microwaves know how they work. This is an example of: a. a production possibility frontier. b. the division of knowledge. c. absolute advantage. d. opportunity cost. ANSWER: b 14. Jennifer buys a computer based on the recommendation of her brother, who is an information technology professional. This is an example of: a. a production possibility frontier. b. the division of knowledge. c. gains from trade. d. opportunity cost. ANSWER: b 15. Division of knowledge refers to: a. dividing tasks into different subtasks and having one person perform all these subtasks. b. people learning different tasks in which they specialize. c. assigning one person to learn all the different ways to perform the same task. d. limiting what each person knows about another person. ANSWER: b 16. Which situation would lead to more starvation? a. a world where everyone grows their own food and there is no trade b. a world with trade and lots of specialization c. a world with immense division of knowledge d. a world where only some people specialize in food and everyone else produces something else ANSWER: a 17. The main reason specialization can raise productivity is that: a. knowledge in human brains is limited. b. some persons have more knowledge than others. c. it is always good to know less than more. d. it is impossible to learn anything well. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 2 ANSWER: a 18. There are many specialties in the practice of medicine. For example, there are surgeons, cardiologists, neurologists, obstetricians, and ophthalmologists. This is an example of: a. a production possibility frontier. b. the division of knowledge. c. gains from trade. d. opportunity cost. ANSWER: b 19. Knowledge increases _____ and specialization _____ total output. a. education; decreases b. productivity; increases c. perception; increases d. economies of scale; decreases ANSWER: b 20. Economic growth in the modern era is primarily due to the: a. increases in the number of people. b. increases in money. c. defining of national borders. d. creation of new knowledge. ANSWER: d 21. Specialization and trade can _____ the per-unit cost of production because _____. a. decrease; they allow for more small-scale production b. decrease; they create economies of scale associated with large-scale production c. increase; they require more expensive, specialized equipment d. increase; more expensive labor is needed ANSWER: b 22. The United States and the European Union are groups of semi-independent states that have come together under agreements whereby resources can travel freely across internal borders and a common currency is in use. Which statement BEST explains how this allows for the achievement of economies of scale? a. Each state or country can now target larger markets and can thus earn more export revenue. b. States and countries no longer have to worry about borders impeding trade. c. Each state or country can adopt large-scale production techniques that allow lower per-unit costs of production. d. The removal of trade borders and a common currency enhance trade between member states.
ANSWER: c 23. One of the outcomes of specialization is that it leads to _____, which _____ the average cost of production. Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 2 a. smaller-scale production; lowers b. smaller-scale production; raises c. larger-scale production; raises d. larger-scale production; lowers ANSWER: d 24. Without _____, specialization is impossible. a. different preferences b. productivity c. opportunity costs d. trade ANSWER: d 25. If each of us had to grow all of our own food: a. civilization would collapse, and billions of people might starve. b. we would have more time for other pursuits. c. people would be richer since they would no longer have to spend money on groceries. d. the total amount of knowledge in society would increase since everyone would have to learn about farming. ANSWER: a 26. If instead of specialized doctors (neurologists, cardiologists, gastroenterologists, etc.) we had doctors who each knew the same things about all aspects of medicine, it would be: a. better because then we could just go to one doctor with no loss of quality in medical care. b. better because total medical knowledge in society would increase. c. worse because the human brain is limited. d. worse because total medical knowledge in society would decrease. ANSWER: d 27. Roses grown in Kenya travel to Amsterdam and ultimately to your local flower shop because: a. the World Rose Commission coordinates the different elements of the rose industry. b. markets coordinate the specialization and trade necessary for the flower industry to function. c. of the trade agreement between the governments of Kenya and Amsterdam. d. customers are willing to pay more for roses that pass through Amsterdam. ANSWER: b 28. Trade barriers like the Berlin Wall: a. increased the number of scientists and engineers. b. added billions of minds to the global division of knowledge. c. decreased innovation and global cooperation. d. prevented restrictive monopolistic practices. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 2 29. A rock carving from ancient Norway depicts two identical people doing different jobs in the same boat: one uses a bow to hunt while the other paddles. How does this early example illustrate the benefits of trade? a. One prefers to hunt, while the other prefers to paddle the boat; this is an example of diverse preferences. b. One learns to be very good at paddling, and one learns to be very good at hunting; this is an example of specialization and division of knowledge. c. The paddler is stronger than the hunter, so the paddler sacrifices a lot by hunting; this is an example of comparative advantage. d. There is no trade in this example, since no goods are being exchanged.
ANSWER: b 30. Fourteenth-century potters in the Chinese city of Jingdezhen developed the technology to heat a kiln at 1,300 degrees Celsius and produce porcelain, or "china," which was particularly popular in Persia, where the Koran forbade serving food on gold or silver and wealthy families were anxious for a legal way to impress their dinner guests. The potters also imported Persian cobalt to create the blue dye for the porcelain (local cobalt was not as bold in color). Which advantage(s) from trade is(are) illustrated in this passage? a. differences in preferences b. specialization c. comparative advantage d. all of these advantages ANSWER: d 31. As trade becomes more widespread, specialization _____, which in turn _____ productivity. a. decreases; decreases b. increases; increases c. decreases; increases d. increases; decreases ANSWER: b 32. Which statements are TRUE? I. Compared with a modern economy, the division of knowledge is greater in a primitive economy because every family is self-sufficient: growing its own food, making its own clothes, and constructing its own shelter. II. Nobody understands the entire process of producing even the simplest products, like a lead pencil, in a modern economy. III. The collapse of communism and the opening of the Chinese economy to the rest of the world have increased the division of knowledge, leading to increased world output. a. I only b. III only c. II and III only d. I, II, and III ANSWER: c 33. Why do people specialize? a. Specialization increases productivity. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 2 b. Specialization decreases people's dependence on one another. c. People become self-sufficient when they specialize. d. Most people know how to do only a few tasks. ANSWER: a 34. Without trade, the knowledge used by an entire economy would be about the same as the knowledge had by: a. all intelligent people combined. b. a large number of people. c. one person. d. no one. ANSWER: c 35. With trade, the knowledge used by an entire economy would be about the same as the knowledge had by: a. all intelligent people combined. b. a large number of people. c. one person. d. no one. ANSWER: a 36. Which is typically a result of the division of knowledge? a. The society runs with the knowledge of a few people. b. Each person has the same knowledge as everyone else. c. Labor productivity is higher. d. No one specializes in any activity. ANSWER: c 37. As _____ develops, so does _____. a. specialization; productivity b. trade; exploitation c. self-sufficiency; trade d. specialization; self-sufficiency ANSWER: a 38. As _____ develops, so does _____. a. trade; agriculture b. trade; self-sufficiency c. productivity; trade d. productivity; specialization ANSWER: c 39. Economies can grow due to: Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 2 a. the extent to which all individuals are educated in all areas of production. b. government policies. c. the extent to which markets facilitate specialization through trade. d. barriers to trade that promote the growth of domestic markets. ANSWER: c 40. The enormous variety of goods and services that we consume each day can be attributed mainly to: a. government regulations. b. home production. c. specialization and trade. d. early craftsmen handing down their knowledge. ANSWER: c 41. If the goal of education were solely to support economic growth, the ideal graduate would be a jack-of-: a. all-trades but master of none (where a "jack" is a serviceable tradesperson). b. one-trade and master of one. c. no-trades and master of none. d. some-trades but master of none. ANSWER: b 42. The relationship between trade and specialization is BEST characterized as follows: a. trade decreases specialization, which in turn increases the demand for trade. b. trade decreases specialization, which in turn decreases the demand for trade. c. trade increases specialization, which in turn increases the demand for trade. d. trade increases specialization, which in turn decreases the demand for trade. ANSWER: c 43. Absolute advantage derives from which of these? a. the lowest use of inputs in production b. the most suitable climate c. the least expensive labor force d. the best educated labor force ANSWER: a 44. Utilizing comparative advantage can BEST be exemplified as: a. your lawyer word-processing their own legal briefs. b. the CEO of Microsoft programming their own computer. c. the president of your university teaching a class again. d. a world-renowned chef hiring someone to cook meals for their family. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 2 45. Utilizing comparative advantage can BEST be exemplified as: a. your plumber fixing their own faucet. b. your professor writing an economics textbook. c. a seamstress making her daughter's prom dress. d. an auto mechanic having their oil changed on the way home from work. ANSWER: d 46. Which BEST describes the principle of comparative advantage? a. Some people can produce the same good better than other people can. b. Someone has the ability to produce the same good using fewer inputs than another producer. c. Someone has the ability to produce the same good for the lowest opportunity cost. d. To produce more of one good, people have to produce less of another good. ANSWER: c 47. Jesse is good at math and excellent at making friends, and Addae is equally good at both. Mathematically and socially challenged Jordan wants to hire tutors to help in each area. Who should tutor Jordan in which area to maximize Jordan's college experience? a. Jesse and Addae should tutor Jordan in both math and social skills. b. Jesse should teach math, and Addae should teach how to make friends. c. Jesse and Addae should both teach how to make friends. d. Jesse should teach how to make friends, and Addae should teach math. ANSWER: d 48. Which of these BEST explains the term specialization with respect to trade? a. Specialization occurs when people concentrate their productive resources on the goods and services they can produce most efficiently. b. Specialization occurs when one person can produce more of a particular good than another person can.
c. Specialization refers to the absolute advantage that a person enjoys in the production of goods and services. d. Specialization refers to the ability of a person to produce more of a good than their trading partners can. ANSWER: a 49. Owen Wilson is an actor who has acted in many action comedy films. In contrast, Tom Cruise has acted in many serious action films. How might the theory of specialization be applied to them? a. Owen Wilson has fully specialized in action comedy movies, while Tom Cruise has fully specialized in serious action movies. b. Due to filmography protectionism, Owen Wilson is unable to secure serious action roles, and Tom Cruise is unable to secure action comedy roles. c. Casting directors see Owen Wilson as relatively better at action comedy roles and Tom Cruise as relatively better at serious action roles and cast them accordingly. d. Owen Wilson does not have the talent necessary to act in more serious films.
ANSWER: c 50. Absolute advantage refers to: Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 2 a. the ability to make a good with fewer inputs than another producer. b. the ability to produce a good with a lower opportunity cost than another producer. c. specializing in the production of one good. d. the amount of output produced by an input. ANSWER: a 51. Comparative advantage refers to: a. the ability to make a good with fewer inputs than another producer. b. the ability to produce a good with a lower opportunity cost than another producer. c. specializing in the production of one good. d. the amount of output produced by an input. ANSWER: b 52. The ability of one producer to produce one good or service using fewer inputs than another producer is: a. comparative advantage. b. absolute advantage. c. opportunity cost. d. competition. ANSWER: b 53. Suppose a famous baseball player, Jacob deGrom, hires a high-school student to paint his house. Which of these is MOST likely TRUE? a. The opportunity cost of painting a house is higher for Jacob deGrom than for the high-school student. b. The opportunity cost of painting a house is lower for Jacob deGrom than for the high-school student. c. The opportunity cost of painting a house is the same for Jacob deGrom as for the high-school student. d. The opportunity cost of painting a house is zero for Jacob deGrom and is negative for the high-school student. ANSWER: a 54. A producer has a comparative advantage over other producers if their production of the good involves: a. more inputs. b. fewer inputs. c. a higher opportunity cost. d. a lower opportunity cost. ANSWER: d 55. A producer has an absolute advantage over other producers if their production of the good involves: a. more inputs. b. fewer inputs. c. a higher opportunity cost. d. a lower opportunity cost. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 2 56. Table: iPhone and Apple Watch Production 1 iPhone 1 Apple Watch Chinese labor units 3 3 German labor units 5 4 According to the table on iPhone and Apple Watch production, which statement is TRUE? a. China has an absolute advantage in producing both iPhones and Apple Watches. b. Germany has an absolute advantage in producing both iPhones and Apple Watches. c. China has an absolute advantage in producing iPhones, and Germany has an absolute advantage in producing Apple Watches. d. Germany has an absolute advantage in producing iPhones, and China has an absolute advantage in producing Apple Watches.
ANSWER: a 57. Table: iPhone and Apple Watch Production 1 iPhone 1 Apple Watch Chinese labor units 3 3 German labor units 5 4 According to the table on iPhone and Apple Watch production, the opportunity cost of producing one iPhone is: a. 5/4 Apple Watches for Germany, and 1 Apple Watch for China. b. 3 Apple Watches for China, and 4 Apple Watches for Germany. c. 4/5 of one Apple Watch for China, and 1 Apple Watch for Germany. d. 2 Apple Watches for China, and 5/4 Apple Watches for Germany. ANSWER: a 58. Table: iPhone and Apple Watch Production 1 iPhone 1 Apple Watch Chinese labor units 3 3 German labor units 5 4 According to the table on iPhone and Apple Watch production, which statement is TRUE about German and Chinese comparative advantages? a. China has a comparative advantage in producing both iPhones and Apple Watches. b. Germany has a comparative advantage in producing both iPhones and Apple Watches. c. China has a comparative advantage in producing iPhones, and Germany has a comparative advantage in producing Apple Watches. d. Germany has a comparative advantage in producing iPhones, and China has a comparative advantage in producing Apple Watches.
ANSWER: c 59. Table: Automobile and Light SUV Production 1 Automobile 1 Light SUV South Korean labor units 15 18 U.S. labor units 24 20 According to the table on automobile and light SUV production, which statement is TRUE? a. South Korea has an absolute advantage in producing both automobiles and light SUVs. Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 2 b. The United States has an absolute advantage in producing both automobiles and light SUVs. c. South Korea has an absolute advantage in producing automobiles, and the United States has an absolute
advantage in producing light SUVs. d. The United States has an absolute advantage in producing automobiles, and South Korea has an absolute advantage in producing light SUVs.
ANSWER: a 60. Table: Automobile and Light SUV Production 1 Automobile 1 Light SUV South Korean labor units 15 18 U.S. labor units 24 20 According to the table on automobile and light SUV production, the opportunity cost of producing one automobile is: a. 6/5 light SUVs for the United States, and 5/6 of one light SUV for South Korea. b. 6 light SUVs for the United States, and 5 light SUVs for South Korea. c. 5/6 of one light SUV for the United States, and 1 light SUV for South Korea. d. 4 light SUVs for the United States, and 5/4 light SUVs for South Korea. ANSWER: a 61. Table: Automobile and Light SUV Production 1 Automobile 1 Light SUV South Korean labor units 15 18 U.S. labor units 24 20 According to the table on automobile and light SUV production, which statement is TRUE about U.S. and South Korean comparative advantages? a. South Korea has a comparative advantage in producing both automobiles and light SUVs. b. The United States has a comparative advantage in producing both automobiles and light SUVs. c. South Korea has a comparative advantage in producing automobiles, and the United States has a comparative advantage in producing light SUVs. d. The United States has a comparative advantage in producing automobiles, and South Korea has a comparative advantage in producing light SUVs.
ANSWER: c 62. According to the theory of comparative advantage, a country should specialize in producing a good that involves: a. more inputs than those in other countries. b. fewer inputs than those in other countries. c. a higher opportunity cost than that of other countries. d. a lower opportunity cost than that of other countries. ANSWER: d 63. Suppose France can produce 4 phones or 3 computers with 1 unit of labor, and Sweden can produce 1 phone or 2 computers with 1 unit of labor. If France can trade only with Sweden, then the theory of comparative advantage suggests that France should: Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 2 a. specialize in producing phones and import computers from Sweden. b. specialize in producing computers and import phones from Sweden. c. produce both phones and computers and import nothing from Sweden. d. import both phones and computers from Sweden. ANSWER: a 64. Suppose South Africa can produce 6 phones or 3 computers with 1 unit of labor, and Australia can produce 7 phones or 2 computers with 1 unit of labor. If South Africa can trade only with Australia, then the theory of comparative advantage suggests that South Africa should: a. specialize in producing phones and import computers from Australia. b. specialize in producing computers and import phones from Australia. c. produce both phones and computers and import nothing from Australia. d. import both phones and computers from Australia. ANSWER: b 65. Suppose Italy can produce 6 bottles of olive oil or 3 bottles of wine with 1 unit of labor, and France can produce 2 bottles of olive oil or 4 bottles of wine with 1 unit of labor. If Italy can trade only with France, then the theory of comparative advantage suggests that France should: a. specialize in producing olive oil and import wine from Italy. b. specialize in producing wine and import olive oil from Italy. c. produce both olive oil and wine and import nothing from Italy. d. import both olive oil and wine from Italy. ANSWER: b 66. According to the theory of comparative advantage: a. every country can produce some good with a lower opportunity cost. b. every country should produce goods that involve high opportunity costs. c. some countries have a comparative advantage in producing every good. d. some countries should import every good from other countries. ANSWER: a 67. Which statement shows how absolute advantage can be distinguished from comparative advantage? a. Absolute advantage refers to the ability to produce a good using fewer inputs, while comparative advantage is based on the monthly amount. b. Absolute advantage is based on the yearly production amount that a country can produce, while comparative advantage is based on the monthly production amount. c. Absolute advantage refers to the ability to produce a larger amount of goods with the same number of inputs, whereas comparative advantage refers to the ability to have the lowest opportunity cost of production. d. Absolute advantage is based on the amount of land a country has to use, while comparative advantage is based on the cost of the labor.
ANSWER: c 68. The real cost of producing a good is the: Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 2 a. dollar cost of inputs used to make the item. b. opportunity cost of producing the good. c. resources that were used to make the good. d. dollar amount it costs to sell the good. ANSWER: b 69. Which determines comparative advantage? a. efficiency b. bargaining power c. opportunity cost d. productivity ANSWER: c 70. The theory of comparative advantage is: a. rarely relevant for identifying whether gains from trade can be obtained. b. always relevant for identifying whether gains from trade can be obtained. c. not true for nations, though it may be true for individuals. d. true for nations, but it is not true for business or individuals. ANSWER: b 71. Figure: PPF Goods X and Y
Which of the points representing various consumption possibilities for the country portrayed in the figure is only attainable through foreign trade? a. point A b. point B c. point C d. both points C and B ANSWER: c 72. Suppose a country without any international trade opens its borders to international trade. After specialization, how will its location on its production possibility frontier change? a. The country moves from inside the PPF to on the PPF. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 2 b. The country moves from on the PPF to beyond the PPF. c. The country moves along the PPF toward its comparative advantage. d. The country moves along the PPF away from its comparative advantage. ANSWER: b 73. Figure: PPF Nickel and Textiles
What is the maximum amount of nickel China can produce? a. 10 tons b. 8 tons c. 6 tons d. 4 tons ANSWER: b 74. Figure: PPF Nickel and Textiles
What is the maximum amount of textiles China can produce? a. 10 tons b. 8 tons c. 6 tons d. 4 tons ANSWER: b 75. Figure: PPF Nickel and Textiles Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 2
How many tons of textiles does Australia give up to produce 1 ton of nickel? a. 1/3 b. 1/2 c. 2 d. 3 ANSWER: a 76. On a production possibilities frontier, a trade-off can be illustrated as a(n): a. outward shift. b. inward shift. c. movement from a point inside the frontier to one on the frontier. d. movement along the frontier itself. ANSWER: d 77. The production possibilities frontier shows the: a. combinations of outputs a country can produce given its resources and productivity. b. combinations of inputs that a country has given its outputs and productivity. c. combinations of outputs and resources that a country possesses given its productivity. d. maximum level of a country's productivity given its resources and outputs. ANSWER: a 78. Anita is a wonderful baker and can bake 10 cakes in a day, but then she has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies but can make only 7 cakes or 100 cookies in a day. Based on this information, which statement is TRUE? a. Anita has the comparative advantage in the production of cakes. b. John has the comparative advantage in the production of cakes. c. John has the absolute advantage in the production of cookies. d. Anita has the comparative advantage in the production of both cakes and cookies. ANSWER: b 79. Anita is a wonderful baker and can bake 10 cakes in a day, but then she has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John can make equally delicious cakes and cookies Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 2 but can make only 7 cakes or 100 cookies in a day. Based on this information, which statement is TRUE? a. Anita should split her time between cakes and cookies. John should bake cakes. b. Anita should bake cakes, and John should bake cookies. c. Anita and John should split their time equally between cakes and cookies. d. Anita should bake cookies, and John should bake cakes. ANSWER: d 80. Figure: PPF Mexico and the United States
The production possibility frontiers show what Mexico and the United States can produce using 24 units of labor. The opportunity costs of producing one computer are: a. 6 shirts for Mexico and 1 shirt for the United States. b. 1/6 of a shirt for both Mexico and the United States. c. 1 shirt for Mexico and 1/6 of a shirt for the United States. d. 6 shirts for both Mexico and the United States. ANSWER: a 81. Figure: PPF Mexico and the United States
The production possibility frontiers show what Mexico and the United States can produce using 24 units of labor. The opportunity costs of producing 1 shirt are: a. 1 computer for Mexico and 1/6 of a computer for the United States. b. 1/6 of a computer for Mexico and 1 computer for United States. c. 1 computer for both Mexico and the United States. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 2 d. 1/6 of a computer for both Mexico and the United States. ANSWER: b 82. Figure: PPF Mexico and the United States
The production possibility frontiers show what Mexico and the United States can produce using 24 units of labor. Mexico has a comparative advantage in _____, and the United States has a comparative advantage in _____. a. computers; shirts b. shirts; computers c. computers; computers d. shirts; shirts ANSWER: b 83. Figure: PPF Australia and the United States
Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 2 The figures show what Australia and the United States can produce using the same quantity of labor. The opportunity costs of producing 1 pound of beef are: a. 5/8 of a bushel of corn for Australia and 1 bushel of corn for the United States. b. 8/5 bushels of corn for the United States and 1 bushel of corn for Australia. c. 1 bushel of corn for Australia and 5/8 of a bushel of corn for the United States. d. 8/5 bushels of corn for the United States and 1 bushel of corn for Australia. ANSWER: a 84. Figure: PPF Australia and the United States
Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 2 The figures show what Australia and the United States can produce using the same quantity of labor. The opportunity costs of producing 1 bushel of corn are: a. 8/5 pounds of beef for Australia and 1 pound of beef for the United States. b. 5/8 of a pound of beef for the United States and 1 pound of beef for Australia. c. 8/5 pounds of beef for Australia and 5/8 of a pound of beef for the United States. d. 1 pound of beef for the United States and 5/8 of a pound of beef for Australia. ANSWER: a 85. Figure: PPF Australia and the United States
Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 2 The figures show what Australia and the United States can produce using the same quantity of labor. Australia and the United States would be willing to trade 1 pound of beef for: a. between 1 and 8/5 pounds of corn. b. between 5/8 and 1 pound of corn. c. between 2/3 and 5/8 of a pound of corn. d. 5/8 of a pound of beef for the United States and 8/5 pounds of beef for Australia. ANSWER: b 86. Figure: PPF Australia and the United States
Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 2 The figures show what Australia and the United States can produce using the same quantity of labor. Australia has a comparative advantage in _____, and the United States has a comparative advantage in _____. a. corn; beef b. beef; beef c. beef; corn d. corn; corn ANSWER: c 87. Figure: PPF Australia and the United States
Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 2 The figures show what Australia and the United States can produce using the same quantity of labor. Australia has an absolute advantage in _____, and the United States has an absolute advantage in _____. a. neither corn nor beef; both corn and beef b. both corn and beef; neither corn nor beef c. beef; corn d. corn; beef ANSWER: a 88. Figure: PPF Australia and the United States
Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 2 The figures show what Australia and the United States can produce using the same quantity of labor. If Australia and the United States trade to have higher consumption, the United States should specialize in the production of _____, and Australia should specialize in the production of _____. a. neither corn nor beef; both corn and beef b. both corn and beef; neither corn nor beef c. beef; corn d. corn; beef ANSWER: d 89. Table: Production Possibilities for the United States and Mexico Corn (millions of tons) Potatoes (millions of tons) United States 50 10 Mexico 40 5 According to the table on production possibilities for the United States and Mexico, Mexico has an absolute advantage in _____ and a comparative advantage in _____. a. neither good; corn b. corn; potatoes c. potatoes; corn d. neither good; potatoes ANSWER: a 90. Table: Production Possibilities for the United States and Mexico Corn (millions of tons) Potatoes (millions of tons) United States 50 10 Mexico 40 5 According to the table on production possibilities for the United States and Mexico, the United States has an absolute advantage in _____ and a comparative advantage in _____. a. both goods; corn b. both goods; potatoes c. potatoes; corn d. nothing; potatoes ANSWER: b 91. Table: Production Possibilities for the United States and Mexico Corn (millions of tons) Potatoes (millions of tons) United States 50 10 Mexico 40 5 According to the table on production possibilities for the United States and Mexico, Mexico's opportunity cost of producing each ton of potatoes is _____, while the United States's opportunity cost of producing each ton of potatoes is _____. a. 0.125 tons of potatoes; 0.2 tons of potatoes b. 8 tons of corn; 0.2 tons of potatoes c. 8 tons of corn; 5 tons of corn Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 2 d. 5 tons of corn; 0.2 tons of corn ANSWER: c 92. Table: Production Possibilities for the United States and Mexico Corn (millions of tons) Potatoes (millions of tons) United States 50 10 Mexico 40 5 Using the table on production possibilities for the United States and Mexico, assume each country specializes in the good for which it has a comparative advantage. Which answer identifies a trade price that both countries would find acceptable? a. a price between 0.2 potatoes for 1 corn and 5 corns for 1 potato b. a price between 0.125 potatoes for 1 corn and 8 potatoes for 1 corn c. a price between 5 corns for 1 potato and 8 corns for 1 potato d. a price between 0.125 potatoes for 1 corn and 5 potatoes for 1 corn ANSWER: c 93. Table: Production Possibilities for Dante and Helena Greeting Cards Artistic Posters Dante 4 2 Helena 6 1 Dante is an artist who produces custom-made greeting cards and artistic posters. Helena is an equally talented artist who can produce these items as well. According to the table on production possibilities, Dante's opportunity cost of producing artistic posters is _____, and Helena's opportunity cost of producing artistic posters is _____. a. 1/2 greeting card; 1/6 greeting card b. 4 greeting cards; 6 greeting cards c. 2 greeting cards; 6 greeting cards d. 4 greeting cards; 1 greeting card ANSWER: c 94. Table: Production Possibilities for Dante and Helena Greeting Cards Artistic Posters Dante 4 2 Helena 6 1 Dante is an artist who produces custom-made greeting cards and artistic posters. Helena is an equally talented artist who can produce these items as well. According to the table on production possibilities, Dante's opportunity cost of producing greeting cards is _____, and Helena's opportunity cost of producing greeting cards is _____. a. 1/2 artistic poster; 1/6 artistic poster b. 2/3 artistic poster; 1/2 artistic poster c. 2 artistic posters; 6 artistic posters d. 4 artistic posters; 1 artistic poster ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 2 95. Table: Production Possibilities for Dante and Helena Greeting Cards Artistic Posters Dante 4 2 Helena 6 1 Dante is an artist who produces custom-made greeting cards and artistic posters. Helena is an equally talented artist who can produce these items as well. According to the table on production possibilities, Dante should specialize in producing _____, and Helena should specialize in producing _____. a. greeting cards; greeting cards b. artistic posters; artistic posters c. artistic posters; greeting cards d. greeting cards; artistic posters ANSWER: c 96. Table: Production Possibilities for Kenya and Sri Lanka Beans (millions of tons) Tea (millions of tons) Kenya 100 200 Sri Lanka 150 450 According to the table on production possibilities for Kenya and Sri Lanka, Kenya's opportunity cost of producing beans is _____, while Sri Lanka's opportunity cost of producing beans is _____. a. 0.5 teas; 0.33 teas b. 2 teas; 0.33 teas c. 200 teas; 450 teas d. 2 teas; 3 teas ANSWER: d 97. Table: Production Possibilities for Kenya and Sri Lanka Beans (millions of tons) Tea (millions of tons) Kenya 100 200 Sri Lanka 150 450 According to the table on production possibilities for Kenya and Sri Lanka, Kenya should produce _____, and Sri Lanka should produce _____. a. beans; tea b. tea; beans c. both goods; neither good d. neither good; both goods ANSWER: a 98. Table: Production Possibilities for Kenya and Sri Lanka Beans (millions of tons) Tea (millions of tons) Kenya 100 200 Sri Lanka 150 450 According to the table on production possibilities for Kenya and Sri Lanka, which answer identifies a trade price that both countries would find acceptable? a. a price between 0.5 beans for 1 tea and 2 teas for 1 bean Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 2 b. a price between 0.5 and 3 beans for 1 tea c. a price between 2 and 3 teas for 1 bean d. a price between 0.3 and 2 beans for 1 tea ANSWER: c 99. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make 1 Pound Pounds Produced in 40 Hours of: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 According to the table on production possibilities for Italy and Belgium, the opportunity cost of 1 pound of linen for Italy is: a. 10 pounds of pasta. b. 1/4 pound of pasta. c. 4 pounds of pasta. d. 2 1/2 pounds of pasta. ANSWER: d 100. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make 1 Pound Pounds Produced in 40 Hours of: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 According to the table on production possibilities for Italy and Belgium, the opportunity cost of 1 pound of linen for Belgium is: a. 5 pounds of pasta. b. 4 pounds of pasta. c. 1/4 pound of pasta. d. 20 pounds of pasta. ANSWER: c 101. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make 1 Pound Pounds Produced in 40 Hours of: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 According to the table on production possibilities for Italy and Belgium, the opportunity cost of 1 pound of pasta for Italy is: a. 2/5 pound of linen. b. 4 pounds of linen. c. 1/4 pound of linen. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 2 d. 2 hours of labor. ANSWER: a 102. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make 1 Pound Pounds Produced in 40 Hours of: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 According to the table on production possibilities for Italy and Belgium, the opportunity cost of 1 pound of pasta for Belgium is: a. 5 pounds of linen. b. 20 pounds of linen. c. 1/4 pound of linen. d. 4 pounds of linen. ANSWER: d 103. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make 1 Pound Pounds Produced in 40 Hours of: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 According to the table on production possibilities for Italy and Belgium, Italy has a comparative advantage in: a. both goods, while Belgium has a comparative advantage in neither good. b. linen, while Belgium has a comparative advantage in pasta. c. pasta, while Belgium has a comparative advantage in linen. d. neither good, while Belgium has a comparative advantage in both goods. ANSWER: c 104. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make 1 Pound Pounds Produced in 40 Hours of: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 According to the table on production possibilities for Italy and Belgium, Italy and Belgium both could benefit if Italy were to specialize in: a. neither good and Belgium were to specialize in both goods. b. both goods and Belgium were to specialize in neither good. c. pasta and Belgium were to specialize in linen. d. linen and Belgium were to specialize in pasta. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 2 105. Table: Production Possibilities for Italy and Belgium Labor Hours Needed to Make 1 Pound Pounds Produced in 40 Hours of: Linen Pasta Linen Pasta Italy 10 4 4 10 Belgium 2 8 20 5 According to the table on production possibilities for Italy and Belgium, Belgium should specialize in linen production because it: a. has an absolute advantage in producing linen and pasta. b. can do so at a greater opportunity cost. c. has a comparative advantage in producing linen. d. already can produce enough pasta to meet demand. ANSWER: c 106. Table: Production in the United States and Germany Labor Units Required to Produce: 1 Clock 1 Sofa United States 2 5 Germany 3 9 According to the table, the opportunity cost of producing 1 sofa in the United States is _____, and the opportunity cost of producing 1 sofa in Germany is _____. a. 2 clocks; 3 clocks b. 10 clocks; 27 clocks c. 0.4 clocks; 0.33 clocks d. 2.5 clocks; 3 clocks ANSWER: d 107. Table: Production in the United States and Germany Labor Units Required to Produce: 1 Clock 1 Sofa United States 2 5 Germany 3 9 According to the table, the opportunity cost of producing 1 clock in the United States is _____, and the opportunity cost of producing 1 clock in Germany is _____. a. 5 sofas; 9 sofas b. 0.4 sofas; 0.33 sofas c. 5 clocks; 9 clocks d. 2.5 clocks; 3 clocks ANSWER: b 108. Table: Production in the United States and Germany Labor Units Required to Produce: 1 Clock 1 Sofa United States 2 5 Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 2 Germany 3 9 According to the table, which statement is TRUE? a. The United States has a comparative advantage in clocks. b. Germany has an absolute advantage in clocks and sofas. c. The United States has a comparative advantage in sofas. d. The United States has a comparative advantage in clocks and sofas. ANSWER: c 109. Table: Production in France and Italy Labor Units Required to Produce: 1 Bag of Truffles 1 Pair of Wool Socks France 1 1 Italy 2 4 According to the table, France should specialize in producing _____, and Italy should specialize in producing _____. a. truffles; wool socks b. wool socks; truffles c. truffles; truffles d. wool socks; wool socks ANSWER: b 110. In Colombia, it takes 3 workers to produce 2 pounds of coffee. In Mexico, it takes 4 workers to produce 1 pound of coffee. Therefore: a. Colombia has a comparative advantage in the production of coffee. b. Mexico has a comparative advantage in the production of coffee. c. in Colombia, the opportunity cost of producing 1 pound of coffee is 2/3. d. Colombia has an absolute advantage in the production of coffee. ANSWER: d 111. In Spain, it takes 4 workers to produce 4 bottles of wine. In France, it takes 3 workers to produce 4 bottles of wine. Therefore: a. Spain has a comparative advantage in the production of wine. b. France has an absolute advantage in the production of wine. c. In Spain, the opportunity cost of producing 1 bottle of wine is 3/4. d. Spain has an absolute advantage in the production of wine. ANSWER: b 112. In Spain, it takes 3 workers to produce 4 pounds of cheese. In France, it takes 6 workers to produce 4 pounds of cheese. Therefore: a. Spain has a comparative advantage in the production of cheese. b. France has an absolute advantage in the production of cheese. c. In Spain, the opportunity cost of producing 1 pound of cheese is 1/2. Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 2 d. Spain has an absolute advantage in the production of cheese. ANSWER: d 113. Which statement is TRUE? a. It is virtually impossible for a country to be the low-cost producer of all goods and services. b. The benefits of trade depend on absolute advantage, not comparative advantage. c. A country could have a comparative advantage in producing everything. d. A country that has the absolute advantage in production will also have the comparative advantage. ANSWER: a 114. Figure: Countries A and B
According to the diagram about countries A and B, which statements are correct? I. Country A has a comparative advantage in good Y. II. Country B has an absolute advantage in both goods. III. Country B has a comparative advantage in good X. a. I and II only b. I and III only c. II and III only d. I, II, and III ANSWER: d 115. Figure: Countries A and B
The opportunity cost of producing good X in country A is _____, and in country B, it is _____, meaning that Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 2 country _____ should specialize in producing good X and country _____ in good Y. a. 2Y; 1Y; B; A b. 1/2Y; 1Y; B; A c. 1/2Y; 1Y; A; B d. 2Y; 1Y; A; B ANSWER: a 116. Figure: Countries A and B
If both countries fully allocated all of their labor toward the good in which they have a comparative advantage, the combined production for the two countries would be _____ units of good X and _____ units of good Y. a. 100; 80 b. 70; 90 c. 40; 100 d. 100; 100 ANSWER: a 117. Figure: Countries A and B
Assume that each country begins by allocating half its labor force to the production of each good. Through trade with each other, each country could increase its consumption of both goods if country A moved part of its labor force to the production of good _____ and country B moved part of its labor force to the production of good _____. a. X; X b. X; Y Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 2 c. Y; Y d. Y; X ANSWER: d 118. Figure: Countries A and B
If each country allocated half of its labor force to the production of each good before trade and then each specialized in its comparative advantage and allocated 75% of its labor force to the production of that good, world production of good X would change by _____ and the production of good Y by _____. a. 40; 50 b. 25; −5 c. 15; −5 d. 50; 40 ANSWER: c 119. Figure: Countries M and N
Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 2 If both countries fully allocated all of their labor toward the good in which they have a comparative advantage, the combined production for the two countries would be _____ units of good A and _____ units of good B. a. 100; 70 b. 40; 90 c. 90; 70 d. 100; 40 ANSWER: a 120. Figure: Countries M and N
Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 2
Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 2 Assume that each country begins by allocating half of its labor force to the production of each good. Through trade, each country could increase its consumption of both goods if country M moved part of its labor force to the production of good _____ and country N moved part of its labor force to the production of good _____. a. A; B b. B; A c. A; A d. B; B ANSWER: a 121. Which BEST characterizes the relationship between the parties to a trade and the gains from trade? a. Gains from trade are fueled by differences in preferences and differences in opportunity costs of production. b. Gains from trade are fueled by differences in preferences only. c. Gains from trade are fueled by differences in opportunity costs of production only. d. Gains from trade are greatest when there are no differences between the two parties to a trade. ANSWER: a 122. Two countries that specialize in something in which they have a comparative advantage and then trade with each other will experience increases in: I. wages. II. total output. III. living standards. a. I and II only b. II and III only c. II only d. I, II, and III ANSWER: d 123. Which statement is TRUE? a. Two countries that specialize in something in which they have a comparative advantage and then trade with each other will experience an increase in wages, but not total output. b. Two countries that specialize in something in which they have a comparative advantage and then trade with each other will experience an increase in total output, but not wages. c. Two countries that specialize in something in which they have a comparative advantage and then trade with each other will experience a decrease in living standards. d. Two countries that specialize in something in which they have a comparative advantage and then trade with each other will experience an increase in wages, total output, and living standards.
ANSWER: d 124. If labor in China is less productive than labor in the United States in all areas of production, then: a. both the United States and China can benefit from trade. b. neither nation can benefit from trade. c. China can benefit from trade, but the United States cannot. d. the United States can benefit from trade, but China cannot. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 2 ANSWER: a 125. According to the theory of comparative advantage, the reason wages are lower in China than in the United States is: a. the higher cost of living in the United States. b. lower productivity in China. c. the lower opportunity cost to work in China. d. more trade restrictions in the United States. ANSWER: b 126. Sophia and Manuel are married. Sophia can do $15 worth of household chores per hour, and Manuel can do $30 worth of household chores per hour. In the labor market, Manuel can earn $30 per hour and Sophia can earn $45 per hour. The theory of comparative advantage suggests that: a. Manuel should specialize in household chores, and Sophia should specialize in the labor market. b. Sophia should specialize in household chores, and Manuel should specialize in the labor market. c. Sophia should specialize in both household chores and the labor market. d. Manuel should specialize in both household chores and the labor market. ANSWER: a 127. The principles of comparative advantage, specialization, and trade apply to: I. individuals. II. communities. III. regions. IV. nations. a. I and II only b. I, II, and III only c. II, III, and IV only d. I, II, III, and IV ANSWER: d 128. Adam Smith advocated the benefits of: a. protectionism. b. trade tariffs over trade quotas. c. international trade. d. absolute advantage. ANSWER: c 129. Absolute advantage is the ability to produce a: a. good at a lower opportunity cost than others. b. good with fewer inputs than others. c. good when demand is high. d. variety of goods. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 2 ANSWER: b 130. A country has a comparative advantage in producing a good when it produces that good: a. at a lower opportunity cost than another country. b. at a higher opportunity cost than another country. c. in greater quantity than another country. d. with fewer inputs than another country. ANSWER: a 131. Two persons each produce two identical goods. Which is TRUE about their absolute and comparative advantages in the production of these two goods? a. One person can have an absolute advantage in both goods but not a comparative advantage in both goods. b. One person can have a comparative advantage in both goods but not an absolute advantage in both goods. c. One person can have neither an absolute nor a comparative advantage in either good. d. Both persons can always have both an absolute and comparative advantage in both goods. ANSWER: a 132. To benefit the most from trade, a person should: a. specialize in an activity for which they have an absolute advantage. b. specialize in an activity for which they have a comparative advantage. c. do everything they possibly can. d. do as little as possible. ANSWER: b 133. The concept of comparative advantage implies that: a. there are winners and losers when people trade without specializing. b. people have to be self-sufficient. c. people benefit from specializing and trading with one another. d. only those people who are productive benefit from trade. ANSWER: c 134. The reason Martha Stewart does not iron her own clothes is that: a. she has never learned how to iron. b. she has a comparative advantage in ironing. c. she does not have an absolute advantage in ironing. d. her opportunity cost of ironing exceeds the person's wages providing the ironing service. ANSWER: d 135. Both Maria and Jorge bake cookies and bread, but Maria spends less time baking each batch of cookies and each loaf of bread than Jorge does. Which is TRUE? a. Maria has an absolute advantage in baking both cookies and bread. Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 2 b. Maria has a comparative advantage in baking both cookies and bread. c. Jorge has an absolute advantage in baking both cookies and bread. d. Jorge has a comparative advantage in baking both cookies and bread. ANSWER: a 136. Both Maria and Jorge bake cookies and bread, but Maria spends less time baking each batch of cookies and each loaf of bread than Jorge does. Specialization and trade between them can benefit: a. both Maria and Jorge. b. Maria, but not Jorge. c. Jorge, but not Maria. d. neither Maria nor Jorge. ANSWER: a 137. Both Bohai and Guiren build fine wood dining tables and desks. Bohai spends less time building each desk than Guiren does. Guiren spends less time building each dining table than Bohai does. Which is TRUE? a. Bohai has an absolute advantage in building both dining tables and desks. b. Bohai has a comparative advantage in building desks. c. Guiren has an absolute advantage in building both dining tables and desks. d. Guiren has a comparative advantage in building desks. ANSWER: b 138. Both Bohai and Guiren build fine wood dining tables and desks. Bohai spends less time building each desk than Guiren does. Guiren spends less time building each dining table than Bohai does. Specialization and trade between them can benefit: a. both Bohai and Guiren. b. Bohai, but not Guiren. c. Guiren, but not Bohai. d. neither Bohai nor Guiren. ANSWER: a 139. Which explains why someone with an absolute advantage in painting houses may NOT spend their time painting houses? a. They may also have a comparative advantage in painting houses. b. Even though they have an absolute advantage in painting houses, they still may not be very good at it. c. In an efficient market, someone with an absolute advantage in painting houses will always spend their time painting houses. d. They may be relatively better at something else than painting houses.
ANSWER: d 140. In his prime, Michael Jordan played both professional basketball and professional baseball. Compared with most people, Jordan would have an absolute advantage in: a. playing both basketball and baseball, since he was better at both than the average person. Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 2 b. playing basketball only because he was relatively better at basketball. c. playing baseball only, since he ultimately gave up baseball to concentrate on basketball. d. neither basketball nor baseball, since he cannot hold the relative advantage in both sports. ANSWER: a 141. A country has an absolute advantage in production if: a. it can produce the same good using fewer inputs than another country. b. it can produce a good using fewer inputs than it takes another country to produce a different good. c. other countries can produce the same good using fewer inputs. d. it has the lowest opportunity cost of producing a good. ANSWER: a 142. A country has a comparative advantage in production if: a. it can produce the same good using fewer inputs than another country. b. it can produce a good using fewer inputs than it takes another country to produce a different good. c. other countries can produce the same good using fewer inputs. d. it has the lowest opportunity cost of producing a good. ANSWER: d 143. Martha Stewart does not do her own ironing because she: a. is not very good at ironing. b. has an absolute advantage in ironing. c. has a comparative advantage in something else. d. has a comparative advantage in ironing. ANSWER: c 144. A country has a comparative advantage in a good if: a. it can produce more of that good than any other country can. b. it does not have an absolute advantage in that good. c. it has the lowest opportunity cost of producing that good. d. no other country is willing to buy that good from it. ANSWER: c 145. Traders should specialize in the good: a. that they can produce with the lowest opportunity cost. b. in which they have an absolute advantage. c. in which their trading partner has a comparative advantage. d. in which they do not have an absolute advantage. ANSWER: a 146. Brazil can produce 1 unit of sugarcane with 1 unit of labor and 1 iPod with 8 units of labor, and China can Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 2 produce 1 unit of sugarcane with 2 units of labor and 1 iPod with 4 units of labor. Which is TRUE? a. Brazil has a comparative advantage in sugarcane production and an absolute advantage in iPod production. b. Both countries have a comparative advantage in sugarcane production. c. China has an absolute advantage in production of both goods. d. Brazil has both a comparative advantage and an absolute advantage in sugarcane production. ANSWER: d 147. Brazil can produce 1 unit of sugarcane with 1 unit of labor and 1 iPod with 8 units of labor, and China can produce 1 unit of sugarcane with 2 units of labor and 1 iPod with 4 units of labor. What are each country's opportunity costs of producing iPods? a. Brazil: 4 units of sugarcane; China: 2 units of sugarcane b. Brazil: 8 units of sugarcane; China: 2 units of sugarcane c. Brazil: 1/8 unit of sugarcane; China: 1/2 unit of sugarcane d. Brazil: 1/2 unit of sugarcane; China: 1/2 unit of sugarcane ANSWER: b 148. Brazil can produce 1 unit of sugarcane with 1 unit of labor and 1 iPod with 8 units of labor, and China can produce 1 unit of sugarcane with 2 units of labor and 1 iPod with 4 units of labor. Which is TRUE? a. Before trade, China's opportunity cost of 1 unit of sugarcane is 2 iPods. b. China has an absolute advantage in sugarcane production. c. Both parties benefit if they specialize and trade at terms of 1 unit of sugarcane for 2 iPods. d. With trade, Brazil should specialize in sugarcane and China in iPods. ANSWER: d 149. The better a person is at producing one good the: a. worse they are at producing other goods. b. higher the opportunity cost to them of producing other goods. c. lower the incentive they have to trade with other people. d. better they are at producing other goods. ANSWER: b 150. Producers who have absolute advantages in all goods: a. cannot exist. b. have no use for trade. c. are better off specializing in their comparative advantages and trading for other goods. d. should avoid the global division of labor because it is counterproductive for them. ANSWER: c 151. In 2010, Switzerland-based Nestlé began sailing supermarket barges up and down parts of the Amazon River. The barges carry approximately 300 different goods and cater to about a dozen local communities that fish the Amazon's bountiful rivers and whose members lack the time and money to visit a conventional store. Which advantage from trade is illustrated in this passage? Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 2 a. differences in preferences b. specialization c. comparative advantage d. Each of these advantages is illustrated in the passage. ANSWER: c 152. When determining what a country should specialize in producing, economists chiefly consider: a. absolute advantage. b. comparative advantage. c. incentives. d. the dispersion of knowledge. ANSWER: b 153. A country has an absolute advantage if it can produce _____ good using _____ inputs than another country. a. the same; fewer b. a different; more c. the same; more d. a different; fewer ANSWER: a 154. The production possibility frontier shows: a. how society can produce more of one good without giving up the production of another good. b. what people can consume given different combinations of goods produced. c. the combinations of output that an economy can produce given its productivity and supply of inputs. d. the types of goods and services that society should produce to satisfy social interest. ANSWER: c 155. On a production possibilities frontier (PPF), a trade-off is demonstrated by a(n): a. outward shift of the PPF. b. inward shift of the PPF. c. movement from a point inside the PPF to a point on the frontier. d. movement along the PPF. ANSWER: d 156. Figure: Production Possibilities A and B
Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 2
In the graph, a trade-off is shown in the movement from: a. point A to point B. b. point A to point C. Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 2 c. point B to point E. d. PPF A to PPF B. ANSWER: a 157. Figure: Production Possibilities A and B
Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 2
If this economy is currently at point D on PPF A without international trade, which point BEST represents consumption with trade? a. point A b. point C Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 2 c. point E d. point B ANSWER: c 158. The fundamental idea behind the production possibilities frontier is: a. the idea of absolute advantage. b. the trade-offs that exist in production. c. that economic growth is unlimited. d. that incentives matter. ANSWER: b 159. The slope of the production possibilities frontier at a given point indicates: _____. a. the preferences of a country b. a country's total gains from trade c. a country's opportunity cost of production d. a country's trade balance ANSWER: c 160. Which is FALSE regarding the production possibilities frontier (PPF)? a. The PPF shows the combination of goods that a country can produce given its current productivity and supply of resources. b. The PPF illustrates the trade-offs that exist in the production of goods.
c. The PPF shows us that gains from trade are maximized when countries produce goods for which they have an absolute advantage in production. d. The PPF illustrates the fundamental ideas of scarcity and opportunity cost.
ANSWER: c 161. Figure: U.S. Production Possibilities Frontier
Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 2
Suppose the figure illustrates the U.S. PPF for the production of corn and TVs. Which statement is TRUE? a. The United States should specialize in the production of corn, since it can produce more corn than TVs. b. For each TV that the United States produces, it gives up 25 units of corn. c. The United States should produce 50 TVs and 1,250 units of corn to maximize value to society. d. The United States has a comparative advantage in the production of TVs. ANSWER: b 162. A production possibilities frontier shows: a. the supply and demand for a good in a country. b. all combinations of goods that a country can produce given its productivity and supply of inputs. c. the uninhabited territory of a country that is full of new possibilities. d. the goods that a country will be able to produce in the future if it continues to grow. ANSWER: b 163. Figure: Coffee and Tea
Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 2
Despite its widespread popularity today, coffee wasn't consumed as a beverage until the mid-1400s. Tea was the beverage of choice, particularly in Southeast Asia. Before coffee, what was the total tea production? (Assume the only reason to grow coffee was for beverage purposes.) a. 80,000,000 b. 130,000,000 Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 2 c. 140,000,000 d. 160,000,000 ANSWER: d 164. Figure: Coffee and Tea
Which is NOT a possible production level? Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 2 a. 20 million pounds of tea, 100 million pounds of coffee b. 120 million pounds of tea, 80 million pounds of coffee c. 100 million pounds of tea, 40 million pounds of coffee d. 0 million pounds of tea, 120 million pounds of coffee ANSWER: b 165. Figure: Drums and Shoes
Given the graph of the production possibilities frontier in the figure, which statement is TRUE? a. The country has 2 units of labor, and it takes 0.5 units of labor to produce 1 unit of either good. b. The country has 3 units of labor, and it takes 1 unit of labor to produce 3 drums and 1 unit of labor to produce 3 1/3 pairs of shoes. c. The country has 4 units of labor, and it takes 2 units of labor to produce 8 drums and 3 units of labor to produce 3 shoes. d. The country has 5 units of labor, and it takes 1 unit of labor to produce 1.8 drums and 1 unit of labor to produce 2.5 shoes.
ANSWER: b 166. The _____ shows all combinations of goods that a country can produce given its productivity and _____. a. comparative advantage frontier; market prices b. absolute advantage frontier; supply of inputs c. production possibilities frontier; supply of inputs d. production possibilities frontier; market prices ANSWER: c 167. Figure: Cars and Boats
Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 2
A country needs 4 units of labor to produce 1 car and 3 units of labor to produce 1 boat, and the country has 120 units of labor. Which of the figures represents this country's PPF? a. Figure A b. Figure B c. Figure C Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 2 d. Figure D ANSWER: b 168. Iceland produces two goods: Viking hats (Y) and fish (X). Its production possibilities frontier is characterized as Y = 50 − 2X and tells us that the opportunity cost of catching (producing) an additional unit of fish in Iceland is: a. increasing in fish production. b. constant in fish production. c. decreasing in fish production. d. unable to be determined from the information given. ANSWER: b 169. Iceland produces two goods: Viking hats (Y) and fish (X). Its production possibilities frontier is characterized as Y = 50 − 2X. What is the opportunity cost of producing 1/10th unit of fish (i.e., going from 9 units of fish production to 10)? a. 0.5 units of fish b. 2 units of fish c. 0.5 Viking hats d. 2 Viking hats ANSWER: d 170. Iceland produces two goods: Viking hats (Y) and fish (X). Its production possibilities frontier is characterized as Y = 50 − 2X. What is the opportunity cost of producing 1/10th Viking hat (i.e., going from a production level of 9 Viking hats to a production level of 10 Viking hats)? a. 0.5 units of fish b. 2 units of fish c. 0.5 Viking hats d. 2 Viking hats ANSWER: a 171. Table: Movies and Oil Hypothetical Maximum Production per Year State Movies Barrels of oil (millions) Texas 75 50 California 60 30 New York 20 5 According to the table, which state has a comparative advantage in oil? a. Texas, because it can produce more oil than anyone else b. New York, because its opportunity cost for a barrel of oil is 4 movies per year c. Texas, because its opportunity cost for a barrel of oil is 1.5 movies per year d. California, because its opportunity cost for a barrel of oil is 2 movies per year ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 2 172. Table: Movies and Oil Hypothetical Maximum Production per Year State Movies Barrels of oil (millions) Texas 75 50 California 60 30 New York 20 5 According to the table, which state has a comparative advantage in movies? a. Texas, because it can produce more movies than anyone else b. New York c. California d. impossible to tell from the information in the table ANSWER: b 173. Brazil and Canada trade two goods: bananas and ice pops. Brazil has a comparative advantage in banana production. This means that: a. Brazil also has a comparative advantage in ice pop production. b. Canada has a comparative advantage in ice pop production. c. neither country has a comparative advantage in ice pop production. d. both countries have a comparative advantage in ice pop production. ANSWER: b 174. Brazil and Canada trade two goods: bananas and ice pops. Brazil has a comparative advantage in banana production. From this, we know that: a. Brazil produces bananas at a lower explicit cost than does Canada. b. Brazil produces ice pops at a lower explicit cost than does Canada. c. Brazil produces bananas at a lower opportunity cost than does Canada. d. Brazil produces ice pops at a lower opportunity cost than does Canada. ANSWER: c 175. Jimmy Kimmel hosts the Jimmy Kimmel Live! show, and Molly McNearney helps write for it. Jimmy needs 4 hours to rehearse, whereas Molly would need 10 hours of rehearsal if she were to host. Jimmy writes one usable joke in 1 hour, but Molly needs 2 hours to do the same. From these numbers, we infer that Jimmy has an absolute advantage in the production of: a. show hosting. b. joke writing. c. neither show hosting nor joke writing. d. both show hosting and joke writing. ANSWER: d 176. Jimmy Kimmel hosts the Jimmy Kimmel Live! show, and Molly McNearney writes for it. Jimmy needs 4 hours to rehearse, whereas Molly would need 10 hours of rehearsal if she were to host. Jimmy writes one usable joke in 1 hour, but Molly needs 2 hours to do the same. From these numbers, we infer that Jimmy has a comparative advantage in the production of: Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 2 a. show hosting. b. joke writing. c. neither show hosting nor joke writing. d. both show hosting and joke writing. ANSWER: a 177. Jimmy Kimmel hosts the Jimmy Kimmel Live! show, and Molly McNearney writes for it. Jimmy needs 4 hours to rehearse, whereas Molly would need 10 hours of rehearsal if she were to host. Jimmy writes one usable joke in 1 hour, but Molly needs 2 hours to do the same. If each party produces according to their comparative advantage: a. Molly will host and Jimmy will write. b. Molly will host and Molly will write. c. Jimmy will host and Jimmy will write. d. Jimmy will host and Molly will write. ANSWER: d 178. Martha Stewart can iron 20 shirts per hour. Her housekeeper can iron 12 shirts per hour. From this information alone, we can infer that: a. Martha has a comparative advantage in ironing. b. the housekeeper has a comparative advantage in ironing. c. Martha has an absolute advantage in ironing. d. the housekeeper has an absolute advantage in ironing. ANSWER: c 179. Jack and Jill work at a bakery. In 1 hour, Jack can decorate either 5 ice-cream cakes or 2 wedding cakes. In 1 hour, Jill can decorate either 4 ice-cream cakes or 1 wedding cake. Thus, the opportunity cost of decorating an ice-cream cake is _____ for Jack and _____ for Jill. a. 4 wedding cakes; 2.5 wedding cakes b. 1/4 wedding cake; 2/5 wedding cake c. 2.5 wedding cakes; 4 wedding cakes d. 2/5 wedding cake; 1/4 wedding cake ANSWER: d 180. Jack and Jill work at a bakery. In 1 hour, Jack can decorate either 5 ice-cream cakes or 2 wedding cakes. In 1 hour, Jill can decorate either 4 ice-cream cakes or 1 wedding cake. According to this scenario, _____ has a comparative advantage in decorating ice-cream cakes and _____ has a comparative advantage in decorating wedding cakes. a. Jack; Jack b. Jill; Jill c. Jack; Jill d. Jill; Jack ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 2 181. Jack and Jill work at a bakery. In 1 hour, Jack can decorate either 5 ice-cream cakes or 2 wedding cakes. In 1 hour, Jill can decorate either 4 ice-cream cakes or 1 wedding cake. According to this scenario, which outcome will benefit both Jack and Jill the MOST? a. Both Jack and Jill specialize in decorating ice-cream cakes. b. Both Jack and Jill specialize in decorating wedding cakes. c. Jill specializes in decorating ice-cream cakes, and Jack specializes in decorating wedding cakes. d. Jill specializes in decorating wedding cakes, and Jack specializes in decorating ice-cream cakes. ANSWER: c 182. Suppose the United States is more productive than China at making both T-shirts and cell phones. The theory of comparative advantage suggests that consumption in both countries will: a. increase if the United States produces both goods. b. increase if each country specializes in producing the good with a lower opportunity cost. c. not change if China produces either T-shirts or cell phones. d. remain unchanged. ANSWER: b 183. Figure: Computers and Books
Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 2 According to the figure, the opportunity cost of producing books: a. is higher for country A than for country B. b. is higher for country B than for country A. c. is the same for countries A and B. d. cannot be determined. ANSWER: a 184. Figure: Computers and Books
According to the figure, both countries can increase consumption if: a. both countries buy computers and books from each other. b. both countries produce both computers and books. c. country A produces only computers and buys books from country B. d. country A produces only books and buys computers from country B. ANSWER: c 185. Figure: Computers and Books
Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 2
According to the figure, if country A produces only the good for which it has a comparative advantage and then consumes the other good by exchanging computers for books, then: a. country A will consume outside its PPF, but country B will consume inside its PPF. b. country A will consume inside its PPF, but country B will consume outside its PPF. c. both countries will consume inside their own PPFs. d. both countries will consume outside their own PPFs. ANSWER: d 186. When economists say that an individual or country has a comparative advantage in the production of a good, it means that they: a. can produce more of the good than anyone else. b. are the lowest-opportunity-cost producer of the good. c. are the highest-opportunity-cost producer of the good. d. are operating on their production possibilities frontier. ANSWER: b 187. The opportunity cost of producing a particular good refers to: a. how much of something else must be given up to produce 1 additional unit of the good. Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 2 b. how much of a good can be produced with the existing technology and resources. c. the total cost of production, including wages. d. the marginal cost of production. ANSWER: a 188. Anita can bake 10 cakes in a day but has no time left to make cookies. If she bakes only cookies, she can make 200 cookies in a day. John makes equally delicious cakes and cookies but can make only 7 cakes or 100 cookies in a day. Based on this information, which statement is TRUE? a. Anita has a comparative advantage in the production of cakes. b. John has a comparative advantage in the production of cakes. c. John has an absolute advantage in the production of cookies. d. Anita has a comparative advantage in the production of both cakes and cookies. ANSWER: b 189. Figure: Comparative Advantage
The figure illustrates both the U.S. and Japanese production possibilities frontiers for TVs and wheat. Based on this information, which is TRUE? a. The United States has a comparative advantage in the production of TVs. b. The United States has a comparative advantage in the production of wheat. c. Japan has a comparative advantage in the production of wheat. d. Japan has an absolute advantage in the production of TVs. ANSWER: b 190. Figure: Comparative Advantage
Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 2
The figure illustrates both the U.S. and Japanese production possibilities frontiers for TVs and wheat. Based on this information, which of these is TRUE? a. The opportunity cost of producing a TV in the United States is 1/3 of a bushel of wheat. b. The opportunity cost of producing a TV in the United States is 900 bushels of wheat. c. The opportunity cost of producing a TV in Japan is 2 bushels of wheat. d. The opportunity cost of producing a bushel of wheat in Japan is 2 TVs. ANSWER: c 191. When countries produce and trade those goods for which they have a comparative advantage: a. total production and consumption will increase in all countries. b. trade will increase, but production will decrease. c. at least one country will be worse off; maximizing production comes from producing those goods for which they have the absolute advantage. d. they are maximizing their opportunity costs.
ANSWER: a 192. Figure: Sofas and Windows
Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 2
In the PPF diagram, what is the opportunity cost of producing an additional window? a. 1 1/4 sofas b. 4/5 of a window c. 1 sofa d. 4/5 of a sofa ANSWER: c 193. Figure: Sofas and Windows
Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 2
In the PPF diagram, what is the opportunity cost of producing an additional sofa? a. 1 1/4 sofas b. 4/5 of a window c. 1 window d. 4/5 of a sofa ANSWER: c 194. How is slope, measured as rise over run, related to the production possibilities frontier? a. Slope measures the fixed costs of producing good X and good Y. For a slope of −3, the fixed cost of
producing either good X or good Y is $3 multiplied by the number of units produced. b. Slope gives the opportunity cost of producing an additional unit of the good on the x-axis. So if the slope is −3, the country must give up producing one-third of a unit of good Y for every additional unit of good X it produces. c. Slope gives the fixed cost of producing an additional unit of the good on the x-axis. So if the slope is −3, the country must give up producing one-third of a unit of good Y for every additional unit of good X it produces. d. Slope gives the opportunity cost of producing an additional unit of the good on the x-axis. So if the slope is −3, the country must give up producing 3 units of good Y for every additional unit of good X it produces.
ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 2 195. Figure: Steel and Lumber
In the PPF diagram, the United States has a comparative advantage in _____ and an absolute advantage in _____. a. both goods; both goods b. steel; lumber c. steel; both goods d. lumber; steel ANSWER: c 196. Figure: Steel and Lumber
Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 2
In the PPF diagram, China has a comparative advantage in _____ and an absolute advantage in _____. a. lumber; neither of the goods b. steel; lumber c. steel; neither of the goods d. lumber; steel ANSWER: a 197. Figure: Rice and Shirts
Copyright Macmillan Learning. Powered by Cognero.
Page 70
Name:
Class:
Date:
Chapter 2
Use the PPFs shown for the United States and India. With specialization and trade, the United States would produce _____, and India would produce _____. a. 50 pounds of rice and 0 shirts; 0 pounds of rice and 35 shirts b. 30 pounds of rice and 16 shirts; 11.4 pounds of rice and 15 shirts c. 0 pounds of rice and 40 shirts; 20 pounds of rice and 0 shirts d. 50 pounds of rice and 40 shirts; 20 pounds of rice and 35 shirts ANSWER: a 198. Figure: Rice and Shirts
Copyright Macmillan Learning. Powered by Cognero.
Page 71
Name:
Class:
Date:
Chapter 2
Use the PPFs shown for the United States and India. If the United States and India specialize and trade, one country will trade away 20 pounds of rice in exchange for 20 shirts from the other. Compared with no trade, _____ will be able to consume _____ additional shirts, and _____ will be able to consume an additional _____ pounds of rice. a. the United States; 0; India; 8.6 b. India; 5; the United States; 0 c. the United States; 4; India; 8.6 d. India; 8.6; the United States; 4 ANSWER: c 199. New Zealand is more productive than Madagascar at producing all goods and services. In this situation: a. New Zealand might or might not benefit by trading with Madagascar. b. Madagascar would be harmed if it traded with New Zealand. c. both countries would benefit from trading with each other. Copyright Macmillan Learning. Powered by Cognero.
Page 72
Name:
Class:
Date:
Chapter 2 d. New Zealand would see its standard of living decline if it traded with Madagascar. ANSWER: c 200. Trade tends to: a. decrease the wages of high-productivity countries. b. decrease the wages of low-productivity countries. c. decrease the wages of both high- and low-productivity countries. d. increase the wages of both high- and low-productivity countries. ANSWER: d 201. Figure: Benin
In the figure, Benin has 32 workers, and the price per ton of cotton and ton of rice is $2,500 and $1,200, respectively. The average wage with no trade is $_____, and the average wage with trade is $_____. a. 850; 1,081.25 b. 768.75; 1,000 c. 1,000; 850 d. 1,000; 1,081.25 ANSWER: b 202. Babe Ruth could produce 2 home runs in a week of play as a fielder or 1 win in a week of play as a pitcher. What was his opportunity cost for a week of pitching? Copyright Macmillan Learning. Powered by Cognero.
Page 73
Name:
Class:
Date:
Chapter 2 a. 1 win b. 2 wins c. 1 home run d. 2 home runs ANSWER: d 203. Babe Ruth could produce 2 home runs in a week of play as a fielder or 1 win in a week of play as a pitcher. What was his opportunity cost of a week of fielding? a. 1 win b. 2 wins c. 1 home run d. 2 home runs ANSWER: a 204. Conan O'Brien hosted the Conan show, and Andy Richter, his sidekick, wrote for it. Conan needed 4 hours to rehearse and host a good show. It took Andy 10 hours to do the same. Conan wrote one usable joke in an hour, but Andy needed 2 hours to do the same. Conan's opportunity cost of writing a single usable joke was: a. 0.2 units of hosting. b. 0.25 units of hosting. c. 0.5 units of hosting. d. 1 unit of hosting. ANSWER: b 205. Conan O'Brien hosted the Conan show, and Andy Richter, his sidekick, wrote for it. Conan needed 4 hours to rehearse and host a good show. It took Andy 10 hours to do the same. Conan wrote one usable joke in an hour, but Andy needed 2 hours to do the same. Andy's opportunity cost of writing a single usable joke was: a. 0.2 units of hosting. b. 0.25 units of hosting. c. 0.5 units of hosting. d. 1 unit of hosting. ANSWER: a 206. Conan O'Brien hosted the Conan show, and Andy Richter, his sidekick, wrote for it. Conan needed 4 hours to rehearse and host a good show. It took Andy 10 hours to do the same. Conan wrote one usable joke in an hour, but Andy needed 2 hours to do the same. Conan's opportunity cost of rehearsing and hosting a show was: a. 0.2 usable jokes. b. 0.5 usable jokes. c. 4 usable jokes. d. 5 usable jokes. ANSWER: c 207. Conan O'Brien hosted the Conan show, and Andy Richter, his sidekick, wrote for it. Conan needed 4 hours Copyright Macmillan Learning. Powered by Cognero.
Page 74
Name:
Class:
Date:
Chapter 2 to rehearse and host a good show. It took Andy 10 hours to do the same. Conan wrote one usable joke in an hour, but Andy needed 2 hours to do the same. Andy's opportunity cost of rehearsing and hosting a show was: a. 0.2 usable jokes. b. 0.5 usable jokes. c. 4 usable jokes. d. 5 usable jokes. ANSWER: d 208. According to the theory of trade, if two countries trade with each other: a. consumption in one country will fall and wages in that country will also fall. b. wage costs will remain low if both countries specialize in producing the goods for which they have a comparative advantage. c. trade will raise the labor productivity and wages of both countries.
d. wages in the country with a comparative advantage will rise, and wages in the country without a comparative advantage will fall.
ANSWER: c 209. Trade tends to: a. increase wages in developed countries but decrease wages in less-developed countries. b. decrease wages in developed countries but increase wages in less-developed countries. c. decrease wages in all countries. d. increase wages in all countries. ANSWER: d 210. Wage rates are primarily based on the: a. level of comparative advantage. b. extent to which the country is involved in trade with other countries. c. productivity of labor. d. institutional factors present. ANSWER: c 211. Which is TRUE regarding trade and wages? a. Trade can decrease wages by decreasing the productivity of labor. b. Trade equalizes wages between high- and low-productivity countries. c. Countries with low productivity levels will always have lower wages than high-productivity nations whether they trade or not. d. Trade directly increases productivity, which in turn increases comparative advantage.
ANSWER: c 212. A country produces and consumes 8 units of sugarcane that cost $50 per unit and 2 Apple Watches that cost $200 each. After specialization and trade, the country consumes 8 units of sugarcane and 4 Apple Watches. With 24 units of labor, what are wages in this country? a. $33.33 without trade and $50 with trade Copyright Macmillan Learning. Powered by Cognero.
Page 75
Name:
Class:
Date:
Chapter 2 b. $50 without trade and $75 with trade c. $50 without trade and $33.33 with trade d. $33.33 without trade and $75 with trade ANSWER: a 213. When a rich country that has absolute advantages in all products begins trading with a poor country the wages in: a. the rich country will go down, and the wages in the poor country will go up. b. both countries will go up. c. both countries will go down. d. the rich country will go up, and the wages in the poor country will go down. ANSWER: b 214. High-productivity workers fear trade because they think they cannot compete with workers in lowproductivity countries. Low-productivity workers fear trade because they think they cannot compete with workers in high-productivity countries. Which of these fears is justified? a. The fears of workers in high-productivity countries are justified; the fears of workers in low-productivity countries are not. b. The fears of workers in low-productivity countries are justified; the fears of workers in high-productivity countries are not. c. Both sets of fears are justified.
d. Neither set of fears is justified. ANSWER: d 215. According to Adam Smith: a. trade is a way for rich people to exploit poor people. b. trade within a nation benefits people, but international trade does not. c. trade does not benefit anyone. d. people buy goods for which they have higher opportunity costs than other people. ANSWER: d 216. Adam Smith said, "It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor." Which concept BEST illustrates Smith's intent with this statement? a. comparative advantage b. incentives matter c. scarcity d. production possibilities frontier ANSWER: a 217. What is the difference between trade among individuals and trade among nations? a. The logic of trade and specialization is stronger for individuals than it is for nations. Copyright Macmillan Learning. Powered by Cognero.
Page 76
Name:
Class:
Date:
Chapter 2 b. The logic of trade and specialization is stronger for nations than it is for individuals. c. The logic of trade and specialization applies equally well among individuals and nations. d. Without looking at specific cases, we can't say much about the logic of trade and specialization for individuals and nations.
ANSWER: c 218. Adam Smith: a. believed that trade in local communities is good for the economy, but trading with people located in foreign countries is bad for the economy. b. did not discuss or have an opinion about international trade.
c. argued that it is beneficial to buy a product if the seller can sell it to us cheaper than we can make it for
ourselves, regardless of the product's country of origin. d. believed that trade in local communities is bad for the economy, but trading with people located in foreign countries is good for the economy.
ANSWER: c 219. In many universities, graduate students are employed to teach introductory undergraduate courses, even though the full professors at these universities have more experience and could potentially teach these courses better. Which BEST explains why universities choose to hire graduate students instead of full professors to teach their introductory courses? a. Graduate students gain a deeper understanding of the material by teaching it. b. The opportunity cost of teaching an introductory course is higher for full professors than for graduate students. c. The opportunity cost of teaching an introductory course is higher for graduate students than for full professors. d. Introductory classes are the best place for graduate students to build their teaching skills. ANSWER: b 220. Gains from international trade are BEST characterized as potential gains from: a. importation. b. exportation. c. neither importation nor exportation. d. both importation and exportation. ANSWER: d 221. The development of shipping containers enabled companies to move freight quickly between ships, trucks, and trains by loading a single large container with many different goods and then moving the container. Before the container, freight had to be loaded and unloaded one palette, barrel, or box at a time. What impact did the shipping container have on globalization? Why? a. an increase because it allowed the faster spread of communication b. an increase because it decreased transportation costs c. a decrease because it caused many dock workers to lose their job d. a decrease because it caused the amount of human cooperation to fall ANSWER: b 222. According to the textbook, globalization: Copyright Macmillan Learning. Powered by Cognero.
Page 77
Name:
Class:
Date:
Chapter 2 a. never took place. b. began as far back as the Roman Empire. c. began in the twenty-first century. d. occurred only during the Dark Ages. ANSWER: b 223. Increased trade has also led to: a. increased globalization of economies. b. a more equal distribution of wealth across countries. c. a decline in human cooperation. d. more specialization and thus less globalization. ANSWER: a 224. The trade networks of the Roman Empire: a. fell apart in the medieval era, leading to the Dark Ages. b. were not of great importance. c. show that globalization is a new phenomenon. d. did not facilitate the transport of goods from different parts of the world. ANSWER: a 225. Globalization is: a. pushed through by politicians while citizens are reacting to disasters and upheavals. b. the advance of human cooperation across national boundaries. c. the advance of human conflict across national boundaries. d. supported only by greedy corporations. ANSWER: b 226. The Dark Ages was a period in which trade: a. expanded because of rising transportation and communication costs. b. expanded because of falling transportation and communication costs. c. decreased because world markets became more isolated. d. decreased because world markets became less isolated. ANSWER: c 227. Globalization is BEST described as a(n): a. new process. b. old process that has consistently grown. c. old process that has grown intermittently. d. old process that has declined over time. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 78
Name:
Class:
Date:
Chapter 2 228. The recent pace of globalization has been increased through: a. declining transportation costs. b. increased speed of communication. c. the integration of world markets. d. each of these developments. ANSWER: d 229. Gains from trade are largest when two parties are similar in terms of preferences. a. True b. False ANSWER: b 230. Gains from trade are largest when two parties are similar in terms of opportunity costs of production. a. True b. False ANSWER: b 231. Trade refers to the exchange of goods or services between two parties. a. True b. False ANSWER: a 232. Trade refers to the exchange of goods and services between at least two different nations. a. True b. False ANSWER: b 233. Trade makes people better off only when they all have the same preferences. a. True b. False ANSWER: b 234. Trades are considered zero-sum transactions because when one person gains, the other loses an equal amount. a. True b. False ANSWER: b 235. Trade works BEST between people who share similar preferences. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 79
Name:
Class:
Date:
Chapter 2 236. Trade creates value by moving goods from people that value them less to people that value them more. a. True b. False ANSWER: a 237. Jerome has an old (working) television that he would like to get rid of now that he has purchased a new television. The old television is no longer worth anything to him now. Shanique, on the other hand, has an even older television that has just broken down. She would pay up to $50 for any working TV. If Jerome trades Shanique his old television for $50, both are better off but the total value in society does not increase. a. True b. False ANSWER: b 238. Involuntary trades increase value in the same way voluntary trades do. a. True b. False ANSWER: b 239. One of the ways trade increases wealth is by taking advantage of differences in preferences. a. True b. False ANSWER: a 240. Large cities should have more professional closet organizers than small cities. a. True b. False ANSWER: a 241. In a world with trade, no one can afford to specialize. a. True b. False ANSWER: b 242. Trade leads to increased productivity because trade allows people to specialize. a. True b. False ANSWER: a 243. Although trade increases productivity, it decreases society's collective knowledge because people specialize in a very limited number of things. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 80
Name:
Class:
Date:
Chapter 2 ANSWER: b 244. The human brain has no limits, so the division of knowledge decreases the total knowledge in society. a. True b. False ANSWER: b 245. Without trade, specialization is impractical. a. True b. False ANSWER: a 246. The U.S. interstate highway system probably allowed more people in small communities to become fulltime interior decorators. a. True b. False ANSWER: a 247. Specialization is an example of self-interest aligning with the social interest because it increases the amount you can consume as well as the amount society can consume. a. True b. False ANSWER: a 248. An advantage to specialization is that it can decrease the average cost of production by concentrating on smaller-scale production. a. True b. False ANSWER: b 249. Specialization and the division of knowledge decreased with the fall of the Berlin Wall and the opening of China's economy to the world. a. True b. False ANSWER: b 250. The benefits of economies of scale and increased competition to an economy include lower unit costs. a. True b. False ANSWER: a 251. As trade becomes more extensive, it slows down the creation of new ideas because fewer people can specialize in areas like science and engineering. Copyright Macmillan Learning. Powered by Cognero.
Page 81
Name:
Class:
Date:
Chapter 2 a. True b. False ANSWER: b 252. If it were impossible to have a comparative advantage, there would be no gains from trade. a. True b. False ANSWER: b 253. If you have a comparative advantage in washing dishes, then you must also have an absolute advantage in washing dishes. a. True b. False ANSWER: b 254. When comparing two countries with two goods each, if one country has a comparative advantage in one good, the other country will have a comparative advantage in the other good. a. True b. False ANSWER: a 255. Comparative advantage occurs when an individual's opportunity cost for producing the same good or service is lower than that of another individual. a. True b. False ANSWER: a 256. Countries can benefit from trading with one another because trade allows each country to specialize in doing what it does BEST. a. True b. False ANSWER: a 257. Trading increases the amount a single country can produce. a. True b. False ANSWER: b 258. The production possibilities frontier shows all the combinations of goods that a country can produce given its productivity and supply of inputs. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 82
Name:
Class:
Date:
Chapter 2 ANSWER: a 259. The points on the production possibilities frontier show the cost of the different goods that a country can produce. a. True b. False ANSWER: b 260. Everyone, from the most to the least skilled to the most and least educated, can benefit from trade. a. True b. False ANSWER: a 261. A country has a comparative advantage in producing one good if its labor cost is lower than that for other countries. a. True b. False ANSWER: b 262. If a country has an absolute advantage in both items produced when compared to another country, there can never be any benefit for them to trade. a. True b. False ANSWER: b 263. U.S. pharmaceutical companies sell drugs to Kenya, and Kenyan farmers sell flowers to the United States. This pattern of trade suggests that the United States is the low-opportunity-cost producer of drugs, and Kenya is the low-opportunity-cost producer of flowers. a. True b. False ANSWER: a 264. In Spain, it takes 10 workers to produce 1 barrel of wine and 4 workers to produce 1 yard of cloth. Thus, the opportunity cost of producing 1 barrel of wine is 2.5 yards of cloth. a. True b. False ANSWER: a 265. Trade causes wages in countries with high productivity to increase and wages in countries with low productivity to decrease. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 83
Name:
Class:
Date:
Chapter 2 266. Specializing in its comparative advantage and trading with other nations benefit a country in terms of its total output but not individuals when it comes to their wages. a. True b. False ANSWER: b 267. Specializing in one's comparative advantage good and trading with others will make individuals better off but may not make countries better off. a. True b. False ANSWER: b 268. Conan O'Brien hosted the Conan show, and Andy Richter, his sidekick, wrote for it. Conan needed 4 hours to rehearse and host a good show. It took Andy 10 hours to do the same. Conan wrote one usable joke in an hour, but Andy needed 2 hours to do the same. Gains from trade were largest when Conan hosted the show and Andy wrote for the show. a. True b. False ANSWER: a 269. International trade is based on the theory of absolute advantage. a. True b. False ANSWER: b 270. To benefit from trade, a country must have an absolute advantage in producing its traded good. a. True b. False ANSWER: b 271. A country or individual that is best at doing something should always undertake that activity to maximize gains from trade. a. True b. False ANSWER: b 272. Trade allows countries to consume more than their ability to produce. a. True b. False ANSWER: a 273. Employing comparative advantage increases the total satisfaction with what's produced but not the total Copyright Macmillan Learning. Powered by Cognero.
Page 84
Name:
Class:
Date:
Chapter 2 amount of what's produced. a. True b. False ANSWER: b 274. If Kino can gather 15 logs a day or catch 10 fish a day and Jian can gather 5 logs a day or catch 5 fish a day, then Jian has a comparative advantage in catching fish. a. True b. False ANSWER: a 275. The production possibilities frontier's negative slope illustrates the notion of trade-offs—producing more units of one good reduces the amount of another good's production. a. True b. False ANSWER: a 276. According to the theory of comparative advantage, a country specializes in producing goods with lower opportunity costs than in another country. a. True b. False ANSWER: a 277. Poor countries are at a distinct disadvantage when it comes to economic production; they get outcompeted in everything, since they do not have a comparative advantage in anything. a. True b. False ANSWER: b 278. In a certain country, it takes 5 of its 10 workers to produce 1 barrel of wine but only 1 worker to produce 1 yard of cloth. If we graphed this country's PPF, placing wine on the vertical axis and cloth on the horizontal axis, the slope of the PPF would equal −1/5. a. True b. False ANSWER: a 279. Mila can clean and polish silverware in 2 hours and change spark plugs in a car in 4 hours. Nadia can clean and polish the same silverware in 1 hour and change spark plugs in a car in 1 hour. Mila does not have a comparative advantage in either activity. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 85
Name:
Class:
Date:
Chapter 2 280. In the time it takes Stanley to clean the bathroom, he can make 3 cheesecakes. In the time it takes Fran to clean the bathroom, she can make 2 cheesecakes. Fran has a comparative advantage in cleaning the bathroom. a. True b. False ANSWER: a 281. The wage rate in India is lower than the wage rate in the United States because Indian workers are more productive than U.S. workers. a. True b. False ANSWER: b 282. Some countries have comparative advantages in everything. a. True b. False ANSWER: b 283. Trade increases productivity when production is carried out by the person or group with the comparative advantage. a. True b. False ANSWER: a 284. The basic idea of trade is to buy the things you could make only at a high opportunity cost and sell the things you can make at a low opportunity cost. a. True b. False ANSWER: a 285. The economist credited with saying, "It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy," is Adam Smith. a. True b. False ANSWER: a 286. Because Chinese wages are much lower than wages in the United States, the Chinese can outcompete the United States in everything. a. True b. False ANSWER: b 287. Globalization is the advance of human cooperation across national boundaries. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 86
Name:
Class:
Date:
Chapter 2 b. False ANSWER: a 288. Evidence from history shows that when the extent of trade expands, the result is prosperity. a. True b. False ANSWER: a 289. Trade makes rich people richer and poor people poorer. a. True b. False ANSWER: b 290. Increased communication speed played a significant role in recent developments that led to increased trade and globalization. a. True b. False ANSWER: a 291. If it produces only wine, Moldova can produce 80 million bottles of wine (W) a year. If it produces only fruit, Moldova can produce 120 million tons of fruit (F) a year. If these are the only outputs for Moldova, which equation describes its production possibilities frontier, putting fruit on the vertical axis and wine on the horizontal axis? a. F = 80 − 1.5W b. F = 120 − 1.5W c. F = 80 − 0.67W d. W = 80 − 1.5F ANSWER: a 292. Suppose Lithuania produces two goods: natural amber jewelry (J) and bicycles (B). Its production possibilities frontier is a straight line described by this equation: J = 100 − 4B. If Lithuanian producers decided to increase jewelry production by 4 units, bicycle production would: a. fall by 1. b. fall by 16. c. fall by 25. d. rise by 1. ANSWER: a 293. Figure: Cars and Boats
Copyright Macmillan Learning. Powered by Cognero.
Page 87
Name:
Class:
Date:
Chapter 2
The graphs show production possibilities for countries A, B, C, and D. If countries A and C began to trade, what would the trade pattern look like? a. A would export cars and C would export boats. b. C would export cars and A would export boats. c. A would export both cars and boats to C. Copyright Macmillan Learning. Powered by Cognero.
Page 88
Name:
Class:
Date:
Chapter 2 d. Since the opportunity costs for A and C are the same, there is no advantage of trading with each other. ANSWER: a 294. Figure: Cars and Boats
The graphs show production possibilities for countries A, B, C, and D. If countries A and B began to trade with Copyright Macmillan Learning. Powered by Cognero.
Page 89
Name:
Class:
Date:
Chapter 2 each other, and C and D began to trade with each other, which countries would export cars? a. A and C would export cars. b. B and D would export cars. c. A and D would export cars. d. B and C would export cars. ANSWER: a 295. Compared to Denmark's economy, the U.S. economy is huge. The United States can probably out-produce Denmark in everything the two countries make. Why is trade with Denmark still beneficial to the United States? a. comparative advantage b. absolute advantage c. production possibilities d. division of knowledge ANSWER: a 296. Which would NOT create a comparative advantage? a. skewed preferences b. a large unskilled labor force c. a highly educated population d. climate ANSWER: a 297. Which is the LEAST likely equation for a production possibilities frontier? a. Y = 100 + 5X b. Y = 200 − 4X c. Y + X = 50 − 4X d. X = 50 − 0.25Y ANSWER: a 298. A country produces food (F) and shelter (S), and its production function is expressed as F = 1000 − 5S. If the country increases its shelter production from 100 to 150, what is the opportunity cost? a. 10 units of food b. 250 units of food c. 850 units of food d. 0.2 units of food ANSWER: b 299. You are considering replacing your phone. Your preferences are, in order, an iPhone, a Samsung, or a Pixel. The iPhones are out of your price range, so you get the Samsung. What is the opportunity cost of your decision? a. the Pixel b. the iPhone Copyright Macmillan Learning. Powered by Cognero.
Page 90
Name:
Class:
Date:
Chapter 2 c. both the iPhone and the Pixel d. Since you got a phone you like, there is no opportunity cost. ANSWER: a 300. A restaurant offers four menu items: pizza, fried chicken, fish and chips, and a pulled-pork sandwich. You decide you are not in the mood for pizza and order the sandwich. Your server regretfully tells you that they are out of pulled pork so you order the fish and chips. What is the opportunity cost of your selection? a. fried chicken b. pizza c. pull-pork sandwich d. The fish and chips were presumably your favored choice of those available, so there is no opportunity cost. ANSWER: a 301. In the Star Trek: Deep Space Nine episode "Treachery, Faith and the Great River," one of the characters is attempting to repair a spaceship. This is a critical job because there's a war going on, but the war is making it difficult to get the needed parts. An alien named Nog explains how he could obtain them by navigating the Great Material Continuum. He explains: It binds the universe together . . . there are millions upon millions of worlds in the universe, each one filled with too much of one thing and not enough of another. And the Great Continuum flows through them all, like a mighty river, from "have" to "want" and back again. And if we navigate the Continuum with skill and grace, our ship will be filled with everything our hearts desire. Identify which of the major themes of trade this passage about the Great Material Continuum highlights, and explain how it works. ANSWER: The Great Material Continuum in this example reflects the concepts of gains from trade and globalization. The various worlds are endowed with certain materials that allow them to specialize, as the various worlds are abundant with different goods. Each world simultaneously provides goods that the other worlds need and is in need of the goods of other worlds. Moreover, the various worlds in the universe are thus interconnected, contributing to globalization, in this case on a universal scale. Trade allows for all to be better off by taking advantage of the fact that preferences differ across the various worlds and peoples of the universe.
302. What are the three major benefits of trade? Explain briefly. ANSWER: The three benefits of trade are: making people better off when their preferences differ, increasing productivity through specialization and division of knowledge, and increasing productivity through comparative advantage. Trade makes everyone better off by moving goods from those who value them less to those who value them more. Moreover, the human brain is limited and there is much to know. Therefore, specialization through trade allows us to take advantage of this reality. Finally, trade allows us to focus on the activity we do at the lowest possible opportunity cost, that in which we have a comparative advantage.
303. Your professor hires a teaching assistant to grade student assignments even though your professor may do the task faster and perhaps more accurately. How can you explain this behavior using the theory of comparative advantage? ANSWER: In this example, while the professor's grading skills may be quicker and more accurate, the opportunity cost of the professor taking the time to grade students' assignments as opposed to spending time on research, developing new lesson plans, or performing other academic duties is simply too high. On the other hand, the teaching assistant's opportunity cost is much lower for this same action. Therefore, the teaching assistant has a comparative advantage in grading the students' papers and will take on this action.
304. In a two-country world of Japan and South Korea, suppose Japan can produce 400 radios or 200 TV sets in Copyright Macmillan Learning. Powered by Cognero.
Page 91
Name:
Class:
Date:
Chapter 2 1 day with all its available resources, whereas South Korea can produce 100 radios or 200 TV sets in 1 day with all its available resources. According to the theory of comparative advantage, what would be the possible gain in this world if the two countries specialized and traded with each other? ANSWER: In a world where both countries simply produce and consume their own output without trade, Japan would produce and consume 200 radios and 100 TV sets, while South Korea would produce and consume 50 radios and 100 TV sets. However, both stand to benefit from specialization. Japan has the comparative advantage in producing radios (it gives up 0.5 TVs for every radio it decides to produce vs. South Korea's 2 TVs), and South Korea has the comparative advantage in producing TVs (it gives up 0.5 radios for every TV it decides to produce vs. Japan's 2 radios). Therefore, Japan would produce radios and South Korea would produce TVs, allowing Japan to produce 400 radios, while South Korea produces 200 TVs. Japan trades 100 radios in order to receive 100 TVs from South Korea, bringing its total consumption to 300 radios and 100 TVs while South Korea's total consumption becomes 100 TVs and 100 radios. Both countries are able to consume more than they could produce without trade.
305. Cameron and Jacquie must prepare a presentation for their marketing class. As part of their presentation, they must create a marketing plan and prepare 40 PowerPoint slides. It would take Cameron 5 hours to do the required plan and 5 hours to prepare the PowerPoint slides. It would take Jacquie 6 hours to do the plan and 10 hours to prepare the PowerPoint slides. a. How much time would it take the two to complete the project if they divided the creation of the marketing plan equally and the preparation of the PowerPoint slides equally? b. How much time would it take the two to complete the project if they used comparative advantage and specialized in creating the marketing plan or preparing the PowerPoint slides? c. If Cameron and Jacquie have the same opportunity cost of $5 per hour, is there a better solution than for each to specialize? ANSWER: a. If the work were divided equally, Cameron would spend 2.5 hours creating half of the marketing plan, while Jacquie would spend 3 hours doing the same work. Moreover, Cameron would spend 2.5 hours creating 20 PowerPoint slides, and Jacquie would spend 5 hours doing her half of the work. Therefore, together it would take them (2.5 + 3 + 2.5 + 5) 13 hours to complete their work. b. Cameron's time is equally well spent doing either task, while Jacquie is much more efficient at working on the marketing plan than on the PowerPoint slides. If Cameron were to work on developing the PowerPoint slides and Jacquie were to work on creating the marketing plan, together they would finish both tasks in (5 + 6) 11 hours, 2 hours less than before. c. In both cases, the marketing plan and the PowerPoint slides, Cameron would require a payment of $25. However, Jacquie would require $30 and $50 for both, respectively. Ultimately, it would be more efficient for Cameron to finish either the slides or the plan and for Jacquie to pay Cameron $25 to finish the remaining work. The total time spent in this case would equal 10 hours.
306. In Narnia, 1 binky can be produced with 2 workers and 1 sippy cup can be produced with 0.25 workers. In Bedrock, 1 binky can be produced with 1 worker and 1 sippy cup can be produced with 0.50 workers. a. What is the opportunity cost of producing 1 sippy cup in Narnia and 1 sippy cup in Bedrock? b. Which country has the comparative advantage in sippy cups? c. Suppose that each country has 100 workers and completely specializes in its comparative advantage. How many units of sippy cups and binkies will each country produce? d. Before trade, Narnia produces 25 binkies and 200 sippy cups, and Bedrock produces 50 binkies and 100 sippy cups. Show how specialization and free trade can make each country better off than it was before trade. ANSWER: a. The opportunity cost of producing 1 sippy cup in Narnia is 0.125 binkies (one worker can produce either 0.5 binkies or 4 sippy cups), and the opportunity cost of producing 1 sippy cup in Bedrock is 0.5 binkies (one worker can produce either 1 binky or 2 sippy cups). b. Using the information calculated in (a), Narnia has the comparative advantage in sippy cup production. c. With 100 workers, Narnia can produce 400 sippy cups, while Bedrock can produce 100 binkies. d. As stated in (c), when Narnia specializes it can produce 400 sippy cups while Bedrock produces 100 binkies. Since Narnia produces only 200 sippy cups without trade, it can trade away up to 200 when it specializes. Likewise, Bedrock Copyright Macmillan Learning. Powered by Cognero.
Page 92
Name:
Class:
Date:
Chapter 2 can trade away up to 50 binkies. Bedrock values binkies at a rate of 1 binky = 2 sippy cups, while Narnia values binkies at the rate 1 binky = 8 sippy cups. Theoretically, Bedrock could trade away 25 binkies for 150 sippy cups, thus putting Bedrock at a level above its PPF curve (Bedrock would be willing to accept 50 binkies for this trade) and Narnia would then have 250 sippy cups and 25 binkies (Narnia would normally value 25 binkies and 200 sippy cups equally). Thus, both sides would be outside of their PPF curves.
307. Briefly describe a few activities that a typical student might do on any given day that reflect the effects of globalization. ANSWER: The typical student may use a smartphone with technology developed in South Korea or a laptop produced in China in order to communicate with their friends and family. Furthermore, a student may use a bike or automobile produced in Japan in order to commute to and from school. The student's diet may consist partially of fruit from Brazil and coffee from Colombia. In just these few examples, one can see the deep connection today's students have to the globalized economy of the modern day.
Copyright Macmillan Learning. Powered by Cognero.
Page 93
Name:
Class:
Date:
Chapter 3 1. Which of these statements is TRUE? a. When the price of oil is high, consumers will use oil for both valuable and less valuable uses. b. When the price of oil is low, consumers will use oil only for its most valuable uses. c. When the price of oil rises, consumers tend to use oil for uses in which there are few substitutes for it. d. When the price of oil falls, consumers start to conserve oil and use it only when there are no other options. ANSWER: c 2. Which of these statements is TRUE? a. Consumer surplus is the difference between the maximum price a consumer is willing to pay for a good or
service and its market price. b. Bill is willing to pay $10 for a pound of clay. If he buys a pound of clay at a market price per pound of $5, his consumer surplus is $2. c. Total consumer surplus is represented graphically by the area beneath the demand curve.
d. Total consumer surplus is represented graphically by the area above the demand curve. ANSWER: a 3. The most important tools in economics, according to the textbook, are supply, demand, and the: a. idea of equilibrium. b. opportunity to barter. c. quantity of sales. d. level of prices. ANSWER: a 4. Figure: Demand Curve
Which statement is TRUE regarding the figure? a. At a price of $6 per unit, consumers are willing and able to buy 10 units. b. The maximum price demanders are willing to pay for 15 units is $6 per unit. c. The higher the price, the greater the quantity demanded. d. At a price of $3.75 per unit, consumers are indifferent between buying 10 and 15 units. ANSWER: a 5. The quantity demanded of a good or service is the amount that: a. consumers are willing and able to buy at a given price. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 3 b. firms are willing to sell during a given time period at a given price. c. consumers would like to buy but might not be able to afford. d. consumers need to consume during a given time period. ANSWER: a 6. The quantity demanded is the quantity that buyers are: a. willing to buy but cannot afford. b. able to buy at a given income level but not willing to pay for. c. willing to buy at a given income level. d. willing and able to buy at a given price. ANSWER: d 7. Quantity demanded: a. shows how much buyers are willing and able to buy at different prices. b. is the amount that buyers are willing and able to buy at a particular price. c. shows how much sellers are willing and able to sell at different prices. d. is the amount that sellers are willing and able to sell at a particular price. ANSWER: b 8. A demand curve is a function that shows the relationship between: a. price and the quantity sold. b. price and the quantity supplied. c. price and the quantity demanded. d. quantity demanded and quantity supplied. ANSWER: c 9. The demand curve for oil shows the: a. quantity demanded of oil at different income levels. b. quantity demanded of oil at different oil prices. c. demand for oil at different prices of other goods. d. demand for oil when there is a surplus or shortage. ANSWER: b 10. The demand curve: a. shows how much buyers are willing and able to buy at different prices. b. is the amount that buyers are willing and able to buy at a particular price. c. shows how much sellers are willing and able to sell at different prices. d. is the amount that sellers are willing and able to sell at a particular price. ANSWER: a 11. The demand curve shows the relationship between: Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 3 a. demand and supply. b. quantity demanded and quantity supplied. c. price and quantity supplied. d. price and quantity demanded. ANSWER: d 12. Which of these is TRUE about demand curves? a. Demand curves are negatively sloped. b. Demand curves are U-shaped. c. Demand curves are positively sloped. d. Demand curves are vertical. ANSWER: a 13. Figure: Demand Curve
What is the maximum price per book that buyers are willing to pay for 2,500 books? a. $60 b. $45 c. $30 d. $15 ANSWER: b 14. Figure: Demand Curve
Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 3 What is the maximum number of books that buyers are willing and able to buy at a price of $45 per book? a. 300 b. 450 c. 100 d. 0 ANSWER: c 15. A supply and/or demand graph typically shows: a. the price of the good on the horizontal axis and the quantity of the good on the vertical axis. b. the quantity of the good on the horizontal axis and the price of the good on the vertical axis. c. supply or demand of the good on the horizontal axis and price of the good on the vertical axis. d. the price of the good on the horizontal axis and supply or demand of the good on the vertical axis. ANSWER: b 16. Figure: Good X
Which statement is TRUE regarding the figure? a. At a price of $12 per unit, consumers are willing and able to purchase between 11 and 26 units of good X. b. By spending a total of $4, consumers can purchase 36 units of good X. c. At a price of $6 per unit, consumers are willing and able to purchase 26 units of good X. d. At a price of $4 per unit, consumers are willing and able to purchase 11 units of good X. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 3 17. Figure: Good X
The maximum price that consumers are willing to pay for _____ units of good X is $_____ per unit. a. 36; 4 b. 11; 4 c. 36; 12 d. 26; 4 ANSWER: a 18. The law of demand states that: a. the lower the price, the greater the quantity demanded. b. the higher the price, the higher the quantity demanded. c. the demand curve slopes upward. d. an increase in income increases the quantity demanded. ANSWER: a 19. What does the law of demand state? a. As incomes increase, people consume more of all goods. b. The demand for a good increases with the number of consumers in the market. c. As the price of a good increases, consumers purchase less of that good. d. The supply of a good increases in proportion to the demand for it. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 3 20. Which statement expresses the law of demand? a. There is a positive relationship between price and consumer surplus. b. There is a positive relationship between price and the quantity that buyers are willing and able to purchase. c. There is an inverse relationship between the willingness to pay and the ability to pay. d. There is a negative relationship between price and quantity demanded. ANSWER: d 21. Recall the discussion about the demand for oil in your textbook. Which of these correctly explains why the demand curve for oil is negatively sloped? As the price of oil rises: a. consumers use oil for more and varied purposes. b. consumers increasingly use oil only for those purposes without good substitutes. c. consumers have an incentive to use oil more freely. d. more producers are more willing and able to produce oil. ANSWER: b 22. A demand curve indicates that the: a. quantity demanded of a good is higher when its price is higher. b. quantity demanded of a good is higher when its price is lower. c. demand for a good is higher when its price is lower. d. demand for a good is higher when its price is higher. ANSWER: b 23. The demand curve for oil slopes downward because oil: a. will be used in its higher-valued uses only when the price is lower. b. will only be used in its higher-valued uses when the price is higher. c. has many substitutes, so no buyer is willing to pay when the price of oil rises. d. has no substitutes, so buyers do not react to any change in the price of oil. ANSWER: b 24. Which of these explains why the demand for oil has a negative slope? a. Oil is equally valuable in all of its uses. b. Oil is not equally valuable in all of its uses. c. Oil has many uses. d. Oil has few substitutes. ANSWER: b 25. When the price of wood is high: a. consumers will be more likely to use wood in its lower-valued uses. b. consumers will be more likely to use wood only in its higher-valued uses. c. the quantity demanded of wood will also rise. d. the quantity demanded of wood will be unaffected. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 3 ANSWER: b 26. Demand slopes down because: a. supply slopes up, and supply and demand must intersect. b. consumers focus too much on the price of goods when they choose the quantity to demand. c. goods usually have only a single use. d. consumers will choose to use goods only in their higher-valued uses when prices are high. ANSWER: d 27. The law of demand suggests a _____ relationship between price and _____. a. positive; quantity demanded b. positive; quantity supplied c. negative; quantity demanded d. negative; quantity supplied ANSWER: c 28. The demand curve for oil has a _____ slope because a _____ price of oil signals that consumers will use oil only in its _____ valuable uses. a. negative; higher; less b. negative; lower; more c. positive; higher; more d. negative; lower; less ANSWER: d 29. If the price of oil were sufficiently high, it would be used only in: a. making plastics. b. generating heat. c. powering cars and jets. d. making kerosene. ANSWER: c 30. Figure: Potatoes
Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 3
According to the demand curve, if the price of potatoes is $8 a pound, how many pounds are demanded? a. 5 b. 50 c. 60,000 d. 80,000 ANSWER: c 31. Figure: Potatoes
Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 3
If the price of potatoes is $8 a pound, what is the consumer surplus received? a. $30,000 b. $60,000 c. $240,000 d. $360,000 ANSWER: c 32. Table: Maximum Willingness to Pay Consumer Willingness to Pay for 1 lb of Bananas Jayce $2.00 Jamie $1.25 Joss $0.75 Jade $0.25 The table shows four individuals' maximum willingness to pay for one pound of bananas. If the market price of bananas is $0.50/lb, what is the total consumer surplus in the market? a. $4.00 b. $2.50 c. $2.75 d. $4.25 ANSWER: b 33. Quentin is willing to pay $1,000 for a new cell phone. When he gets to the store, he finds the cell phone he wants is priced at $650. Which of these is true? Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 3 a. Quentin will not purchase the cell phone because consumer surplus is not high enough. b. When Quentin purchases the cell phone he wants, he will enjoy a consumer surplus of $350. c. Quentin will buy the cell phone, but he will not enjoy any consumer surplus from the purchase. d. Quentin will lose $350 of consumer surplus when he purchases the cell phone. ANSWER: b 34. Which statement about consumer surplus is TRUE? a. Consumer surplus is the gross benefit to consumers from the exchange that occurs in a market. b. Consumer surplus is the gains from trade on the part of the consumer that result from a market transaction. c. Total consumer surplus is equal to the price the consumers paid multiplied by the quantity they purchased. d. Consumer surplus is the difference between the minimum price the consumer is willing to pay and the market price.
ANSWER: b 35. Table: Excel Company Survey Consumer Maximum Willingness to Pay for Excel Personal Computers Shira $1,459 Simon $1,320 Sian $1,201 Sonnie $1,165 The table shows the results of Excel Company's market survey. If the market price of Excel computers is $1,200 each, how much total consumer surplus (in $) are the four consumers earning? a. $380 b. $415 c. $345 d. $5,145 ANSWER: a 36. Table: Sweetbrand Cheesecakes Consumer Maximum Willingness to Pay for Sweetbrand Cheesecakes Fred $11.65 Sam $17.99 Merry $12.99 Piper $16.75 The table shows the maximum consumer willingness to pay for Sweetbrand cheesecakes. Which of the four consumers receives the most consumer surplus if the market price of the cheesecakes is $12.50 each? a. Fred b. Sam c. Merry d. Piper ANSWER: b 37. Table: Sweetbrand Cheesecakes Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 3 Consumer Maximum Willingness to Pay for Sweetbrand Cheesecakes Fred $11.65 Sam $17.99 Merry $12.99 Piper $16.75 The table shows the maximum consumer willingness to pay for Sweetbrand cheesecakes. Which of the four consumers receives the smallest positive consumer surplus if the market price of the cheesecakes is $12.50 each? a. Fred b. Sam c. Merry d. Piper ANSWER: c 38. If Maria is willing to pay $50 for a sweatshirt, how much consumer surplus does she earn if the market price for sweatshirts is $27.50 each? a. $27.50 b. $50.00 c. $77.50 d. $22.50 ANSWER: d 39. Figure: Consumer Surplus
Calculate the dollar amount of consumer surplus being earned in this market when the price is $30 and there are 300 units consumed. a. $4,500 b. $9,000 c. $18,000 d. $450 ANSWER: a 40. Figure: Earned Consumer Surplus Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 3
The market price of the product is $20 per unit. Calculate the dollar amount of consumer surplus being earned in this market. a. $120,000 b. $60,000 c. $100,000 d. $80,000 ANSWER: b 41. Figure: Earned Consumer Surplus
If the market price is $30 per unit, calculate the dollar amount of consumer surplus being earned in this market. a. $60,000 b. $30,000 c. $100,000 d. $80,000 ANSWER: b 42. If the university president valued a parking space close to the administration building at $500 and paid $30 for a parking permit, he would receive consumer surplus equal to $: a. 30. b. 470. c. 500. d. 530. Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 3 ANSWER: b 43. The difference between the maximum price a consumer is willing to pay for a given quantity of a good and its market price is: a. producer shortage. b. consumer shortage. c. producer surplus. d. consumer surplus. ANSWER: d 44. When you are willing to pay $5 for a hamburger but you pay $4 for it, your consumer surplus for the hamburger is: a. −$1. b. $1. c. −$9. d. $9. ANSWER: b 45. On a graph of a demand curve, total consumer surplus equals the: a. demand curve. b. area above the demand curve and beneath the market price. c. area beneath the demand curve and above the market price. d. market price. ANSWER: c 46. Figure: Demand
In the diagram, for a market price of $4, total consumer surplus equals $: a. 30. b. 60. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 3 c. 100. d. 75. ANSWER: a 47. To economists, the term "consumer surplus" means the: a. excess money consumers have left over after purchasing goods. b. difference between the price a consumer is willing to pay and the price that suppliers are willing to accept. c. consumer's gain from trading. d. difference between the price a consumer is able to pay and willing to pay. ANSWER: c 48. Consumer surplus is the amount that consumers: a. are willing to pay for a good minus what they actually pay for it. b. are willing to pay for a good. c. actually pay for a good. d. are willing to pay for a good plus the amount that they actually pay for it. ANSWER: a 49. Alex and Tyler enjoy the food at a restaurant named China Star. Alex values a meal there at $15, and Tyler values it at $26. If the restaurant charges only $10 a meal, what is Alex and Tyler's joint consumer surplus from a meal at China Star? a. $41 b. $31 c. $21 d. $16 ANSWER: c 50. If you are willing to pay $8 for a $6 burrito, what is your consumer surplus if you buy it? a. $8 b. $2 c. $0 d. $6 ANSWER: b 51. The market price of a good is $5, and 40 units of the good sell at this price. Its demand curve intersects the vertical axis at a price of $10 and has a constant slope. What is the approximate value of consumer surplus in this market? a. $100 b. $50 c. $200 d. $75 Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 3 ANSWER: a 52. The market price of a good is $10, and 40 units of the good sell at this price. Its demand curve intersects the vertical axis at a price of $12 and has a constant slope. What is the approximate value of consumer surplus in this market? a. $20 b. $30 c. $40 d. $50 ANSWER: c 53. Figure: Good X
At a price of $200, consumer surplus is $: a. 20,000. b. 40,000. c. 10,000. d. 200. ANSWER: c 54. Figure: Good X
Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 3
As the price falls from $200 to $100, consumer surplus changes by: a. $5,000. b. $10,000. c. $12,500. d. −$25,000. ANSWER: c 55. A decrease in demand refers to a(n): a. rightward shift of the demand curve. b. leftward shift of the demand curve. c. upward movement along the demand curve. d. downward movement along the demand curve. ANSWER: b 56. An increase in demand shifts the demand curve: a. up and to the right. b. down and to the right. c. up and to the left. d. down and to the left. ANSWER: a 57. If, for any given amount of a good or service, willingness to pay increases, then: a. supply has increased. b. supply has decreased. Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 3 c. demand has increased. d. demand has decreased. ANSWER: c 58. If, for a given amount of a good or service, willingness to pay decreases, then: a. supply has increased. b. supply has decreased. c. demand has increased. d. demand has decreased. ANSWER: d 59. If the demand curve for a normal good shifts downward and to the left: a. willingness to pay has increased. b. the population has increased. c. the price of a substitute has increased. d. income has decreased. ANSWER: d 60. Which variable is NOT a demand shifter? a. price of complements b. price of substitutes c. price of raw materials d. tastes and preferences ANSWER: c 61. Which variable is NOT a demand shifter? a. price of complements b. price of substitutes c. amount of subsidies d. tastes and preferences ANSWER: c 62. In the week before Hurricane Katrina, the price of flashlights rose in New Orleans because of a(n): a. increase in supply. b. increase in demand. c. decrease in supply. d. decrease in demand. ANSWER: b 63. Which variable does NOT shift the demand curve? a. population Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 3 b. prices of complement goods c. income d. the price of the good itself ANSWER: d 64. What are factors that shift the demand curve? a. costs of production, price of the product, subsidies b. income, population, tastes, input prices c. expectations, opportunity costs, price of the product d. price of substitutes, tastes, price of complements ANSWER: d 65. Which one of these choices would cause the demand curve for an inferior good to shift to the left? a. a fall in incomes b. a fall in the price of the inferior good c. a rise in incomes d. a rise in the price of the inferior good ANSWER: c 66. A decrease in income causes demand for a normal good to _____, and an increase in income causes demand for an inferior good to _____. a. decrease; decrease b. increase; increase c. decrease; increase d. increase; decrease ANSWER: a 67. Figure: Demand Shift
Which of these could explain the figure? a. Consumer income increases in the market for a normal good. b. Consumer income falls in the market for a normal good. c. Consumer income rises in the market for an inferior good. Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 3 d. Consumer income remains the same and the price of the good falls. ANSWER: a 68. Mario buys 8 units of good X when his income is $2,000 a month. When his income increases to $2,700 per month, he buys only 6 units of good X. For Mario, good X is a(n): a. normal good. b. good with few substitutes. c. inferior good. d. good of high value. ANSWER: c 69. Wendy buys 6 units of good Y when her income is $4,000 a month. When her income increases to $5,000 per month, she buys only 3 units of good Y. For Wendy, good Y is a(n): a. normal good. b. good with few substitutes. c. inferior good. d. good of high value. ANSWER: c 70. Thomas buys 7 pizzas when his income is $3,000 a month. When his income increases to $4,500 per month, he buys only 4 pizzas. For Thomas, pizzas are a(n): a. normal good. b. good with few substitutes. c. inferior good. d. good of high value. ANSWER: c 71. Assume that spaghetti is an inferior good for most people. As peoples' incomes increase, all other things held constant, the demand for spaghetti will: a. decrease, shifting the demand curve to the left. b. decrease, shifting the demand curve to the right. c. increase, shifting the demand curve to the left. d. increase, shifting the demand curve to the right. ANSWER: a 72. Assume that store-brand ketchup is an inferior good for most people. As peoples' incomes increase, all other things held constant, the demand for store-brand ketchup will: a. decrease, shifting the demand curve to the left. b. decrease, shifting the demand curve to the right. c. increase, shifting the demand curve to the left. d. increase, shifting the demand curve to the right. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 3 73. Assume that leather belts are a normal good for most people. As peoples' incomes increase, all other things held constant, the demand for leather belts will: a. decrease, shifting the demand curve to the left. b. decrease, shifting the demand curve to the right. c. increase, shifting the demand curve to the left. d. increase, shifting the demand curve to the right. ANSWER: d 74. Assume that corn chips are an inferior good for most people. As peoples' incomes increase, all other things held constant, the demand for corn chips will: a. decrease, shifting the demand curve to the left. b. decrease, shifting the demand curve to the right. c. increase, shifting the demand curve to the left. d. increase, shifting the demand curve to the right. ANSWER: a 75. Michael graduates from college, and his income increases by $40,000 a year. Other things held constant, he decreases the quantity of pizza he buys. For Michael, pizza is a(n): a. inferior good. b. complement. c. substitute. d. normal good. ANSWER: a 76. Jose graduates from college, and his income increases by $60,000 a year. Other things held constant, he increases the quantity of bicycles he buys. For Jose, bicycles are a(n): a. inferior good. b. complement. c. substitute. d. normal good. ANSWER: d 77. Tiffany graduates from college, and her income increases by $70,000 a year. Other things held constant, she decreases the quantity of breakfast cereal she buys. For Tiffany, breakfast cereal is a(n): a. inferior good. b. complement. c. substitute. d. normal good. ANSWER: a 78. For a normal good, higher income results in a(n): Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 3 a. increase in demand. b. decrease in demand. c. movement up along the demand curve. d. movement down along the demand curve. ANSWER: a 79. Zoey receives a big raise at work and decides to buy additional porcelain figurines. Which of these statements is TRUE? a. Zoey considers porcelain figurines to be a normal good. b. Zoey considers porcelain figurines to be an inferior good. c. Zoey's demand for porcelain figurines decreased. d. Zoey's willingness to pay for porcelain figures has decreased. ANSWER: a 80. For an inferior good, higher income results in a(n): a. increase in demand. b. decrease in demand. c. movement up along the demand curve. d. movement down along the demand curve. ANSWER: b 81. A good is considered normal if demand for it _____ when income _____. a. increases; increases b. decreases; increases c. stays the same; decreases d. increases; decreases ANSWER: a 82. An inferior good is one that: a. is of low quality or not very durable. b. gets poor reviews from objective, independent evaluators. c. no consumers are willing to buy. d. experiences decreased demand when income increases. ANSWER: d 83. Figure: Shifting Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 3
In the diagram, which of these factors would cause the demand curve to shift from D1 to D2? a. an increase in the price of a substitute good b. a decrease in the price of a complement good c. an increase in the population d. an increase in income if this is an inferior good ANSWER: d 84. As the population of elderly in the United States increases, which service will likely see the biggest increase in demand? a. skateboard repair b. home medical care c. career training d. child day care ANSWER: b 85. The average age in the United States is _____, causing the demand for prescription drugs to _____. a. increasing; decrease b. increasing; increase c. decreasing; increase d. decreasing; decrease ANSWER: b 86. Imagine that millions of refugees move out of country A and into country X. This would cause the demand for housing in country A to _____ and the demand for housing in country X to _____. a. increase; decrease b. increase; increase c. decrease; increase Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 3 d. decrease; decrease ANSWER: c 87. The current demand for parking in a city's downtown district is such that all the parking garages are full. If there is an increase in the city's population, there will be: a. an increase in the willingness to pay for parking. b. a decrease in the quantity of parking spaces demanded across all prices. c. a decrease in demand for parking. d. no increase in demand, since the parking garages are already at capacity. ANSWER: a 88. The quantity of DVDs that people plan to buy this month will increase when: a. movie theater ticket prices increase. b. the price of movies for download decreases. c. the price of DVD players increases. d. cable television prices decrease. ANSWER: a 89. Coke and Pepsi are substitute soft drinks. Which of these would cause the demand curve for Pepsi to shift to the left? a. A new Pepsi ad campaign increases the popularity of Pepsi. b. The price of Coke decreases. c. The price of Pepsi decreases. d. The cost of making Pepsi rises. ANSWER: b 90. Domino's and Pizza Hut are substitute pizzas. Which of these would cause the demand curve for Pizza Hut pizzas to shift to the left? a. A new Pizza Hut ad campaign increases the popularity of Pizza Hut pizzas. b. The price of Domino's pizza decreases. c. The price of Pizza Hut pizzas decreases. d. The cost of making Pizza Hut pizzas rises. ANSWER: b 91. Figure: Demand Shift
Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 3
Which of these factors would cause the change in the figure? a. an increase in the price of a complement good b. a decrease in people's willingness to pay for the good c. an increase in the price of a substitute good d. an increase in income for those buying an inferior good ANSWER: c 92. If romaine lettuce and iceberg lettuce are substitutes, a(n) _____ in the price of romaine lettuce will _____ the demand for iceberg lettuce. a. increase; decrease b. increase; increase c. decrease; increase d. decrease; not change ANSWER: b 93. If the demand for good A increases when the price of good B increases, then good A and good B are: a. not related. b. both inferior goods. c. substitutes for each other. d. complements to each other. ANSWER: c 94. A decrease in the price of one substitute good causes a(n): a. upward movement along the demand curve for the other substitute good. b. downward movement along the demand curve for the other substitute good. c. rightward shift in the demand curve for the other substitute good. d. leftward shift in the demand curve for the other substitute good. ANSWER: d 95. People's expectation of the price of gasoline going up tomorrow may increase the demand for gasoline today. If so, what does this imply about the relationship between gasoline tomorrow and gasoline today? a. They are complements. Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 3 b. They are substitutes. c. They are unrelated. d. Although related, they are neither substitutes nor complements. ANSWER: b 96. Mark considers 3-D archery and shooting trap substitute activities for each other. As the price of shooting trap increases, Mark's demand to participate in: a. 3-D archery decreases. b. 3-D archery increases. c. shooting trap increases. d. both activities decrease. ANSWER: b 97. Jorge considers ping pong and darts substitute activities for each other. As the price of darts increases, Jorge's demand to participate in: a. ping pong decreases. b. ping pong increases. c. darts increases. d. both activities decreases. ANSWER: b 98. Figure: Chicken Legs
In the diagram, the current demand curve for chicken legs is represented by D1. If the price of chicken thighs, a substitute for chicken legs, decreases, the demand curve for chicken legs will: a. shift to D2. Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 3 b. shift to D3. c. remain at D1. d. shift to D2 and then back to D1. ANSWER: b 99. As world coal prices rise due to increasing scarcity and coal-based energy costs rise, the demand for wind energy will: a. increase. b. decrease. c. remain the same. d. change in random patterns. ANSWER: a 100. Which of these are likely to be complements? a. hot dogs and hamburgers b. books and book-lights c. coffee and tea d. cars and vans ANSWER: b 101. If the price of computers _____, the demand for printers will _____. a. increases; increase b. decreases; decrease c. decreases; not change d. increases; decrease ANSWER: d 102. A local university decides to double its enrollment over the next five years in order to increase tuition revenue. Which of these would MOST likely occur in the market for rental housing in the surrounding community? a. a decrease in the price of rental housing b. an increase in the demand for rental housing c. a decrease in the supply of rental housing d. a change in quantity demanded, not demand (because this is the result of a change in population) ANSWER: b 103. Which of these would cause the demand for hot dog buns to increase? a. a fall in the price of hot dog buns b. a fall in the price of hot dogs c. a rise in the price of hot dogs d. a rise in the price of hot dog buns Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 3 ANSWER: b 104. Figure: Demand Shift
Which factor would cause the change in the figure? a. a decrease in the price of a complement good b. a decrease in the price of the product c. a decrease in the price of a substitute good d. an increase in taxes ANSWER: a 105. If the price of shotguns _____, the demand for shotgun shells will _____. a. increases; decrease b. increases; increase c. decreases; decrease d. decreases; stay the same ANSWER: a 106. If the price of swimming pools decreases, we would expect the demand for: a. tennis courts, a substitute good, to increase. b. chlorine, a complement good, to increase. c. swimming pools to increase. d. swimming pools to decrease. ANSWER: b 107. Cell phone data plans are most useful when used with a smartphone, and smartphones are most useful when used with a data plan. As the price of data plans falls, the demand for smartphones will: a. decrease because smartphones and data plans are substitutes. b. increase because smartphones and data plans are complements. c. decrease because smartphones and data plans are complements. d. increase because smartphones and data plans are substitutes. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 3 108. Figure: Piano Lessons
Which event would shift the demand curve for piano lessons from D1 to D2, as shown in the diagram? a. an increase in the price of piano lessons b. a decrease in the price of piano lessons c. a decrease in the price of pianos d. an increase in the price of pianos ANSWER: c 109. Xbox One's controllers use two AA batteries. When the price of Xbox One fell from $299 to $249, the demand for AA batteries: a. increased, since they are a complement good for the Xbox One. b. decreased, since they are a complement good for the Xbox One. c. increased, since they are a substitute good for the Xbox One. d. decreased, since they are a substitute good for the Xbox One. ANSWER: a 110. If the price of _____ rises, all else the same, the demand for large SUVs will decrease. a. electric vehicles b. gasoline c. minivans d. motorcycles ANSWER: b 111. Weather forecasters predict that a major winter storm will strike your town within the next few days. Which would occur today based on the expected storm? Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 3 a. a decrease in people's willingness to pay for bottled water b. a decrease in demand for batteries c. an increase in people's willingness to pay for electric generators d. a shift to the left of the demand curve for snow tires ANSWER: c 112. Figure: Oil Market
Which event could cause the change in the figure? a. the expectation of an outbreak of war in the world's best oil-producing regions b. the expectation of an increase in the future supply of oil c. the expectation that next week's oil prices will be substantially lower d. the expectation of a technology breakthrough in solar energy ANSWER: a 113. Suppose it is widely believed that the price of flat-screen, high-definition televisions will be lower next year. What will happen as a result of such beliefs? a. The demand for flat-screen TVs will increase now. b. The demand for flat-screen TVs will decrease next year. c. The demand for flat-screen TVs will decrease now. d. The demand for flat-screen TVs will not change now. ANSWER: c 114. Suppose that consumers begin to believe that the price of housing will be lower next period. What will happen in the market for housing as a result of these expectations? a. Nothing will happen now. Consumers will wait for the price to actually decrease before changing their behavior. b. Demand for housing will increase now as people adjust to the expectation.
c. Demand for housing will begin to fall now as people postpone their purchase until prices are lower. d. Investors will buy up all the housing inventory, believing they are getting a "deal." ANSWER: c 115. Which of these could cause an increase in the demand for gasoline? Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 3 a. the resolution of a civil war in one of the world's biggest oil-producing nations b. the expectation that the price of gasoline will decrease in the future c. a new technology that makes the production of gasoline significantly less expensive d. an approaching hurricane that threatens a major oil refinery in Texas ANSWER: d 116. If the price of gas is expected to rise sharply in the future, all else the same, the demand for gas today will: a. increase. b. decrease. c. remain the same. d. change in an indeterminate direction. ANSWER: a 117. A decrease in the expected future supply of a good will lead to: a. a change in the demand for the good, but not until the supply actually goes down. b. a change in the price of the good, but not until the supply actually goes down. c. a change in the demand for the good even before the supply actually decreases. d. no change in the demand for the good. ANSWER: c 118. Scientists discover that an asteroid is headed toward Earth and the force of its impact, expected in a matter of weeks, will wipe out all human life. What will happen to the demand for cancer screenings? a. It will increase because everyone will want to make sure they don't have cancer before they die. b. There will be no effect. c. The price of the screenings will increase, but the quantity demanded will stay the same. d. It will decrease because people won't care anymore if they have cancer. ANSWER: d 119. If we expect the current poor weather conditions to lead to higher cotton prices in the future, the: a. current demand for cotton will decrease. b. future demand for cotton will increase. c. current demand for cotton will be unchanged. d. current demand for cotton will increase. ANSWER: d 120. In the worldwide coronavirus epidemic: a. current demand for medical-grade face masks decreased. b. future demand for medical-grade face masks increased. c. current demand for medical-grade face masks was unchanged. d. current demand for medical-grade face masks increased. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 3 121. The movie trilogy The Lord of the Rings was hugely successful, and, as a result, the demand for fantasy novels, action figures, and online role-playing games surged. The increase in demand can be explained by a(n): a. increase in population. b. change in expectations. c. change in tastes. d. change in the price of substitutes. ANSWER: c 122. New research indicates that running marathons is actually bad for the heart (it increases inflammatory markers associated with heart attacks). This news will: a. lead to a decrease in the demand for running shoes. b. have no effect on the demand for or supply of running shoes. c. increase the supply of running shoes. d. lead to an increase in the demand for running shoes. ANSWER: a 123. New research suggests that cholesterol may not be as unhealthy as previously thought. If so, what will happen to the demand for eggs, a high-cholesterol food? a. It will decrease because eggs and cholesterol are substitutes. b. It will increase because of consumers' taste for food that is perceived to be healthier. c. It will increase, since eggs are an inferior good. d. It will decrease because there will be fewer chickens to lay eggs. ANSWER: b 124. The quantity supplied is the: a. amount of inputs that a firm earns profit on. b. change in the sellers' output multiplied by the change in price. c. incremental cost of producing one more unit of output, holding all other things constant. d. amount of a good that firms are willing and able to sell at a particular price during a given period of time. ANSWER: d 125. The quantity supplied of oil is the amount that: a. producers plan to sell during a given time period at a given price. b. is actually bought during a given time period at a given price. c. producers wish they could sell at a higher price. d. people are willing to buy during a given time period at a given price. ANSWER: a 126. Figure: Supply Curve
Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 3
A vertical reading of the figure indicates that at: a. a price higher than $40, the quantity supplied drops to zero. b. prices of $40 or less, suppliers are willing to sell at least 500 units. c. a price of $40 per unit, suppliers are willing and able to sell 500 units. d. a price lower than $40, the quantity supplied drops to zero. ANSWER: c 127. The supply curve illustrates the: a. relationship between the cost of production and price. b. relationship between the quantity supplied and the price of a good. c. total cost of producing a good. d. willingness to produce a good if the technology to produce it becomes available. ANSWER: b 128. The supply curve for oil shows the: a. quantity of oil supplied at different income levels. b. quantity of oil supplied at different prices of oil. c. supply of oil at different prices of other goods. d. supply of oil when there is a surplus or shortage. ANSWER: b 129. The quantity supplied is the quantity that sellers are: a. willing but not able to sell. b. able but not willing to sell at a given price. c. willing to sell at a given price. d. willing and able to sell at a given price. ANSWER: d 130. The supply curve: a. shows how much buyers are willing and able to buy at different prices. b. is the amount that buyers are willing and able to buy at a particular price. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 3 c. shows how much sellers are willing and able to sell at different prices. d. is the amount that sellers are willing and able to sell at a particular price. ANSWER: c 131. The quantity supplied: a. shows how much buyers are willing and able to buy at different prices. b. is the amount that buyers are willing and able to buy at a particular price. c. shows how much sellers are willing and able to sell at different prices. d. is the amount that sellers are willing and able to sell at a particular price. ANSWER: d 132. Figure: Bananas
If the price of bananas is $10 a pound, which number is closest to the number of pounds that suppliers will supply? a. 5 b. 50 c. 60,000 d. 80,000 ANSWER: d 133. Figure: Bananas Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 3
If the price of bananas is $2 a pound, how many pounds of bananas will suppliers supply? a. 0 b. 1 c. 10 d. 10,000 ANSWER: a 134. The supply curve shows the relationship between: a. demand and supply. b. quantity demanded and quantity supplied. c. price and quantity supplied. d. price and quantity demanded. ANSWER: c 135. Figure: Oil
Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 3
To produce 30 million barrels of oil per day, the minimum price per unit that producers in the diagram require is $: a. 20. b. 40. c. 60. d. 80. ANSWER: c 136. Figure: Oil
Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 3
Compared with producing the 20 millionth barrel of oil, the cost of producing the 40 millionth barrel of oil is: a. $40 lower. b. $40 higher. c. approximately the same. d. $80 higher. ANSWER: b 137. The supply curve: a. illustrates the quantity supplied at different prices. b. shows the relationship between the number of units purchased and the number of units produced. c. gives the maximum price that sellers may charge for a good and the quantity supplied. d. shows a negative relationship between price and output. ANSWER: a 138. Suppose that country X is a high-cost producer of oil and country Y is a low-cost producer of oil. The citizens of country X use oil produced in their own country as well as oil produced in country Y. If the market price of oil decreases, oil production in country X will _____, and the citizens of country X will _____. a. decrease; purchase a larger fraction of their oil from country Y b. increase; purchase a larger fraction of their oil from country X Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 3 c. decrease; not change their consumption mix between imported and domestic oil d. increase; purchase a smaller fraction of their oil from country Y ANSWER: a 139. Recall the discussion in your textbook about the supply curve for oil. What explains why the supply curve for oil is positively sloped? a. As the price of oil rises, producers' costs of drilling oil also rise. b. As more and more producers enter the market, the price of oil rises. c. As the price of oil rises, consumers buy less and less oil. d. As the price of oil rises, more producers enter the market. ANSWER: d 140. What does the law of supply state? a. There is a positive relationship between price and quantity supplied. b. There is a negative relationship between price and quantity supplied. c. When prices rise, suppliers sell more. d. When prices rise, buyers buy less of the product. ANSWER: a 141. A supply curve indicates that the: a. quantity supplied of a good is higher when the price of that good is higher. b. quantity supplied of a good is higher when the price of that good is lower. c. supply for a good is higher when the price of that good is lower. d. supply for a good is higher when the price of that good is higher. ANSWER: a 142. Which of these statements about the supply curve is TRUE? a. As the price of a good rises, it becomes profitable to sell the higher-cost good. b. As the price of a good rises, it becomes profitable to sell only the lower-cost good. c. All sellers are willing to sell a good only when the price is very high. d. All sellers are able to sell a good only when the price is very low. ANSWER: a 143. The supply curve for oil slopes upward because: a. oil will be extracted from more costly sources only when the price of oil is lower. b. oil will be extracted from more costly sources only when the price of oil is higher. c. no oil producer is willing to extract oil when the price of oil decreases. d. oil producers do not react to any change in the price of oil. ANSWER: b 144. As the price of a good increases: Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 3 a. it becomes profitable to produce more of the good as long as the costs of production stay the same. b. it becomes profitable to produce more of the good even with higher costs of production. c. demand for that good will decrease. d. suppliers will adjust their quantity supplied only if demand for the good declines. ANSWER: b 145. Why does supply slope up? a. At higher prices, suppliers can profitably produce using more expensive techniques and inputs. b. The cost of producing a given good is the same, no matter how many are produced. c. Producers charge the maximum price that they can get. d. If supply did not slope up, it would not intersect with demand. ANSWER: a 146. The main difference between Saudi Arabian oil production and U.S. oil production is the: a. quantity of production. b. cost of production. c. quality of the product. d. price of the product. ANSWER: b 147. Consider the (world) market supply curve for oil. Saudi oil production inhabits the _____ part of the curve, and Canadian oil production inhabits the _____ part of the curve. a. upper; upper b. lower; lower c. upper; lower d. lower; upper ANSWER: d 148. The law of supply states that there is a _____ relationship between price and quantity _____. a. positive; demanded b. positive; supplied c. negative; demanded d. negative; supplied ANSWER: b 149. Figure: Producer Surplus
Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 3
What is the producer surplus at a price of $2 per unit? a. $5 b. $6 c. $10 d. $20 ANSWER: a 150. Figure: Producer Surplus
What is the change in producer surplus if the price rises from $2 to $3 per unit? a. $5 b. $10 c. $15 d. $20 ANSWER: c 151. Nigeria receives $53 of producer surplus from each barrel of oil sold at $60. At that level of production, Nigeria's cost to produce a barrel of oil is $: a. 1.13. b. 7. c. 53. d. 113. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 3 152. Figure: Earned Producer Surplus
Calculate the total dollar amount of producer surplus earned in this market at a price of $100. a. $5,000 b. $10,000 c. $100 d. $200 ANSWER: a 153. Figure: Generic Market Producer Surplus
Calculate the total dollar amount of producer surplus earned in this market if the market price is $60. a. $800 b. $1,600 c. $2,400 d. $1,200 ANSWER: a 154. Table: Willingness to Sell Country Minimum Willingness to Sell a Single Barrel of Oil Country X $12.00 Country Y $5.99 Country Z $17.25 Country A $36.99 Which country is earning the most producer surplus at a market price of $35 per barrel of oil? Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 3 a. country X b. country Y c. country Z d. country A ANSWER: b 155. Table: Willingness to Sell Country Minimum Willingness to Sell a Single Barrel of Oil Country X $12.00 Country Y $5.99 Country Z $17.25 Country A $36.99 Which country is earning the least amount of producer surplus at a market price of $52 per barrel of oil? a. country X b. country Y c. country Z d. country A ANSWER: d 156. Table: Barrels of Oil Country Minimum Willingness to Sell a Single Barrel of Oil Country A $32.00 Country B $16.00 Country C $17.25 Country D $56.99 What is the total amount of producer surplus (per barrel of oil) earned by all the four producers if the market price per barrel of oil is $51? a. $65.25 b. $81.76 c. $87.75 d. $93.74 ANSWER: c 157. Figure: Bananas
Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 3
If the price of bananas in the diagram is $6 a pound, what is the total producer surplus? a. $80,000 b. $120,000 c. $160,000 d. $240,000 ANSWER: a 158. The difference between the market price and the minimum price at which a seller is willing to sell a certain quantity of a good is: a. producer shortage. b. consumer shortage. c. producer surplus. d. consumer surplus. ANSWER: c 159. Total producer surplus equals the: a. supply curve. b. area above the supply curve and beneath the market price. c. area beneath the supply curve and above the demand curve. d. market price. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 3 160. Figure: Producer Surplus
If the market price of coffee is $4, how much producer surplus do suppliers earn? a. $15 b. $45 c. $20 d. $22.50 ANSWER: d 161. Figure: Producer Surplus
Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 3
If the market price of coffee is $6, how much producer surplus do suppliers earn? a. $25 b. $125 c. $75.50 d. $62.50 ANSWER: d 162. Producer surplus is the: a. difference between the market price and the minimum price at which producers are willing to sell a good. b. amount at which producers are willing to sell a good. c. amount at which producers sell a good. d. amount at which producers are willing to sell a good plus the amount at which they sell it. ANSWER: a 163. If prices rise, what happens to producer surplus (all other things being equal)? a. It falls because fewer people buy goods. b. It falls because it encourages competition, which reduces profits. c. It rises because each producer is getting more surplus per good sold. d. It stays the same because the forces increasing the surplus counteract the forces reducing it. ANSWER: c 164. Suppose that Saudi Arabia can produce oil at $4 per barrel, Iran at $10 per barrel, and Canada at $25 per barrel. If the price of oil is $90 per barrel, what is total producer surplus per barrel for world suppliers? a. $270 Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 3 b. $129 c. $231 d. $51 ANSWER: c 165. Figure: A Supply Curve
Producer surplus at a price of $40 is $: a. 200. b. 100. c. 400. d. 600. ANSWER: b 166. A change in which factor would shift the supply curve? a. the price of the good being sold b. the demand for the product c. production technology d. the willingness of consumers to pay ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 3 167. Which of these choices contains only factors that cause the supply curve to shift to the right? a. a fall in production costs, a rise in technology, an increase in taxes on output b. a fall in tastes and preferences for the product, economic growth, a rise in technology c. a decrease in taxes on production, a fall in subsidies on production, a rise in costs of production d. a rise in technology, a fall in the costs of production, a fall in taxes on output ANSWER: d 168. Which of these would shift the supply curve to the left? a. an increase in taxes on production b. a fall in tastes and preferences c. an increase in subsidies on production d. a rise in technology ANSWER: a 169. An increase in supply refers to a(n): a. rightward shift of the supply curve. b. leftward shift of the supply curve. c. upward movement along the supply curve. d. downward movement along the supply curve. ANSWER: a 170. A decrease in supply refers to a(n): a. rightward shift of the supply curve. b. leftward shift of the supply curve. c. upward movement along the supply curve. d. downward movement along the supply curve. ANSWER: b 171. Figure: Supply Shift
Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 3
In the figure, a movement from S1 to S2 represents a(n): a. decrease in supply. b. increase in supply. c. decrease in quantity supplied. d. increase in quantity supplied. ANSWER: b 172. An increase in supply shifts the supply curve: a. down and to the right. b. down and to the left. c. up and to the right. d. up and to the left. ANSWER: a 173. Figure: Supply Shift
According to the figure, the: a. costs of producing output have decreased. Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 3 b. technology for producing output has improved. c. costs of producing output have increased. d. price of the product has decreased. ANSWER: c 174. In the oil market, an increase in the wage of oil workers will shift the: a. supply curve for oil to the right. b. supply curve for oil to the left. c. demand curve for oil to the left. d. demand curve for oil to the right. ANSWER: b 175. New production technology in the manufacture of 4K ultra-high-definition television screens has reduced the cost of production. What effect will this have in the market for televisions? a. The demand curve will shift to the right. b. The supply curve will shift to the right. c. The demand and supply curves both will shift to the right. d. The demand curve will shift to the left. ANSWER: b 176. In the market for fertilizer, an: a. increase in the wage rate will increase the demand for fertilizer. b. advance in technology will increase the supply of fertilizer. c. increase in the wage rate will increase the supply of fertilizer. d. increase in the cost of equipment will increase the supply of fertilizer. ANSWER: b 177. As the price of lead falls (a key input in the production of automobile batteries), the cost of producing batteries decreases, shifting the supply curve of batteries: a. down and to the left. b. up and to the right. c. down and to the right. d. up and to the left. ANSWER: c 178. As the price of lithium falls (a key input in the production of various batteries), the cost of producing batteries decreases, shifting the: a. supply curve to the left. b. demand curve to the right. c. supply curve to the right. d. demand curve to the left. Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 3 ANSWER: c 179. When the price of inputs increases: a. the supply curve shifts down and to the right. b. the supply curve shifts up and to the left. c. there is an upward movement along the supply curve. d. there is a downward movement along the supply curve. ANSWER: b 180. When the price of inputs decreases: a. the supply curve shifts down and to the right. b. the supply curve shifts up and to the left. c. there is an upward movement along the supply curve. d. there is a downward movement along the supply curve. ANSWER: a 181. Anonymity on the Internet has lowered the cost of rudely confronting people. What has happened to the supply of rude confrontations? a. The supply has increased, shifting up and to the left. b. The supply has increased, shifting down and to the right. c. The supply has decreased, shifting up and to the left. d. The supply has decreased, shifting down and to the right. ANSWER: b 182. Pipefitter union workers have demanded that all employers of pipefitters provide health insurance at no cost to the pipefitter. What will happen to the supply of goods produced in factories employing pipefitters? a. Supply will increase, shifting up and to the left. b. Supply will increase, shifting down and to the right. c. Supply will decrease, shifting up and to the left. d. Supply will decrease, shifting down and to the right. ANSWER: c 183. Figure: Supply Shift
Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 3
What would cause the supply curve to shift from S1 to S2 as shown in the diagram? a. an increase in taxes on firms' output b. an increase in the price of inputs used to produce the output c. a decrease in the number of firms that produce the output d. a decrease in the wages paid to union workers who produce the output ANSWER: d 184. Figure: Supply Shift
Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 3
What would cause the supply curve to shift from S2 to S1 as shown in the diagram? a. a decrease in the opportunity costs of producing the good b. a decrease in the costs of production c. an increase in the prices of inputs used in production d. an expected decrease in the future price of the good ANSWER: c 185. A decrease in production costs at any given quantity _____ supply. a. increases b. decreases c. does not change d. may increase or decrease ANSWER: a 186. An increase in production costs at any given quantity: a. increases supply. b. decreases supply. c. does not change supply. d. changes supply in an indeterminate direction. Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 3 ANSWER: b 187. Which of these factors causes a decrease in supply? a. a decrease in demand b. a decrease in the price of the product c. an increase in the price of the product d. new taxes on output ANSWER: d 188. Which of these factors causes an increase in supply? a. an increase in demand b. an increase in taxes on production c. an improvement in the technology used in production d. new taxes on output paid by the consumer ANSWER: c 189. Firms are willing and able to sell 100 guitars per day at a price of $250 per guitar. What price will firms require to sell 100 guitars per day if there is a tax of $15 per guitar? a. $235 b. $250 c. between $235 and $250 d. $265 ANSWER: d 190. A government subsidy to producers causes the supply: a. of the product to increase. b. of the product to decrease. c. curve to change slope. d. curve to shift up and to the left. ANSWER: a 191. A subsidy is a: a. reverse tax. b. means of shifting the supply curve left. c. form of tax increase. d. movement along the supply curve. ANSWER: a 192. Figure: Lobster Market
Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 3
In the figure, a $10 tax is imposed on the market for lobsters. What is the market price that lobster producers would need to receive to induce them to produce 5,000 bushels of lobster per day after the tax is implemented? a. $10 b. $40 c. $50 d. $60 ANSWER: d 193. If the government decided to heavily regulate small farmers who grow organic and free-range food, the supply of that food would: a. increase because the regulations would improve the quality of that food. b. decrease because the regulations are like a tax on the food; they make it more expensive to produce. c. have no effect because none of the shifters of supply are affected. d. increase because of changing expectations. ANSWER: b 194. In 2011, the U.S. Senate voted to end ethanol subsidies. What will be the effect of this bill in the market for ethanol? a. Demand will increase. b. Demand will decrease. c. Supply will decrease. d. Supply will increase. ANSWER: c 195. Figure: Supply Shift 2 Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 3
What would cause the supply curve to shift from S1 to S2? a. a $20 tax reduction on each unit of output b. a $40 tax reduction on each unit of output c. a $40 subsidy reduction on each unit of output d. a $20 subsidy reduction on each unit of output ANSWER: d 196. Figure: Supply Shift 2
Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 3
What would cause the supply curve to shift from S1 to S2? a. a $20 tax on each unit of output b. a $40 tax on each unit of output c. a $40 subsidy on each unit of output d. a $20 subsidy on each unit of output ANSWER: a 197. An increase in a per unit production tax: a. increases supply. b. decreases supply. c. does not change supply. d. changes supply in an indeterminate direction. ANSWER: b 198. A decrease in a per unit production tax: a. increases supply. b. decreases supply. c. does not change supply. d. changes supply in an indeterminate direction. ANSWER: a 199. An increase in a per unit production subsidy: a. increases supply. b. decreases supply. Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 3 c. does not change supply. d. changes supply in an indeterminate direction. ANSWER: a 200. A decrease in a per unit production subsidy: a. increases supply. b. decreases supply. c. does not change supply. d. changes supply in an indeterminate direction. ANSWER: b 201. Figure A: Supply Right Shift Figure B: Supply Left Shift
Which statement is TRUE? a. Figure A depicts the expectation that the future price will decrease. b. Figure A depicts an increase in taxes. c. Figure B depicts falling input prices. d. Figure B depicts technological innovations. ANSWER: a 202. If producers form expectations that copper prices will be higher in the future, then this will shift the: a. demand curve for copper to the left. b. supply curve for copper to the right. c. demand curve for copper to the right. d. supply curve for copper to the left. ANSWER: d 203. Figure: Supply Shifts
Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 3
In the figure, the initial supply curve is S1. If producers form expectations that the price will be lower in the near future, S1 will: a. shift to S2 now. b. shift to S3 now. c. not shift now. d. shift to S3 only in the future. ANSWER: b 204. Figure: Supply Shifts
In the figure, the initial supply curve is S1. Producers engage in market speculation with the belief that the price of the good will increase in the near future. This would be represented in the figure by shifting the supply curve to: a. S2, resulting in a lower quantity supplied at each price. b. S2, resulting in a higher quantity supplied at each price. c. S3, resulting in a lower quantity supplied at each price. d. S3, resulting in a higher quantity supplied at each price. ANSWER: a 205. Figure: Supply Shifts
Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 3
In the figure, the initial supply curve is at S1. If producers can pay lower wages to their employees, there is a shift of the supply curve to: a. S2, resulting in a lower quantity supplied at each price. b. S2, resulting in a higher quantity supplied at each price. c. S3, resulting in a lower quantity supplied at each price. d. S3, resulting in a higher quantity supplied at each price. ANSWER: d 206. Suppose a new study predicts that the price of hybrid cars is expected to decrease in the near future. As a result, we would expect: a. consumers to increase demand for hybrid cars today. b. producers to increase supply of hybrid cars today. c. no change in either demand or supply of hybrid cars today. d. producers to decrease supply of hybrid cars today. ANSWER: b 207. If producers expect the price of a good to fall in the future, they might: a. raise the price of the good today. b. hoard goods to save them for when the price is lower. c. increase their supply of goods out of storage today. d. increase the demand for their goods today. ANSWER: c 208. An increase in the expected price of a storable good: a. increases supply today. b. decreases supply today. c. does not change supply today. d. changes supply today in an indeterminate direction. ANSWER: b 209. In the early 1980s, movie rentals averaged $5 a night; by the early 1990s, that average was $1 per night. This is an example of a supply curve shifter based on: Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 3 a. a change in tastes and preferences. b. a decrease in the wages of workers in the video rental stores. c. an increase in the number of VCRs owned by consumers. d. the entry of new suppliers into the market. ANSWER: d 210. Recall your reading about NAFTA in the textbook. Why did the NAFTA agreement result in an increase in lumber supply in the United States? a. NAFTA decreed that the United States should produce more lumber. b. NAFTA stands for North American Furniture Trade Agreement. c. NAFTA reduced barriers to trade, allowing Canadian lumber to enter the United States. d. The United States sold more lumber to Canada. ANSWER: c 211. One result of the North American Free Trade Agreement was that the number of Canadian lumber companies selling in U.S. markets _____, causing a(n) _____ in the total market supply of lumber in the United States. a. increased; decrease b. increased; increase c. decreased; decrease d. decreased; increase ANSWER: b 212. What will happen to the supply of workers 18 to 21 years after a baby boom? a. It will decrease, since workers will cost more to hire. b. It will increase because of the influx of new adults into the labor market. c. It will increase because workers will be needed to care for retirees. d. It will decrease because producer surplus will be lower. ANSWER: b 213. NAFTA made it _____ for Canadian lumber producers to sell lumber in the United States, shifting the supply curve of lumber to the _____. a. easier; right b. difficult; left c. difficult; right d. easier; left ANSWER: a 214. In 2011, revolutions and uprisings spread across North Africa and the Middle East, where a lot of oil is pumped. How did this affect the oil market? a. The supply curve for oil shifted to the left. b. The minimum price producers were willing to sell oil for decreased. Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 3 c. The quantity of oil that firms were willing and able to produce increased. d. The supply curve for oil shifted to the right. ANSWER: a 215. A firm produces volleyballs and soccer balls. What happens to the supply of soccer balls if the market price of volleyballs increases? a. The opportunity cost of producing soccer balls rises, so the supply curve of soccer balls increases. b. The opportunity cost of producing soccer balls falls, so the supply curve of soccer balls decreases. c. The opportunity cost of producing soccer balls rises, so the supply curve of soccer balls decreases. d. The opportunity cost of producing soccer balls falls, so the supply curve of soccer balls increases. ANSWER: c 216. Which of these choices correctly illustrates how changes in opportunity costs affect supply? a. A farmer produces corn and wheat. The price of wheat rises, so they shift their resources toward wheat and the supply of wheat rises. b. A fisherman fishes for lobsters and oysters. The price of lobsters rises, so he decides to spend more of his time fishing for oysters because he can make the same amount of money with fewer lobsters. c. A textbook for economics becomes cheaper, so more students opt to buy that particular textbook.
d. Milk and cereal are complementary goods, so when the price of cereal falls, the quantity supplied of milk rises. ANSWER: a 217. Joe runs a landscape company and uses one of the bedrooms in his home as a home office. This office could be used to earn rental income from college students. If average rental income in Joe's neighborhood were to rise: a. Joe's opportunity cost of using a bedroom as a home office would decrease. b. Joe's landscape company would experience a decrease in demand for services at all prices. c. Joe should expand his office space in his home. d. Joe's opportunity cost of using a bedroom as a home office would increase. ANSWER: d 218. A farmer can grow either apples or oranges. An increase in the price of apples _____ the opportunity cost of growing oranges so that the supply curve of oranges shifts _____. a. decreases; down and to the right b. increases; down and to the right c. decreases; up and to the left d. increases; up and to the left ANSWER: d 219. A decrease in the opportunity cost of steel production will: a. increase the price of steel. b. make suppliers more likely to produce steel, thus shifting the supply curve up and to the left. c. make suppliers more likely to produce steel, thus shifting the supply curve down and to the right. Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 3 d. entice producers to produce more substitute goods. ANSWER: c 220. A farmer can grow soy or sorghum. If the price of soy increases, the opportunity cost of growing sorghum _____, shifting the supply curve of sorghum _____. a. decreases; up and to the left b. increases; up and to the left c. decreases; down and to the right d. increases; down and to the right ANSWER: b 221. A change in price is reflected by a movement along the same demand curve, while a change in demand refers to a shift of the entire demand curve. a. True b. False ANSWER: a 222. If the price of ski lift tickets increases, the demand for ski lift tickets will increase. a. True b. False ANSWER: b 223. The quantity demanded is the quantity that buyers can afford to buy at a particular income level. a. True b. False ANSWER: b 224. The demand curve shows the quantity that consumers are willing and able to purchase at different prices. a. True b. False ANSWER: a 225. The demand curve has a negative slope. a. True b. False ANSWER: a 226. When the price of a good goes down, demand for the good goes down. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 3 227. The quantity demanded is the quantity that consumers are willing and able to purchase at a given price. a. True b. False ANSWER: a 228. A vertical reading of the demand curve gives the maximum price per unit that consumers are willing to pay for a particular quantity of a good. a. True b. False ANSWER: a 229. There are more substitutes for oil as a heating and energy generator than for oil as a jet fuel. a. True b. False ANSWER: a 230. There are more substitutes for oil as a jet fuel than for oil as a lubricant. a. True b. False ANSWER: b 231. Consumer surplus can be defined as the net benefit to consumers from participating in a market. a. True b. False ANSWER: a 232. Other things being equal, total consumer surplus falls when the market price rises. a. True b. False ANSWER: a 233. Total consumer surplus is measured by the area beneath the demand curve. a. True b. False ANSWER: b 234. An increase in demand is a movement along the demand curve to the right. a. True b. False ANSWER: b 235. An increase in the price of a good will typically increase demand for that good. Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 3 a. True b. False ANSWER: b 236. When income increases, the demand for all goods increases as well. a. True b. False ANSWER: b 237. The demand curve for an inferior good reacts inversely to changes in income, while the demand curve for a normal good has a positive relationship with changes in income. a. True b. False ANSWER: a 238. An increase in income increases the demand for normal goods. a. True b. False ANSWER: a 239. The demand for an inferior good increases when income decreases. a. True b. False ANSWER: a 240. An inferior good is one of poor quality. a. True b. False ANSWER: b 241. Demand for a good or service increases when the consumer's income rises, regardless of whether the good is a normal good or inferior good. a. True b. False ANSWER: b 242. When the price of oil used for generating electricity increases, the demand for nuclear power will increase. a. True b. False ANSWER: a 243. If golf course fees decrease, the demand for golf balls will increase. Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 3 a. True b. False ANSWER: a 244. If the price of granite countertops rises, we would expect the demand for quartz countertops (a substitute product for granite) to decrease. a. True b. False ANSWER: b 245. A reduction in the expected future supply of a good will increase the demand for substitute goods today. a. True b. False ANSWER: b 246. Changes in expectations can shift supply or demand. a. True b. False ANSWER: a 247. There is no relationship between present prices and future prices. a. True b. False ANSWER: b 248. Advertising, fads, and fashion are examples of influences on demand that are generally referred to as altering expectations about products. a. True b. False ANSWER: b 249. A change in quantity supplied is reflected by a movement along the same supply curve, while a change in supply refers to a shift in the entire supply curve. a. True b. False ANSWER: a 250. The supply curve tells us the minimum quantity that suppliers would be willing to sell at different prices. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 3 251. At low prices, only low-cost producers serve the market, but as market prices rise, higher-cost producers begin to serve the market. a. True b. False ANSWER: a 252. Suppose that the market price for MP3 players is $90, and MP3 players can be produced by firm X for $40 each. Producer surplus for this firm is $50 per MP3 player. a. True b. False ANSWER: a 253. Producer surplus can be defined as the revenue producers make from selling goods in a market. a. True b. False ANSWER: b 254. Consumer surplus is a gain from exchange, but producer surplus is a loss from exchange. a. True b. False ANSWER: b 255. Advances in technology such as personal computers and cellular telecommunications are indicated in the supply graph by a movement along the supply curve. a. True b. False ANSWER: b 256. An increase in the use of labor-saving technologies will shift a product's supply curve to the right. a. True b. False ANSWER: a 257. A decrease in the cost of inputs will shift the supply curve down and to the right. a. True b. False ANSWER: a 258. A technological innovation in the production of electronic goods causes the supply for electronic goods to increase. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 3 ANSWER: a 259. A tax of $4 shifts the supply curve down and to the right by $4. a. True b. False ANSWER: b 260. NAFTA increased the supply curve of lumber in the United States. a. True b. False ANSWER: a 261. A higher opportunity cost of producing a good increases the supply of that good. a. True b. False ANSWER: b 262. If the price of corn rises, all else the same, we expect the supply of soybeans to increase. a. True b. False ANSWER: b 263. Explain the difference between a change in demand and a change in the quantity demanded. ANSWER: A change in quantity demanded involves a movement along a demand curve, while a change in demand involves a movement of the entire demand curve up and to the right (increase) or down and to the left (decrease). Changes in price involve a simple change in quantity demanded, while the shifters of demand are more complex and include changes in income, population, tastes, prices of substitutes, prices of complements, and expectations.
264. The demand for a product is given by: Price Quantity Demanded $0 8 1 6 2 4 3 2 4 0 Graph the demand curve and calculate consumer surplus at a price of $2. ANSWER: Consumer surplus at a price of $2 would involve the triangle with a height from price = $2 to price = $4, and the base of 0 to 4. Therefore, this area is equal to 0.5× ($2)× (4) = $4, therefore there is a consumer surplus of $4.
265. A market has a demand equation as follows: Qd = 60 − 4P. The market price of the product is $5. Calculate the dollar amount of consumer surplus in this market and illustrate your answer graphically. ANSWER: In this example, Qd = 0 when P = $15, therefore this functions as the y-intercept of the problem. Furthermore, at a
price of $5, Qd = 60 − 4(5) = 60 − 20 = 40. Therefore, the area of consumer surplus can be calculated to be = 0.5 × (40 − 0) × ($15 − $5) = 0.5 × (40) × ($10) = $200.
266. A market has a demand equation as follows: Qd = 100 − 2P. The market price for the product is $20. Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 3 Calculate the dollar amount of consumer surplus in this market and illustrate your answer graphically. ANSWER: In this example, Qd = 0 when P = $50, therefore this functions as the y-intercept of the problem. Furthermore, at a
price of $20, Qd = 100 − 2(20) = 100 − 40 = 60. Therefore, the area of consumer surplus can be calculated to be = 0.5 × (60 − 0) × ($50 − $20) = 0.5× (60) × ($30) = $900.
267. An increase in the population will lead to an increase in demand. Give three other examples that lead to an increase in demand. ANSWER: Three possible shifters of demand to the right include increases in income (for normal goods), changes in tastes, and an increase in the price of substitutes.
268. What is the difference between a change in quantity demanded (Qd) and a change in demand? Explain what causes a change in Qd and what causes a change in demand, and illustrate using graphs. ANSWER: A change in quantity demanded involves a movement along a demand curve, while a change in demand involves a movement of the entire demand curve up and to the right (increase) or down and to the left (decrease). Changes in price involve a simple change in quantity demanded, while the shifters of demand are more complex and include changes in: income, population, tastes, prices of substitutes, prices of complements, and expectations.
269. Throughout 2005, average home prices in the United States soared to record highs. Clearly, those individuals who were purchasing homes were paying more for them. But what about the people who were not buying homes? In particular, were people who did NOT own homes affected by this housing bubble? Explain. (Hint: What impact did this substantial increase in the price of owner-occupied housing have on the price of rental housing?) ANSWER: The increasing home prices would incentivize developers to focus on selling homes rather than providing rental housing. This means that the supply of rentals would decrease whereas demand for rentals potentially increases due to an increasing number of individuals not being able to afford homes. Therefore, the housing bubble had the direct consequence of increasing rental home prices as well as an increasing number of people begin to chase a smaller amount of supplied rental properties.
270. Bloomberg News reports that OPEC (a group of countries that together form the world's leading supplier of oil) will increase its supply of oil. This is expected to bring future oil prices down. How will this move by OPEC affect the demand for oil today? Explain your reasoning. ANSWER: As OPEC increases the supply of oil and the price of oil falls, consumers will choose to also use oil in its less and less valued uses (e.g., for heating or making rubber ducks) as opposed to using it in its higher-value uses, such as for transportation. This is because oil has few substitutes at its higher-value uses when compared to its less-valued uses, where there are many substitutes for oil. However, a lower oil price changes this calculation and allows for an increasing use of oil in its lesser-valued areas.
271. A market has a supply equation as follows: Qs = P. The market price for the product is $50. Calculate the dollar amount of producer surplus in this market and illustrate your answer graphically. ANSWER: When Qs = 0, P = $0, and when P = $50, Qs = 50. Therefore, the area of producer surplus is calculated to be = 0.5 × (50 − 0) × ($50 − $0) = $1,250.
272. A market has a supply equation as follows: Qs = −20 + 2P. The market price for the product is $20. Calculate the dollar amount of producer surplus in this market and illustrate your answer graphically. ANSWER: When Qs = 0, P = $10, and when P = $20, Qs = 20. Therefore, the area of producer surplus is calculated to be = 0.5 × (20 − 0) × ($20 − $10) = 0.5 × (20) × ($10) = $100.
273. For each of these changes, determine whether there will be a change in supply (i.e., a shift of the supply curve) or a change in quantity supplied (i.e., no shift of the supply curve). I. change in the resource cost Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 3 II. change in producer expectations III. change in the price of the good IV. change in technology V. the number of sellers ANSWER: The changes representing a change in the amount supplied at any price (i.e., a change in supply) include the changes listed in I, II, IV, and V. On the other hand, III, a change in the price of the good, represents a movement along the existing supply curve and therefore is a change in quantity supplied.
274. What is the difference between a change in quantity supplied (Qs) and a change in supply (S)? Explain what causes a change in Qs and what causes a change in S, and illustrate using graphs. ANSWER: A change in quantity supplied involves a movement along a supply curve, while a change in supply involves a movement of the entire supply curve up and to the left (decrease) or down and to the right (increase). Changes in price involve a simple change in quantity demanded, while the shifters of demand are more complex and include changes in: technology, prices of inputs, taxes and subsidies, expectations, entry or exit of other producers, and opportunity costs.
275. It is widely known that the rapidly expanding corn-ethanol industry is quickly increasing the price of corn on world markets. Given this, many farmers have begun to grow corn more intensively. For instance, some producers who currently pursue a corn-soybean rotation (planting corn one year and soybeans the next) might shift to a corn-corn-soybean rotation (planting corn two years in a row and then planting soybeans in the third). Continuous production of corn (planting corn every year on the same plot of land) is another possibility. Explain what impact this explosion in the market for corn may have on the market for soybeans. In particular, will those who produce soybeans exclusively be better off, worse off, or unaffected as a result of the increase in corn prices? ANSWER: The explosion in the market for corn will negatively affect the market for soybeans. More farmers will switch over to producing corn instead of soybeans due to the higher returns provided by the corn. Therefore, as corn prices increase, soybean producers will be made worse off as their products will receive lower returns compared to producers who produce or switch to producing more corn.
276. A recent explosion in the demand for (and price of) organically produced foods has caused many farmers to convert from traditional farming methods to higher-cost organic farming methods. Explain what has happened to the opportunity cost of traditional farming and why. Based on your explanation, does it make sense to see so many farmers moving to organic farming? Explain. ANSWER: The increase in demand for (and price of) organically produced foods has made the opportunity cost of producing crops using traditional farming methods increase. This is due to organic food production now becoming more profitable. Therefore, an increase in organic farming is definitely a rational decision for farmers, as otherwise they would be missing out on increasing their profits.
Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 4 1. Table: Equilibrium Quantity Price Quantity Demanded Quantity Supplied $10 100 400 $8 150 350 $6 200 300 $4 250 250 $2 300 200 Based on the table, the equilibrium quantity is: a. 10. b. 250. c. 100 and 400. d. 275.5. ANSWER: b 2. In a market, the equilibrium condition is given by the following: a. quantity demanded = quantity supplied. b. quantity demanded > quantity supplied. c. quantity demanded/quantity supplied. d. price = quantity demanded = quantity supplied. ANSWER: a 3. The key condition for equilibrium to occur in a market is: a. the demand curve equals the supply curve. b. quantity demanded equals quantity supplied. c. price equals quantity. d. demand for one good equals demand for all other goods. ANSWER: b 4. Figure: Equilibrium
The equilibrium price is $: a. 8. b. 10. c. 16. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 4 d. 12. ANSWER: a 5. Figure: Equilibrium
The equilibrium quantity (in units) is: a. 8. b. 10. c. 16. d. 12. ANSWER: c 6. A market can be described by the equations Qd = 100 − P and Qs = P. What are the equilibrium price and quantity in this market? a. The equilibrium price is $50, and the equilibrium quantity is 50 units. b. The equilibrium price is $100, and the equilibrium quantity is 100 units. c. The equilibrium price is $0, and the equilibrium quantity is 0 units. d. The equilibrium price is $0, and the equilibrium quantity is 100 units. ANSWER: a 7. A market can be described by the equations Qd = 50 − 3P and Qs = 2P. What are the equilibrium price and quantity in this market? a. The equilibrium price is $20, and the equilibrium quantity is 10 units. b. The equilibrium price is $50, and the equilibrium quantity is 100 units. c. The equilibrium price is $30, and the equilibrium quantity is 10 units. d. The equilibrium price is $10, and the equilibrium quantity is 20 units. ANSWER: d 8. A market can be described by the equations Qd = 450 − 30P and Qs = 200 + 20P. What are the equilibrium price and quantity in this market? a. The equilibrium price is $5, and the equilibrium quantity is 300 units. b. The equilibrium price is $6.50, and the equilibrium quantity is 330 units. c. The equilibrium price is $13, and the equilibrium quantity is 460 units. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 4 d. The equilibrium price is $7, and the equilibrium quantity is 340 units. ANSWER: a 9. A market can be described by the equations Qd = 300 − 15P and Qs = 180 + 5P. What are the equilibrium price and quantity in this market? a. The equilibrium price is $6, and the equilibrium quantity is 210 units. b. The equilibrium price is $24, and the equilibrium quantity is 300 units. c. The equilibrium price is $12, and the equilibrium quantity is 240 units. d. The equilibrium price is $18, and the equilibrium quantity is 270 units. ANSWER: a 10. Figure: Market Equilibrium
At a price of $3, quantity supplied is _____ and quantity demanded is _____, leading to a _____ units. a. 6; 2; surplus of 4 b. 2; 6; shortage of 8 c. 2; 4; surplus of 2 d. 4; 2; shortage of 2 ANSWER: a 11. Figure: Market Equilibrium
At a price of $1, quantity supplied is _____ and quantity demanded is _____, leading to a _____ units. a. 2; 6; shortage of 4 b. 6; 2; surplus of 6 Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 4 c. 2; 4; shortage of 6 d. 4; 2; surplus of 4 ANSWER: a 12. Figure: Market Equilibrium
At a price of $1, the market is characterized by a(n): a. excess supply of 2 units. b. excess demand of 4 units. c. surplus of 4 units. d. shortage of 6 units. ANSWER: b 13. Figure: Market Equilibrium
According to the figure, the equilibrium price and quantity are $: a. 1 and 4 units. b. 4 and 8 units. c. 2 and 4 units. d. 3 and 6 units. ANSWER: c 14. Figure: Market Equilibrium
Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 4
At a price of $10, quantity supplied is _____ units and quantity demanded is _____ units, leading to a _____ units. a. 600; 225; surplus of 375 b. 225; 600; shortage of 375 Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 4 c. 225; 600; surplus of 375 d. 600; 225; shortage of 375 ANSWER: a 15. Figure: Market Equilibrium
Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 4
At a price of $4, the market is characterized by a(n): a. surplus. b. shortage. c. overage. Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 4 d. equilibrium. ANSWER: b 16. Figure: Market Equilibrium
Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 4 According to the figure, the equilibrium price and quantity are $: a. 10 and 275 units. b. 4 and 600 units. c. 7 and 400 units. d. 7 and 600 units. ANSWER: c 17. Figure: Market Equilibrium
Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 4
According to the figure, if the price is $4, there is a: a. surplus of 375 units, and the price will fall. b. shortage of 375 units, and the price will rise. c. shortage of 200 units, and the price will fall. Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 4 d. surplus of 200 units, and the price will rise. ANSWER: b 18. Figure: Market Equilibrium
Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 4 According to the figure, if the price is $10, there is a: a. surplus of 375 units, and the price will fall. b. shortage of 200 units, and the price will rise. c. shortage of 200 units, and the price will fall. d. surplus of 375 units, and the price will rise. ANSWER: a 19. Suppose that a market is characterized as follows: Consumers are willing and able to purchase 100 units, and sellers are willing and able to sell 70 units. Which of these statements is TRUE? a. There is a shortage of 30 units. b. The market is in equilibrium. c. The price in the market will decrease. d. Quantity demanded will increase. ANSWER: a 20. Suppose that a market is characterized as follows: Consumers are willing and able to purchase 165 units, and sellers are willing and able to sell 280 units. Which of these statements is TRUE? a. There is a surplus of 115 units. b. The market is in equilibrium. c. The price in the market will increase. d. There is a shortage of 115 units. ANSWER: a 21. If sellers want to sell more products than buyers are willing to purchase, we know that: a. the current price is less than the equilibrium price. b. quantity demanded exceeds quantity supplied. c. the current price is greater than the equilibrium price. d. the demand curve will likely increase. ANSWER: c 22. Suppose that the equilibrium price in the market is $10.00. If the current market price is $7.50: a. the equilibrium price will fall to $7.50. b. competition among buyers will increase the current price. c. the current price will fall below $7.50 as sellers compete for market share. d. the quantity demanded in the market will decrease until the current market price falls. ANSWER: b 23. Suppose that the equilibrium price in the market is $12. If the current market price is $14: a. the quantity supplied in the market will rise, driving the current market price up to $14. b. competition among buyers will increase the current market price. c. the current market price will fall as sellers compete for market share. Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 4 d. the quantity demanded in the market will decrease until the current market price falls. ANSWER: c 24. In free markets, shortages lead to: a. lower prices. b. higher prices. c. surpluses. d. unexploited gains from trade. ANSWER: b 25. In free markets, surpluses lead to: a. lower prices. b. higher prices. c. stable prices. d. unexploited gains from trade. ANSWER: a 26. Figure: Price Adjustment
If the price of the product is $14, there is a: a. shortage of 30 units of the product, and the price will rise to $16. b. surplus of 20 units of the product, and the price will rise to $16. c. shortage of 50 units of the product, and the price will rise to $16. d. surplus of 40 units of the product, and the price will rise to $16. ANSWER: c 27. Table: Equilibrium Price, Quantity P QD QS $10 50 30 $12 45 35 $14 40 40 $16 35 45 $18 30 50 The equilibrium price and quantity are $: Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 4 a. 10 and 50. b. 12 and 35. c. 40 and 14. d. 14 and 40. ANSWER: d 28. Table: Equilibrium Price, Quantity P QD QS $10 50 30 $12 45 35 $14 40 40 $16 35 45 $18 30 50 If the price in the market were $16, there would be a: a. shortage of 10 units. b. shortage of 35 units. c. surplus of 10 units. d. surplus of 45 units. ANSWER: c 29. Table: Equilibrium Price, Quantity P QD QS $10 50 30 $12 45 35 $14 40 40 $16 35 45 $18 30 50 If the price in the market were $12, there would be a: a. shortage of 10 units. b. shortage of 45 units. c. surplus of 10 units. d. surplus of 35 units. ANSWER: a 30. Table: Equilibrium Price, Quantity P QD QS $10 50 30 $12 45 35 $14 40 40 $16 35 45 $18 30 50 If the demand curve for the product shifts to the right such that 10 more units of the good are demanded at every price, what is the new equilibrium price? a. $12 Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 4 b. $14 c. $16 d. $18 ANSWER: c 31. Table: Equilibrium Price, Quantity P QD QS $10 50 30 $12 45 35 $14 40 40 $16 35 45 $18 30 50 If the demand curve for the product shifts to the right such that 20 more units of the good are demanded at every price, what is the new equilibrium price? a. $12 b. $14 c. $16 d. $18 ANSWER: d 32. Table: Equilibrium Price, Quantity P QD QS $10 50 30 $12 45 35 $14 40 40 $16 35 45 $18 30 50 If the supply curve for the product shifts to the right such that 10 more units of the good are supplied at every price, what is the new equilibrium price? a. $12 b. $14 c. $16 d. $18 ANSWER: a 33. Table: Equilibrium Price, Quantity P QD QS $10 50 30 $12 45 35 $14 40 40 $16 35 45 $18 30 50 If the supply curve for the product shifts to the right such that 20 more units of the good are supplied at every price, what is the new equilibrium price? Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 4 a. $10 b. $12 c. $14 d. $16 ANSWER: a 34. For each good produced in a free market economy, demand and supply determine: a. the price of the good, but not the quantity. b. the quantity of the good, but not the price. c. both the price and the quantity of the good. d. neither price nor quantity; sellers determine the price. ANSWER: c 35. When there is a shortage of 1,000 units of a particular good: a. the price of the good will rise. b. the price of the good will fall. c. the quantity demanded of the good will equal 1,000 units. d. there will be no change in the price of the good. ANSWER: a 36. When a surplus exists in a market, we know that the actual price is: a. above equilibrium price, and quantity supplied is greater than quantity demanded. b. above equilibrium price, and quantity demanded is greater than quantity supplied. c. below equilibrium price, and quantity demanded is greater than quantity supplied. d. below equilibrium price, and quantity supplied is greater than quantity demanded. ANSWER: a 37. Table: Equilibrium Adjustment Price Quantity Demanded Quantity Supplied $10 100 160 $8 120 145 $6 130 130 $4 140 115 $2 150 100 If the price in the free market were $8, then a: a. surplus of 25 units would exist, and the price would tend to fall. b. surplus of 25 units would exist, and the price would tend to rise. c. shortage of 25 units would exist, and the price would tend to rise. d. shortage of 25 units would exist, and the price would tend to fall. ANSWER: a 38. Table: Equilibrium Adjustment Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 4 Price Quantity Demanded Quantity Supplied $10 100 160 $8 120 145 $6 130 130 $4 140 115 $2 150 100 If the price in the free market were $2, then a: a. surplus of 50 units would exist, and the price would fall. b. surplus of 50 units would exist, and the price would rise. c. shortage of 50 units would exist, and the price would rise. d. shortage of 50 units would exist, and the price would fall. ANSWER: c 39. Table: Equilibrium Adjustment Price Quantity Demanded Quantity Supplied $10 100 160 $8 120 145 $6 130 130 $4 140 115 $2 150 100 The equilibrium price is $: a. 2. b. 4. c. 6. d. 8. ANSWER: c 40. Table: Supply and Demand Price Quantity Demanded Quantity Supplied $10 2,000 1,200 $12 1,900 1,300 $14 1,800 1,400 $16 1,700 1,500 $18 1,600 1,600 $20 1,500 1,700 If the price in the free market were $18, then: a. a surplus of 200 units would exist, and the price would fall. b. a shortage of 600 units would exist, and the price would rise. c. a shortage of 200 units would exist, and the price would rise. d. the market would be in equilibrium. ANSWER: d 41. Table: Supply and Demand Price Quantity Demanded Quantity Supplied Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 4 $10 2,000 1,200 $12 1,900 1,300 $14 1,800 1,400 $16 1,700 1,500 $18 1,600 1,600 $20 1,500 1,700 If the price in the free market were $20, then a: a. surplus of 200 units would exist, and the price would fall. b. surplus of 600 units would exist, and the price would rise. c. shortage of 200 units would exist, and the price would rise. d. shortage of 400 units would exist, and the price would fall. ANSWER: a 42. Table: Supply and Demand Price Quantity Demanded Quantity Supplied $10 2,000 1,200 $12 1,900 1,300 $14 1,800 1,400 $16 1,700 1,500 $18 1,600 1,600 $20 1,500 1,700 If the price in the free market were $10, then a: a. surplus of 800 units would exist, and the price would fall. b. surplus of 800 units would exist, and the price would rise. c. shortage of 800 units would exist, and the price would rise. d. shortage of 800 units would exist, and the price would fall. ANSWER: c 43. Table: Supply and Demand Price Quantity Demanded Quantity Supplied $10 2,000 1,200 $12 1,900 1,300 $14 1,800 1,400 $16 1,700 1,500 $18 1,600 1,600 $20 1,500 1,700 If the price in the free market were $12, then a: a. surplus of 200 units would exist, and the price would fall. b. shortage of 600 units would exist, and the price would rise. c. shortage of 200 units would exist, and the price would rise. d. surplus of 400 units would exist, and the price would fall. ANSWER: b 44. Table: Supply and Demand Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 4 Price Quantity Demanded $10 2,000 $12 1,900 $14 1,800 $16 1,700 $18 1,600 $20 1,500 The equilibrium price is $: a. 12. b. 44. c. 16. d. 18. ANSWER: d
Quantity Supplied 1,200 1,300 1,400 1,500 1,600 1,700
45. A free market achieves an equilibrium price and quantity due to: a. the combined actions of buyers and sellers. b. increased competition among sellers. c. government regulations placed on market participants. d. buyers' ability to affect market outcomes. ANSWER: a 46. When there is a surplus of a good: a. sellers will lower the price to increase the quantity demanded. b. sellers will raise the price to decrease the quantity demanded. c. sellers will compete with buyers. d. this is an indication that the buyers do not value the good. ANSWER: a 47. When there is a shortage of a good: a. buyers will bid up the price of the good to increase the quantity supplied. b. sellers will lower the price of the good to decrease the quantity demanded. c. sellers will compete with buyers for the good. d. this is an indication that the buyers do not value the good. ANSWER: a 48. When the quantity supplied of a good exceeds the quantity demanded, there is a(n): a. shortage. b. surplus. c. equilibrium. d. opportunity cost. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 4 49. A shortage of a good occurs when: a. the quantity supplied equals the quantity demanded. b. the quantity supplied is greater than the quantity demanded. c. the quantity supplied is less than the quantity demanded. d. supply does not exist. ANSWER: c 50. A surplus of a good occurs when: a. the quantity demanded equals the quantity supplied. b. the quantity demanded is greater than the quantity supplied. c. the quantity demanded is less than the quantity supplied. d. demand does not exist. ANSWER: c 51. If the market for Apple Watches experiences a surplus, then the: a. supply of Apple Watches will fall. b. demand for Apple Watches will rise. c. price of Apple Watches will rise. d. price of Apple Watches will fall. ANSWER: d 52. The equilibrium price is: a. stable because at this price the quantity demanded equals the quantity supplied. b. unstable because at this price the quantity demanded is less than the quantity supplied. c. unstable because at this price the quantity demanded exceeds the quantity supplied. d. stable because at this price all buyers are willing and able to pay. ANSWER: a 53. Figure: Basic Supply and Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 4
In the diagram, which of these statements is TRUE? a. The equilibrium price is $3, and the equilibrium quantity is 60 units. b. The equilibrium price is $4, and the equilibrium quantity is 60 units. c. The equilibrium price is $2, and the equilibrium quantity is 40 units. d. The equilibrium price is $3, and the equilibrium quantity is 50 units. ANSWER: d 54. Figure: Basic Supply and Demand
In the diagram, if the market price is $2, then there is: a. a surplus of 60 units. Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 4 b. a surplus of 20 units. c. a shortage of 20 units. d. market equilibrium. ANSWER: c 55. Figure: Basic Supply and Demand
In the diagram, which of these statements is TRUE? a. When the price is $3, the quantity demanded exceeds the quantity supplied by 60 units. b. When the price is $2, the quantity demanded exceeds the quantity supplied by 40 units. c. When the price is $4, the quantity demanded is less than the quantity supplied by 40 units. d. When the price is $2, there is a tendency for the price to rise in the future. ANSWER: d 56. Figure: Basic Supply and Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 4
In the diagram, the market price is stable only at a price of $: a. 2. b. 3. c. 4. d. 50. ANSWER: b 57. If the market price is above the equilibrium price, which of these will occur? a. Quantity demanded will exceed quantity supplied, and the market price will eventually fall. b. Quantity demanded will exceed quantity supplied, and the market price will eventually rise. c. Quantity supplied will exceed quantity demanded, and the market price will eventually fall. d. Quantity supplied will exceed quantity demanded, and the market price will eventually rise. ANSWER: c 58. If the market price is below the equilibrium price, which of these will occur? a. Quantity demanded will exceed quantity supplied, and the market price will eventually fall. b. Quantity demanded will exceed quantity supplied, and the market price will eventually rise. c. Quantity supplied will exceed quantity demanded, and the market price will eventually fall. d. Quantity supplied will exceed quantity demanded, and the market price will eventually rise. ANSWER: b 59. If the price of Nike Air Max 1 shoes is below the equilibrium price: a. competition will eventually push the price up. b. there will be a surplus of sneakers. c. quantity demanded will increase as the price rises to the equilibrium price. Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 4 d. quantity supplied will be greater than quantity demanded. ANSWER: a 60. The yearly shortage of Super Bowl tickets implies that the price of Super Bowl tickets is: a. set at the equilibrium price since they always sell out. b. above the equilibrium price. c. below the equilibrium price. d. not set by supply and demand, but instead set by the NFL. ANSWER: c 61. If there is a surplus of a good, sellers will: a. lower the price to increase the quantity demanded. b. raise the price to decrease the quantity demanded. c. compete with buyers. d. know that the buyers overvalue the good. ANSWER: a 62. A surplus occurs when: a. workers are more productive than expected. b. the quantity supplied is greater than the quantity demanded. c. more people want to buy a good than want to sell it. d. a market is at equilibrium. ANSWER: b 63. A shortage occurs when: a. the price of a good is too high. b. a market is at equilibrium. c. the quantity supplied is zero. d. the quantity demanded is greater than the quantity supplied. ANSWER: d 64. The equilibrium price is: a. the price at which quantity demanded is equal to quantity supplied. b. never higher than what most consumers are willing to pay. c. unstable. d. the highest price at which all consumers can afford a good. ANSWER: a 65. When there is a surplus, sellers have an incentive to _____ their price and buyers have an incentive to offer a _____ price. a. increase; lower Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 4 b. decrease; lower c. increase; higher d. decrease; higher ANSWER: b 66. When there is a shortage, sellers have an incentive to _____ their price and buyers have an incentive to offer a _____ price. a. increase; lower b. decrease; lower c. decrease; higher d. increase; higher ANSWER: d 67. If a market has a surplus, how will the market respond? a. The price will fall, and the quantity supplied will fall. b. The price will fall, and the quantity supplied will rise. c. The price will rise, and the quantity supplied will fall. d. The price will rise, and the quantity supplied will rise. ANSWER: a 68. Figure: Chocolate
Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 4
What is the equilibrium price per pound in the diagram? a. $4 b. $6 c. $8 d. $10 ANSWER: c 69. Figure: Chocolate
Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 4
If the price in the diagram is $5, what will happen? a. The price will increase because of a shortage. b. The price will decrease because of a shortage. c. The price will increase because of a surplus. d. The price will decrease because of a surplus. ANSWER: a 70. Figure: Price and Quantity 1
Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 4
In the diagram, at which price is there a surplus? a. $80 b. $50 c. $40 d. $0 ANSWER: a 71. Figure: Price and Quantity 1
In the diagram, at which price is quantity demanded equal to quantity supplied? Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 4 a. $40 b. $50 c. $60 d. $80 ANSWER: b 72. Figure: Price and Quantity 1
In the diagram, at a price of $80, the quantity demanded is _____, the quantity supplied is _____, and there is _____. a. 20; 80; a surplus of 60 units b. 80; 20; a surplus of 60 units c. 80; 20; a shortage of 60 units d. 20; 20; no surplus or shortage ANSWER: a 73. Figure: Price and Quantity 1
Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 4
In the diagram, at a price of $40, the quantity demanded is _____, the quantity supplied is _____, and there is a _____ units. a. 40; 60; surplus of 20 b. 80; 20; shortage of 60 c. 60; 40; shortage of 20 d. 20; 60; surplus of 40 ANSWER: c 74. When there is an excess supply in the market, competition will: a. drive the price down to the equilibrium price. b. drive the price up to the equilibrium price. c. cause the demand curve to shift right. d. cause the supply curve to increase. ANSWER: a 75. When there is a shortage in the market, competition will: a. drive the price down to the equilibrium price. b. drive the price up to the equilibrium price. c. cause the demand curve to shift right. d. cause the supply curve to increase. ANSWER: b 76. Table: Supply and Demand Schedule Price per Unit Quantity Demanded Quantity Supplied $17 80 97 Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 4 $15 88 88 $13 96 79 $11 104 71 In the table, a surplus occurs at a price _____, and a shortage occurs at a price _____. a. of $17; below $15 b. of $15; above $15 c. above $15; of $15 d. above $11; below $17 ANSWER: a 77. Table: Supply and Demand Schedule Price per Unit Quantity Demanded Quantity Supplied $17 80 97 $15 88 88 $13 96 79 $11 104 71 In the table, equilibrium occurs at a price of $_____. a. 11 b. 13 c. 15 d. 17 ANSWER: c 78. In a free market equilibrium, prices and quantities are uniquely: a. stable. b. unstable. c. moving in the "right" direction. d. moving in the "wrong" direction. ANSWER: a 79. Imagine a free market in which, at a price of $10, quantity supplied is 50 units and quantity demanded is 40 units. Equilibrium price in this market: a. is equal to $10. b. is less than $10. c. is greater than $10. d. differs from $10 in an indeterminate direction. ANSWER: b 80. Imagine a free market in which, at a price of $10, quantity supplied is 40 units and quantity demanded is 50 units. Equilibrium price in this market: a. is equal to $10. b. is less than $10. Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 4 c. is greater than $10. d. differs from $10 in an indeterminate direction. ANSWER: c 81. Imagine a free market in which, at a price of $10, quantity supplied is 50 units and quantity demanded is 50 units. Equilibrium price in this market: a. is equal to $10. b. is less than $10. c. is greater than $10. d. differs from $10 in an indeterminate direction. ANSWER: a 82. Imagine a free market in which, at a price of $24, quantity supplied is 300 units and quantity demanded is 550 units. Equilibrium price in this market: a. is equal to $24. b. is less than $24. c. is greater than $24. d. differs from $24 in an indeterminate direction. ANSWER: c 83. Imagine a free market in which, at a price of $55, quantity supplied is 250 units and quantity demanded is 435 units. Equilibrium price in this market: a. is equal to $55. b. is less than $55. c. is greater than $55. d. differs from $55 in an indeterminate direction. ANSWER: c 84. Imagine a free market in which, at a price of $4, quantity supplied is 120 units and quantity demanded is 100 units. Equilibrium price in this market: a. is equal to $4. b. is less than $4. c. is greater than $4. d. differs from $4 in an indeterminate direction. ANSWER: b 85. Imagine a free market in which, at a price of $3,500, quantity supplied is 2,400 units and quantity demanded is 2,100 units. Equilibrium price in this market: a. is equal to $3,500. b. is less than $3,500. c. is greater than $3,500. d. differs from $3,500 in an indeterminate direction. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 4 ANSWER: b 86. Imagine a free market in which quantity supplied is 50 units and quantity demanded is 50 units at the current price. The market is experiencing a(n): a. equilibrium. b. surplus. c. shortage. d. shift. ANSWER: a 87. Imagine a free market in which quantity supplied is 40 units and quantity demanded is 50 units at the current price. The market is experiencing a(n): a. equilibrium. b. surplus. c. shortage. d. shift. ANSWER: c 88. Imagine a free market in which quantity supplied is 50 units and quantity demanded is 40 units at the current price. The market is experiencing a(n): a. equilibrium. b. surplus. c. shortage. d. shift. ANSWER: b 89. In a free market setting where quantity supplied is 40 units and quantity demanded is 50 units, price will: a. rise. b. fall. c. remain the same. d. move in an indeterminate direction. ANSWER: a 90. In a free market setting where quantity supplied is 50 units and quantity demanded is 50 units, price will: a. rise. b. fall. c. remain the same. d. move in an indeterminate direction. ANSWER: c 91. In a free market setting where quantity supplied is 50 units and quantity demanded is 40 units, price will: a. rise. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 4 b. fall. c. remain the same. d. move in an indeterminate direction. ANSWER: b 92. In a competitive market: a. buyers compete with other buyers, and sellers compete with other sellers. b. buyers compete with sellers, and sellers compete with buyers. c. sellers alone determine the equilibrium price. d. buyers alone determine the equilibrium price. ANSWER: a 93. When a market is competitive: a. buyers compete with sellers to try to get lower prices. b. buyers compete with other buyers, raising prices; and sellers compete with sellers, lowering prices. c. everybody competes with everybody else. d. buyers compete with sellers and sellers compete with one another, but buyers do not compete with one another.
ANSWER: b 94. How is a class in which students are graded on a curve like a competitive market? a. In both cases, the quantity supplied equals the quantity demanded. b. In a competitive market, demanders compete against one another for goods, the same way students compete
for grades. c. In a competitive market, demanders compete against suppliers for goods, the same way students compete for grades. d. If the price is too high, demanders should blame suppliers, the same way students should blame professors for bad grades.
ANSWER: b 95. Figure: Demand and Supply
Which statement is TRUE? a. The gains from trade are maximized at 20 units of output. Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 4 b. At 16 units of output, there are unexploited gains from trade. c. Buyers are willing to pay $20 for the 16th unit of output, and it costs sellers $60 to produce that unit. d. A free market is likely to produce less than 12 units of output. ANSWER: c 96. Figure: Demand and Supply
At the equilibrium quantity, total surplus is $: a. 960. b. 480. c. 320. d. 240. ANSWER: b 97. Figure: Demand and Supply
At a price of $60, total surplus is $: a. 1,280. b. 640. c. 240. d. 0. ANSWER: c 98. Gains from trade are maximized at the: Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 4 a. equilibrium price and quantity. b. midpoint on the demand curve. c. point at which output is maximized. d. vertical intercept on the supply curve. ANSWER: a 99. Figure: Gains from Trade
What are the unexploited gains from trade at the free market equilibrium? a. $1,000 b. $500 c. $0 d. $1,500 ANSWER: c 100. Figure: Gains from Trade
What are the total gains from trade at the free market equilibrium? a. $1,000 b. $500 c. $0 d. $1,500 ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 4 101. Figure: Consumer and Producer Surplus
What area represents the total gains from trade at the free market equilibrium? a. triangle AGM b. triangle CGL c. triangle AEG d. triangle DGK Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 4 ANSWER: a 102. Figure: Consumer and Producer Surplus
What area represents the total consumer surplus from trade at the free market equilibrium? a. triangle AGM b. triangle CGL Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 4 c. triangle AEG d. triangle EGM ANSWER: c 103. Figure: Consumer and Producer Surplus
What area represents the total producer surplus from trade at the free market equilibrium? Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 4 a. triangle AGM b. triangle CGL c. triangle AEG d. triangle EGM ANSWER: d 104. Figure: Consumer and Producer Surplus
Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 4
What area represents the unexploited gains from trade when the price is set at B? a. triangle AGM b. triangle CGL c. triangle AEG d. triangle DGK ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 4 105. Figure: Consumer and Producer Surplus
What area represents the value of wasted resources from trade when the price is set at J? a. triangle AGM b. triangle CGL c. triangle AEG Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 4 d. triangle DGK ANSWER: d 106. Gains from trade are maximized when: a. the market price is higher than the equilibrium price. b. the market price is less than the equilibrium price. c. the market price is equal to the equilibrium price. d. there are additional potential trades available that have not been completed. ANSWER: c 107. In a free market, when there are unexploited gains from trade: a. the market is slow to adjust to this situation. b. there are sellers who are unwilling to sell at prices buyers are willing to pay. c. there are buyers who are willing to pay more for goods than sellers are asking. d. an equilibrium price and quantity have been reached. ANSWER: c 108. In a free market in which an equilibrium price and quantity prevail consumer surplus: a. is less than producer surplus. b. is greater than producer surplus. c. is the same as producer surplus. d. and producer surplus are maximized. ANSWER: d 109. Gains from trade are maximized in a competitive market when quantity: a. supplied equals quantity demanded. b. supplied exceeds quantity demanded. c. demanded exceeds quantity supplied. d. supplied equals zero. ANSWER: a 110. Why is consuming a quantity above equilibrium wasteful? a. because there are willing buyers of the good who do not purchase it b. because resources are used without making society better off c. because it creates a shortage, which generates waste d. because it creates a surplus, which generates waste ANSWER: b 111. Figure: Basic Supply and Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 4
In a free market, as illustrated in the diagram, total gains from trade are greatest when: a. 60 units are sold at a price of $2. b. 40 units are sold at a price of $3. c. 60 units are sold at a price of $4. d. 50 units are sold at a price of $3. ANSWER: d 112. Figure: Basic Supply and Demand
In a free market, as illustrated in the diagram, there are wasted resources when: a. 60 units are sold at a price of $2. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 4 b. 40 units are sold at a price of $3. c. 60 units are sold at a price of $4. d. 50 units are sold at a price of $3. ANSWER: a 113. Figure: Basic Supply and Demand
In a free market, as illustrated in the diagram, the unexploited gains from trade are greatest when: a. 60 units are sold at a price of $2. b. 40 units are sold at a price of $4. c. 60 units are sold at a price of $4. d. 50 units are sold at a price of $3. ANSWER: b 114. For suppliers to sell more than the equilibrium quantity, it would mean that: a. it costs suppliers less to produce the good than its value to buyers. b. it costs suppliers more to produce the good than its value to buyers. c. the gains from trade increase. d. suppliers gain from trade while buyers are unaffected. ANSWER: b 115. Figure: Supply and Demand 1
Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 4
At a market quantity of 5, the shaded region in the figure represents: a. satisfied wants. b. unexploited gains from trade. c. the value of wasted resources. d. willingness to pay. ANSWER: b 116. When the price of a good equals the equilibrium price: a. there will still be some wasted resources. b. gains from trade are minimized. c. opportunity cost is minimized. d. there are no unexploited gains from trade. ANSWER: d 117. Tim values dog treats at $10 per box, and John values them at $6 per box. If the price of dog treats is $3 per box but only one box is available between these two buyers, then gains from trade will be maximized when: a. Tim buys the treats. b. John buys the treats. c. either buys the treats, since they both value them more than the market price. d. consumer surplus is equal to $3. ANSWER: a 118. Gains from trade will be maximized at the free market equilibrium price and quantity because the supply of goods is: a. bought by the buyers who have the highest willingness to pay. b. bought by the buyers who have the lowest willingness to pay. Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 4 c. sold by the sellers with the highest opportunity cost. d. sold by the sellers that minimize producer surplus. ANSWER: a 119. Adali values a new computer at $500. Carsten values a new computer at $750. InfoTech can produce a new computer for $360. Gains from trade are maximized when: a. Adali buys a new computer. b. Carsten buys a new computer. c. both Adali and Carsten buy a new computer. d. neither Adali nor Carsten buys a new computer. ANSWER: c 120. It costs suppliers $1 to produce each additional widget, and widgets sell for $2. Some consumers are not willing to pay $2 for a widget but are nevertheless willing to pay more than $1. Which of these statements is TRUE? a. The market is at equilibrium. b. Suppliers must be reaping big profits. c. There are unexploited gains from trade. d. Consumers will bid up prices. ANSWER: c 121. When producers produce more than the equilibrium quantity: a. resources are wasted because goods are produced at a higher cost than consumers are willing to pay. b. the market is operating at an abnormally high level of efficiency. c. sellers have an incentive to reduce their price. d. buyers have an incentive to offer a higher price. ANSWER: a 122. The equilibrium quantity is the quantity at which: a. consumers' willingness to pay equals producers' willingness to sell. b. buyers have no unsatisfied wants. c. gains from trade are minimized. d. suppliers' production is maximized. ANSWER: a 123. Figure: Price and Quantity 2
Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 4
At a cost of $20 per unit, the demanders whose wants are satisfied are represented by the section of the demand curve between the prices of $: a. 100 and $80. b. 100 and $50. c. 0 and $100. d. 20 and $80. ANSWER: a 124. Figure: Price and Quantity 2
Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 4
At a cost of $20 per unit, the value of the unexploited gains from trade is represented by areas: a. A + B + E. b. A + B + C + D. c. E + F. d. B + C + E + F. ANSWER: c 125. Figure: Price and Quantity 2
Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 4 At a cost of $20 per unit, the value of the unexploited gains from trade is $: a. 200. b. 500. c. 600. d. 900. ANSWER: d 126. Figure: Price and Quantity 3
At a quantity of 80 units, it costs sellers $_____ to produce the last unit, but buyers value this last unit at $_____. a. 80; 50 b. 50; 20 c. 20; 80 d. 80; 20 ANSWER: d 127. Figure: Price and Quantity 3
Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 4
The value of wasted resources at a quantity of 80 units is $: a. 800. b. 900. c. 600. d. 200. ANSWER: b 128. Why did Vernon Smith win the Nobel Prize in economics in 2002? a. He created the theory of supply and demand. b. He used laboratory experiments as a tool to confirm the theory of supply and demand. c. He was able to disprove the theory of supply and demand. d. This is a trick question, because Vernon Smith did not win the Nobel Prize. ANSWER: b 129. Laboratory experiments by Vernon Smith support: a. the supply and demand model's usefulness in predicting changes in a free market. b. a market equilibrium where the quantity supplied always exceeds the quantity demanded. c. a market equilibrium where the quantity demanded always exceeds the quantity supplied. d. suspicions that a market equilibrium does not exist in the real world. ANSWER: a 130. In Vernon Smith's supply and demand lab experiment: a. Smith knew the true demand and supply curves, but the subjects did not. Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 4 b. the subjects did not know their own willingness to pay or sell. c. it took a long time to arrive at equilibrium. d. there were many unrealized gains from trade. ANSWER: a 131. Vernon Smith tested the supply and demand model in the laboratory and found that: a. the results were not consistent with competitive price theory, as he expected. b. buyers and sellers quickly converged on the predicted equilibrium. c. the model may work in real life, but it does not work in the laboratory. d. the buyers with the lowest willingness to pay bought the goods. ANSWER: b 132. Which of these is a contribution of economist Vernon Smith? a. the idea of movements along the supply and demand curves b. the discovery of equilibrium price c. experimental evidence of equilibrium price d. the theory of demand shocks ANSWER: c 133. Before his pioneering experiments on market equilibrium, Vernon Smith believed that the market equilibrium concept: a. described reality. b. might describe reality. c. did not describe reality. d. may have described reality. ANSWER: c 134. Vernon Smith showed the market equilibrium concept to be: a. unrelated to experimental results. b. inconsistent with experimental results. c. consistent with experimental results. d. not testable in experimental settings. ANSWER: c 135. The September 11 terrorist attacks turned many people away from flying. The demand and supply model would predict which of these events in the airline travel market? a. The supply of airline travel would decrease, resulting in a higher equilibrium price and a lower equilibrium quantity. b. The supply of airline travel would increase, resulting in a lower equilibrium price and a higher equilibrium quantity. c. The demand for airline travel would decrease, resulting in a lower equilibrium price and a lower equilibrium quantity.
Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 4 d. The supply and demand for airline travel would decrease, resulting in a higher equilibrium price and a higher equilibrium quantity.
ANSWER: c 136. The COVID-19 pandemic caused many gyms to close down. The supply and demand model would predict which of these events in the gym membership market? a. The supply of gym memberships would decrease, resulting in a higher equilibrium price and a lower equilibrium quantity. b. The supply of gym memberships would increase, resulting in a lower equilibrium price and a higher equilibrium quantity. c. The demand for gym memberships would decrease, resulting in a lower equilibrium price and a lower equilibrium quantity. d. The demand for gym memberships would decrease, resulting in a lower equilibrium price and an uncertain change in equilibrium quantity.
ANSWER: a 137. The COVID-19 pandemic caused many consumers to be quarantined in their homes. The supply and demand model would predict which of these events in the market for craft supplies sold by online craft stores? a. The supply of craft supplies sold by online retailers would decrease, resulting in a higher equilibrium price and a lower equilibrium quantity. b. The supply of craft supplies sold by online retailers would increase, resulting in a lower equilibrium price and a higher equilibrium quantity. c. The demand for craft supplies sold by online retailers would increase, resulting in a higher equilibrium price and a higher equilibrium quantity. d. The demand for craft supplies sold by online retailers would decrease, resulting in a lower equilibrium price and a lower equilibrium quantity.
ANSWER: c 138. Brazilian rosewood is renowned for its tonal qualities and gorgeous figuring on acoustic guitars. However, Brazilian rosewood is now banned in the construction of new guitars. What will likely happen to the price of used Brazilian rosewood guitars over time? a. The price of used Brazilian rosewood guitars will increase because there will be a smaller supply of those guitars on the used market. b. The price of used Brazilian rosewood guitars will decrease as fewer people decide to sell their rosewood guitars. c. The price of used Brazilian rosewood guitars will increase at first and then decrease, since an increase in demand raises prices, causing people to buy less of the product. d. The price of used Brazilian rosewood guitars will increase as more people try to cash in by selling their increasingly rare rosewood guitars.
ANSWER: a 139. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 4
If the figures represent the market for a popular soda, which figure shows the effect of an increase in the price of a competing energy drink? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: c 140. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 4
If the figures represent the market for coffee, which figure shows the effect of an increase in the price of donuts, a complementary good to coffee? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: d 141. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 4
If the figures represent the market for wool sweaters, which figure shows the effect of an unseasonably warm winter? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: d 142. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 4
If these figures represent the market for blue jeans, which figure shows the effect of an increase in the price of denim, a raw material used to make jeans? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: a 143. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 4
If these figures represent the market for sourdough bread in a community, which figure shows the effect of new bakeries opening up in that community? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: b 144. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 4
If these figures represent the market for asparagus, which figure shows the effect of a new disease-resistant asparagus seed? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: b 145. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 4
If these figures represent the market for new cars, which figure shows the effect of an economic recession? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: d 146. Figure: Market Changes
Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 4
If these figures represent the market for gasoline-power cars, which figure shows the effect of an increase in concern about climate change among consumers? a. Figure A b. Figure B c. Figure C d. Figure D ANSWER: d 147. If the U.S. government reduces the number of Chinese-made bras that may be imported the: a. equilibrium price will increase and the equilibrium quantity will decrease. b. demand for bras will increase, leading to a lower equilibrium price. c. equilibrium price will increase and the equilibrium quantity will increase. d. equilibrium price will decrease, leading to a higher equilibrium quantity. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 4 148. Suppose the U.S. government increases the amount of steel that can be exported to foreign countries. What will happen in the domestic market for steel? a. The domestic supply of steel will decrease, leading to a higher equilibrium price. b. The domestic demand for steel will increase, leading to a lower equilibrium price. c. The domestic demand for steel will decrease, leading to a higher equilibrium price. d. The domestic supply of steel will increase, leading to a lower equilibrium price. ANSWER: a 149. Suppose the U.S. government increases the amount of steel that can be exported to foreign countries. What will happen in the domestic market for steel? a. The domestic supply of steel will decrease, leading to a higher equilibrium quantity. b. The domestic demand for steel will increase, leading to a lower equilibrium quantity. c. The domestic demand for steel will decrease, leading to a higher equilibrium quantity. d. The domestic supply of steel will increase, leading to a lower equilibrium quantity. ANSWER: b 150. Suppose a fungus wipes out the tomato crop in the southeast. What will happen in the tomato market? a. The supply of tomatoes will decrease, leading to a higher equilibrium price. b. The demand for tomatoes will increase, leading to a lower equilibrium price. c. The demand for tomatoes will decrease, leading to a higher equilibrium price. d. The supply of tomatoes will increase, leading to a lower equilibrium price. ANSWER: a 151. Suppose a fungus wipes out the tomato crop in the southeast. What will happen in the tomato market? a. The supply of tomatoes will decrease, leading to a higher equilibrium quantity. b. The demand for tomatoes will increase, leading to a lower equilibrium quantity. c. The demand for tomatoes will decrease, leading to a higher equilibrium quantity. d. The supply of tomatoes will increase, leading to a lower equilibrium quantity. ANSWER: b 152. Figure: Demand, Supply Shifts
In the figure, the initial demand curve is D1 and the initial supply curve is S1. If technological innovations lower Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 4 the costs of production, what will happen? a. D1 will shift to D3, and equilibrium price and equilibrium quantity will increase. b. S1 will shift to S2, and equilibrium price will increase but equilibrium quantity will decrease. c. D1 will shift to D2, and equilibrium price and equilibrium quantity will decrease. d. S1 will shift to S3, and equilibrium price will decrease but equilibrium quantity will increase. ANSWER: d 153. Figure: Demand, Supply Shifts
In the figure, the initial demand curve is D1 and the initial supply curve is S1. Suppose this depicts the market for corn. How does the market change when flooding in Iowa destroys a significant amount of the corn crop? a. S1 will shift to S2. b. D1 will shift to D2. c. S1 will shift to S3. d. There will be no change in supply or demand in the market for corn. ANSWER: a 154. Figure: Demand, Supply Shifts
In the figure, the initial demand curve is D1 and the initial supply curve is S1. If this depicts the equilibrium in the market for computer printers, what will happen when the price of computers increases? a. S1 will shift to S2. b. D1 will shift to D2. c. D1 will shift to D3. Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 4 d. S1 will shift to S3. ANSWER: b 155. Figure: Demand, Supply Shifts
In the figure, the initial demand curve is D1 and the initial supply curve is S1. Resource prices in this market increase; at the same time, the consumer population declines as migration causes an outflow of population to other regions. What happens to the supply curve and/or demand curve? a. S1 shifts to S2, but then shifts back to S1. D1 remains at D1. b. S1 shifts to S3, and D1 shifts to D2. c. S1 shifts to S2, and D1 shifts to D3. d. S1 shifts to S2, and D1 shifts to D2. ANSWER: d 156. Which of these would increase the demand for beef, a normal good? a. lower pork prices b. higher consumer income c. higher prices of feed grains used to feed beef cattle d. an increase in the price of beef ANSWER: b 157. Which of these would increase the demand for trout, a normal good? a. higher salmon prices b. an increase in trout fisheries c. new technology that makes catching trout easier d. an increase in the price of trout ANSWER: a 158. Suppose there is an increase in demand in a market and no change in supply. What will happen to the market equilibrium price and quantity? a. Equilibrium price will rise; equilibrium quantity will rise. b. Equilibrium price will rise; equilibrium quantity will fall. c. Equilibrium price will fall; equilibrium quantity will rise. Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 4 d. Equilibrium price will fall; equilibrium quantity will fall. ANSWER: a 159. Suppose there is a decrease in demand and no change in supply. What will happen to the market equilibrium price and quantity? a. Equilibrium price will rise; equilibrium quantity will rise. b. Equilibrium price will rise; equilibrium quantity will fall. c. Equilibrium price will fall; equilibrium quantity will rise. d. Equilibrium price will fall; equilibrium quantity will fall. ANSWER: d 160. An increase in supply and a decrease in demand occur in a market. What happens to the equilibrium price and quantity? a. The equilibrium price decreases; the change in the equilibrium quantity is uncertain. b. The equilibrium price decreases; the equilibrium quantity increases. c. The equilibrium price increases; the change in the equilibrium quantity is uncertain. d. The equilibrium price increases; the equilibrium quantity decreases. ANSWER: a 161. An increase in demand and a decrease in supply occur in a market. What happens to the equilibrium price and quantity? a. The equilibrium price decreases; the change in the equilibrium quantity is uncertain. b. The equilibrium price decreases; the equilibrium quantity increases. c. The equilibrium price increases; the change in the equilibrium quantity is uncertain. d. The equilibrium price increases; the equilibrium quantity decreases. ANSWER: c 162. An early frost in the vineyards of Napa Valley would cause a(n): a. increase in the demand for wine, increasing price. b. increase in the supply of wine, decreasing price. c. decrease in the demand for wine, decreasing price. d. decrease in the supply of wine, increasing price. ANSWER: d 163. After adjusting for inflation, a comparison of the price of leg warmers reveals that the price was significantly higher in the 1980s than it is today. Which of these can explain this? a. Since the 1980s jeans have become preferable to leg warmers, decreasing the demand for leg warmers. b. New regulation on the importing of leg warmers made abroad decreased the supply of leg warmers to the
United States. c. An increase in the price of cotton used to make leg warmers has led to a decrease in the price of leg warmers today. d. The expected increase in the price of yarn has led to a decrease in the price of leg warmers today.
Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 4 ANSWER: a 164. Which of these might explain why the price of DVD players has fallen? a. an increase in consumer income b. an increase in the availability of video streaming services c. a decrease in the price of DVDs d. an increase in the price of gasoline ANSWER: b 165. Which of these would cause the demand for televisions to decrease? a. an economic boom, which increases the amount that people are willing to spend on personal electronics b. an increase in the number of video streaming services that allow consumers to watch television programs on their cell phones and computers c. producers expecting that the future price of televisions will decrease
d. an increase in the wages offered to technicians producing televisions ANSWER: b 166. Which of these would NOT lead to a decrease in the price of domestic automobiles? a. an increase in the price of foreign-made automobiles b. an economic recession, which decreases consumer income c. a decrease in the wages paid to union auto workers d. an increase in the number of domestic automakers ANSWER: a 167. Immediately after a hurricane, it is likely that the quantity demanded for tree cutting/removal services will _____ the quantity supplied, causing the price of tree cutting/removal services to _____. a. equal; remain unchanged b. be less than; rise c. exceed; rise d. decrease; fall ANSWER: c 168. Figure: Supply-Driven Price Change
Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 4
When the supply curve shifts from S0 to S1, the equilibrium price rises to $: a. 12 and the equilibrium quantity falls to 70. b. 10 and the equilibrium quantity falls to 100. c. 12 and the equilibrium quantity falls to 40. d. 10 and the equilibrium quantity falls to 70. ANSWER: a 169. Five new sellers enter a market (that previously had seven) and begin producing a good. Which of these choices explains what happens to the equilibrium Q and P? a. The demand curve will shift to the right, and the equilibrium P and Q both will rise. b. The supply curve will shift to the right, the equilibrium P will fall, and the equilibrium Q will rise. c. The supply curve will shift to the left, the equilibrium P will fall, and the equilibrium Q will rise. d. The supply curve will shift to the right, the equilibrium P will rise, and the equilibrium Q will fall. ANSWER: b 170. In markets for manufactured goods, a new form of 3-D printing that lowers production costs will lead to a(n): a. increase in demand, a decrease in quantity demanded, and an increase in price. b. increase in supply, an increase in quantity demanded, and a decrease in price. c. decrease in demand, an increase in quantity supplied, and a decrease in price. d. increase in supply, an increase in quantity demanded, and an increase in price. ANSWER: b 171. If the government institutes a tax on suppliers of Cheesy-Poofs, the market for Cheesy-Poofs will see a(n): a. decrease in demand, a decrease in quantity supplied, and an increase in price. b. increase in supply, a decrease in quantity supplied, and an increase in price. c. decrease in supply, an increase in quantity demanded, and an increase in price. d. decrease in supply, a decrease in quantity demanded, and an increase in price. ANSWER: d 172. If online influencers promote vinyl records such that CDs fall in popularity relative to vinyls, what will happen to the market for CDs? Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 4 a. Demand will decrease, quantity demanded will decrease, and price will increase. b. Supply will decrease, quantity demanded will decrease, and price will decrease. c. Demand will decrease, quantity supplied will decrease, and price will decrease. d. Demand will decrease, quantity supplied will increase, and price will decrease. ANSWER: c 173. If the price of Netflix decreases, what will happen in the market for Hulu? a. Demand will decrease, quantity demanded will decrease, and price will increase. b. Supply will decrease, quantity demanded will decrease, and price will decrease. c. Demand will decrease, quantity supplied will decrease, and price will decrease. d. Demand will decrease, quantity supplied will increase, and price will decrease. ANSWER: c 174. If the price of ground beef increases, what will happen in the market for steak? a. Demand will increase, quantity supplied will increase, and price will increase. b. Supply will increase, quantity supplied will increase, and price will decrease. c. Demand will increase, quantity supplied will decrease, and price will decrease. d. Demand will decrease, quantity supplied will increase, and price will decrease. ANSWER: a 175. For most of human history, salt was a rare and valuable commodity that had to be either mined or extracted from the ocean through evaporation. This changed when modern chemistry allowed humans to produce it in factories. How did this development affect the market for salt? a. Demand increased, causing the price to rise. b. Demand increased, causing the price to fall. c. Supply increased, causing the price to rise. d. Supply increased, causing the price to fall. ANSWER: d 176. How did the spread of the Internet affect the market for newspapers? a. Demand increased, causing the price to rise. b. Demand decreased, causing the price to fall. c. Supply decreased, causing the price to rise. d. Supply increased, causing the price to fall. ANSWER: b 177. How did the spread of the Internet affect the market for news (regardless of source)? a. Demand increased, causing the price to rise. b. Demand decreased, causing the price to fall. c. Supply decreased, causing the price to rise. d. Supply increased, causing the price to fall. Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 4 ANSWER: d 178. If supply decreases and its slope remains the same, consumer surplus: a. increases. b. decreases. c. stays the same. d. cannot be determined given the information provided. ANSWER: b 179. If demand increases, what happens with the supply curve? a. The supply increases. b. The supply decreases. c. There is a movement rightward along the supply curve. d. There is a movement leftward along the supply curve. ANSWER: c 180. A(n) _____ causes the equilibrium price to _____ and equilibrium quantity to _____. a. decrease in supply; rise; fall b. decrease in demand; fall; rise c. increase in supply; rise; rise d. increase in demand; rise; fall ANSWER: a 181. An increase in demand causes a: a. temporary shortage at the old equilibrium price and a higher new equilibrium price and quantity. b. permanent shortage, leaving the equilibrium price and quantity unchanged. c. temporary surplus at the old equilibrium price and a lower equilibrium price and quantity. d. temporary shortage at the old equilibrium price, a higher new equilibrium price, and a lower new equilibrium quantity.
ANSWER: a 182. Which of these events will cause a decrease in the equilibrium price? a. a government tax on output b. a decrease in income for an inferior good c. an increase in the price of a substitute good d. lower input prices ANSWER: d 183. What can cause both equilibrium price and quantity to increase? a. an increase in the price of a complement good b. a decrease in the population c. consumer tastes becoming more favorable toward the good Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 4 d. an increase in the number of sellers ANSWER: c 184. What effect do computer chip sellers' expectations of falling chip prices in the coming months have on the current computer chip market? a. The supply of computer chips increases, pushing down the equilibrium price and quantity. b. The supply of computer chips increases, pushing down the equilibrium price and increasing the equilibrium quantity. c. The demand for computer chips increases, pushing down the equilibrium price and increasing the equilibrium quantity. d. The demand for computer chips decreases, pushing down the equilibrium price and increasing the equilibrium quantity.
ANSWER: b 185. What will happen in the market for cotton as a result of a severe drought? a. The demand for cotton will decrease, causing the equilibrium price to fall and equilibrium quantity to fall. b. The demand for cotton will increase, causing the equilibrium price to rise and equilibrium quantity to rise. c. The supply of cotton will decrease, causing the equilibrium price to fall and equilibrium quantity to fall. d. The supply of cotton will decrease, causing the equilibrium price to rise and equilibrium quantity to fall. ANSWER: d 186. Many car buyers use credit to purchase their new cars. What effect does a decrease in interest rates have on the market for new cars? a. The supply of new cars increases, decreasing the price of new cars. b. The supply of new cars decreases, increasing the price of new cars. c. The demand for new cars increases, increasing the price of new cars. d. The demand for new cars decreases, decreasing the price of new cars. ANSWER: c 187. Many home buyers use mortgages to purchase new homes. What effect does an increase in interest rates have on the market for new homes? a. The supply of new homes increases, decreasing the price of new homes. b. The supply of new homes decreases, increasing the price of new homes. c. The demand for new homes increases, increasing the price of new homes. d. The demand for new homes decreases, decreasing the price of new homes. ANSWER: d 188. Imagine a free market in equilibrium. After a sudden increase in demand (but before the price can adjust), the market experiences: a. a shortage. b. a surplus. c. no change. d. a new equilibrium. Copyright Macmillan Learning. Powered by Cognero.
Page 70
Name:
Class:
Date:
Chapter 4 ANSWER: a 189. Imagine a free market in equilibrium. After a sudden decrease in demand (but before the price can adjust), the market experiences: a. a shortage. b. a surplus. c. no change. d. a new equilibrium. ANSWER: b 190. Imagine a free market in equilibrium. After a sudden increase in supply (but before the price can adjust), the market experiences: a. a shortage. b. a surplus. c. no change. d. a new equilibrium. ANSWER: b 191. Imagine a free market in equilibrium. After a sudden decrease in supply (but before the price can adjust), the market experiences: a. a shortage. b. a surplus. c. its initial equilibrium. d. a new equilibrium. ANSWER: a 192. If demand increases, ceteris paribus, market price will be _____ at the new equilibrium point. a. higher b. lower c. the same d. either higher or lower ANSWER: a 193. Immediately following a decrease in the demand for a product, a _____ occurs, which puts _____ pressure on prices. a. surplus; upward b. surplus; downward c. shortage; upward d. shortage; downward ANSWER: b 194. Immediately following an increase in the demand for a product, a _____ occurs, which puts _____ pressure Copyright Macmillan Learning. Powered by Cognero.
Page 71
Name:
Class:
Date:
Chapter 4 on prices. a. surplus; upward b. surplus; downward c. shortage; upward d. shortage; downward ANSWER: c 195. Immediately following a decrease in the supply of a product, a _____ occurs, which puts _____ pressure on prices. a. surplus; upward b. surplus; downward c. shortage; upward d. shortage; downward ANSWER: c 196. Immediately following an increase in the supply of a product, a _____ occurs, which puts _____ pressure on prices. a. surplus; upward b. surplus; downward c. shortage; upward d. shortage; downward ANSWER: b 197. If demand decreases, ceteris paribus, market price will be _____ at the new equilibrium point. a. higher b. lower c. the same d. either higher or lower ANSWER: b 198. If supply increases, ceteris paribus, market price will be _____ at the new equilibrium point. a. higher b. lower c. the same d. either higher or lower ANSWER: b 199. If supply decreases, ceteris paribus, market price will be _____ at the new equilibrium point. a. higher b. lower c. the same Copyright Macmillan Learning. Powered by Cognero.
Page 72
Name:
Class:
Date:
Chapter 4 d. either higher or lower ANSWER: a 200. If demand increases, ceteris paribus, the quantity exchanged will be _____ at the new market equilibrium point. a. larger b. smaller c. the same d. either larger or smaller ANSWER: a 201. If demand decreases, ceteris paribus, the quantity exchanged will be _____ at the new market equilibrium point. a. larger b. smaller c. the same d. either larger or smaller ANSWER: b 202. If supply increases, ceteris paribus, the quantity exchanged will be _____ at the new market equilibrium point. a. larger b. smaller c. the same d. either larger or smaller ANSWER: a 203. If supply decreases, ceteris paribus, the quantity exchanged will be _____ at the new market equilibrium point. a. larger b. smaller c. the same d. either larger or smaller ANSWER: b 204. Figure: Supply and Demand 2
Copyright Macmillan Learning. Powered by Cognero.
Page 73
Name:
Class:
Date:
Chapter 4
What happens as a result of the change in demand in the diagram? a. a decrease in both the equilibrium price and the equilibrium quantity b. an increase in both the equilibrium price and the equilibrium quantity c. an increase in the equilibrium price and a decrease in the equilibrium quantity d. a decrease in the equilibrium price and an increase in the equilibrium quantity ANSWER: b 205. If market demand decreases equilibrium price: a. and quantity both will increase. b. and quantity both will decrease. c. will increase but equilibrium quantity will decrease. d. will decrease but equilibrium quantity will increase. ANSWER: b 206. If market supply increases equilibrium price: a. and quantity both will increase. b. and quantity both will decrease. c. will increase but equilibrium quantity will decrease. d. will decrease but equilibrium quantity will increase. ANSWER: d 207. If equilibrium price increases while equilibrium quantity decreases, then we know that market: a. demand has increased. Copyright Macmillan Learning. Powered by Cognero.
Page 74
Name:
Class:
Date:
Chapter 4 b. demand has decreased. c. supply has decreased. d. supply has increased. ANSWER: c 208. If equilibrium price decreases while equilibrium quantity increases, then we know that market: a. demand has increased. b. demand has decreased. c. supply has decreased. d. supply has increased. ANSWER: d 209. Following the release of a new study showing health benefits of drinking red wine, economists expect: a. a shortage of red wine until the price rises. b. a surplus of red wine until the price falls. c. that both the price and quantity of red wine will decrease. d. that the supply of red wine will increase immediately. ANSWER: a 210. After a hurricane in Florida destroys half of the orange crop, economists predict a(n): a. increase in both orange prices and orange sales. b. decrease in both orange prices and orange sales. c. increase in orange prices and a decrease in orange sales. d. decrease in orange prices and an increase in orange sales. ANSWER: c 211. Lower gasoline prices have led to an increase in the demand for large SUVs. Consequently, in the market for SUVs, economists are predicting a(n): a. increase in both the price and quantity of sales. b. decrease in both the price and quantity of sales. c. increase in the price of sales and a decrease in the quantity of sales. d. decrease in the price of sales and an increase in the quantity of sales. ANSWER: a 212. When supply decreases, there is a _____ at the old equilibrium price, which puts _____ pressure on price until the market reaches the new equilibrium. a. surplus; downward b. surplus; upward c. shortage; upward d. shortage; downward ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 75
Name:
Class:
Date:
Chapter 4 213. When demand increases, there is a _____ at the old equilibrium price, which puts _____ pressure on price until the market reaches the new equilibrium. a. surplus; downward b. surplus; upward c. shortage; upward d. shortage; downward ANSWER: c 214. Figure: Demand Shift
In the figure, the demand curve shifted from D0 to D1. To describe this movement, we would say that: a. demand increased, which caused an increase in supply. b. quantity demanded increased, which caused an increase in supply. c. demand increased, which caused an increase in quantity supplied. d. quantity demanded increased, which caused an increase in quantity supplied. ANSWER: c 215. Figure: Supply Shift
In the figure, the supply curve shifted from S0 to S1. To describe this movement, we would say that: a. demand decreased, which caused a decrease in supply. b. supply decreased, which caused a decrease in quantity demanded. c. supply decreased, which caused a decrease in demand. d. supply increased, which caused a decrease in quantity demanded. Copyright Macmillan Learning. Powered by Cognero.
Page 76
Name:
Class:
Date:
Chapter 4 ANSWER: b 216. Technological advances have increased the supply of digital cameras. As a result, the: a. demand for digital cameras will increase, putting downward pressure on the price of digital cameras. b. quantity demanded for digital cameras will increase. c. quantity supplied of digital cameras will increase, putting downward pressure on the price of digital cameras. d. demand and supply of digital cameras both will increase. ANSWER: b 217. When you move along a demand curve: a. only price is held constant. b. income and the price of the good are held constant. c. all non-price determinants of demand are held constant. d. all determinants of quantity demanded are held constant. ANSWER: c 218. When you move along a demand curve: a. only the price is held constant. b. there is a change in quantity demanded. c. there is a change in demand. d. all determinants of quantity demanded are held constant. ANSWER: b 219. When the supply curve shifts to the right: a. only the price is held constant. b. there is a decrease in supply. c. there is a change in quantity supplied. d. there is an increase in supply. ANSWER: d 220. When the demand curve shifts to the left: a. only the price is held constant. b. there is a decrease in demand. c. there is a change in quantity demanded. d. there is an increase in demand. ANSWER: b 221. A demand curve shows the relationship between: a. quantity demanded and quantity supplied, which are positively related. b. quantity demanded and quantity supplied, which are negatively related. c. price and quantity demanded, which are positively related. Copyright Macmillan Learning. Powered by Cognero.
Page 77
Name:
Class:
Date:
Chapter 4 d. price and quantity demanded, which are negatively related. ANSWER: d 222. When the price of a good decreases: a. the quantity demanded increases. b. demand increases. c. the quantity supplied increases. d. supply increases. ANSWER: a 223. When the price of a good increases, demand for the good will: a. increase. b. decrease. c. be unaffected. d. depend on the corresponding change in supply. ANSWER: c 224. Figure: Supply and Demand 3
Which of these statements applies to the diagram? a. An increase in supply causes an increase in quantity demanded. b. A decrease in supply causes an increase in quantity demanded. c. An increase in supply causes an increase in demand. d. A decrease in supply causes a decrease in demand. Copyright Macmillan Learning. Powered by Cognero.
Page 78
Name:
Class:
Date:
Chapter 4 ANSWER: a 225. An increase in the quantity supplied results in a: a. shift of the supply curve to the left. b. shift of the supply curve to the right. c. movement upward and to the right along the supply curve. d. movement downward and to the left along the supply curve. ANSWER: c 226. Figure: Four Panel 1
Copyright Macmillan Learning. Powered by Cognero.
Page 79
Name:
Class:
Date:
Chapter 4
Which of the four panels shows an increase in the quantity supplied? a. panel A b. panel B c. panel C d. panel D ANSWER: b 227. Figure: Four Panel 2 Copyright Macmillan Learning. Powered by Cognero.
Page 80
Name:
Class:
Date:
Chapter 4
Which of the four panels shows an increase in income on an inferior good? a. panel A b. panel B c. panel C d. panel D ANSWER: a 228. An increase in the demand for organic foods will lead to a(n): a. increase in the price, and hence an increase in the supply of organic foods. Copyright Macmillan Learning. Powered by Cognero.
Page 81
Name:
Class:
Date:
Chapter 4 b. increase in the price, and hence an increase in the quantity supplied of organic foods. c. decrease in the price, and hence a decrease in the supply of organic foods. d. decrease in the price, and hence a decrease in the quantity supplied of organic foods. ANSWER: b 229. What is the difference between a shift in the demand curve and a movement along the demand curve? a. A shift is a reaction to a movement along the demand curve. b. A shift implies a change in the whole demand curve; a movement does not. c. A shift conveys a change in the opportunity cost; a movement does not. d. A shift creates a new equilibrium price; a movement creates a new equilibrium quantity. ANSWER: b 230. What is the difference between a change in demand and a change in quantity demanded? a. A change in demand requires a movement along the demand curve; a change in quantity demanded does not. b. A change in demand shifts the entire curve; a change in quantity demanded means that the price changed. c. A change in quantity demanded means that consumer preferences have changed. d. A change in demand creates a new market equilibrium; a change in quantity demanded does not. ANSWER: b 231. Figure: Price and Quantity 4
If the figure depicts a market for an inferior good, which of these statements describes what could have happened? a. Consumer income increased, causing an increase in demand and an increase in supply. b. Consumer income decreased, causing an increase in demand and an increase in quantity supplied. c. The price of a substitute good increased, causing an increase in quantity demanded and an increase in Copyright Macmillan Learning. Powered by Cognero.
Page 82
Name:
Class:
Date:
Chapter 4 quantity supplied. d. Consumers expect lower future prices, causing an increase in demand and an increase in supply.
ANSWER: b 232. A technological innovation in the production of golf balls increases _____, causing the price to _____ and the _____. a. supply; fall; quantity demanded to increase b. the quantity supplied; fall; quantity demanded to increase c. supply; rise; demand to decrease d. supply; fall; demand to increase ANSWER: a 233. In the market for a normal good, an increase in income will cause an increase in _____, an increase in quantity _____, and a(n) _____ in price. a. demand; supplied; increase b. demand; supplied, decrease c. supply; demanded; decrease d. supply; demanded; increase ANSWER: a 234. Which choice explains how the OPEC crisis of 1973 affected oil prices? a. The supply of oil was reduced, leading to a rise in oil prices. b. The supply of oil was increased, leading to a fall in oil prices. c. The demand for oil increased, leading to a rise in oil prices. d. The demand for oil decreased, leading to a fall in oil prices. ANSWER: a 235. The Arab Oil Embargo of 1973 and the Iranian Revolution of 1979 affected oil prices by: a. increasing the demand for oil. b. reducing the supply of oil. c. reducing the demand for oil. d. increasing the supply of oil. ANSWER: b 236. Economic growth in China led to more Chinese people owning cars, which: a. increased demand for oil, causing oil prices to rise. b. decreased demand for oil, causing oil prices to rise. c. increased demand for oil but decreased supply, causing oil prices to increase rapidly. d. increased demand and supply of oil, causing oil prices to increase rapidly. ANSWER: a 237. When Asian countries went into a recession in 1997, the demand for oil _____ and the price of oil _____. Copyright Macmillan Learning. Powered by Cognero.
Page 83
Name:
Class:
Date:
Chapter 4 a. increased; increased b. decreased; increased c. decreased; decreased d. increased; decreased ANSWER: c 238. OPEC is able to raise oil prices by: a. increasing the demand for oil. b. decreasing the supply of oil by cutting production. c. decreasing transportation costs, a complement to oil. d. subsidizing the oil production of developing countries. ANSWER: b 239. In 1980, when Iraq attacked Iran, the price of oil _____ because of a(n) _____. a. increased; disruption in the supply of oil b. increased; decrease in the demand for oil c. fell; increased demand for oil d. fell; increased quantity of oil supplied ANSWER: a 240. Which statement MOST accurately explains the upward trend in the market price of oil between 2000 and 2014? a. The supply of oil has increased faster than the demand for oil has increased. b. Both the demand for and the supply of oil have decreased. c. The demand for oil has increased faster than the supply of oil has increased. d. The demand for oil has decreased while the supply of oil has increased. ANSWER: c 241. What effect did the 1997 East Asian recession in countries such as South Korea, Indonesia, and Thailand have on the oil market? a. The recession decreased income, made the world more dependent on oil, and increased oil demand and prices. b. The recession led to high unemployment and reduced the demand for driving and the supply of oil.
c. The recession decreased income and reduced the demand for oil and oil prices. d. The recession led to high unemployment, increased demand for Sunday driving, and increased oil prices. ANSWER: c 242. The growing economies of China and India have increased the demand for: a. oil, leading to higher oil prices in the early part of the twenty-first century. b. automobiles, leading to rising oil supplies and falling prices. c. automobiles, leading to a decrease in the supply of oil and rising oil prices. Copyright Macmillan Learning. Powered by Cognero.
Page 84
Name:
Class:
Date:
Chapter 4 d. oil, leading to lower oil prices in the early part of the twenty-first century. ANSWER: a 243. Figure: Four Panel 3
Which of the panels shows the effect of a negative supply shock? a. panel A b. panel B c. panel C d. panel D Copyright Macmillan Learning. Powered by Cognero.
Page 85
Name:
Class:
Date:
Chapter 4 ANSWER: d 244. Figure: Four Panel 3
Which of the panels shows the effect of a positive demand shock? a. panel A b. panel B c. panel C d. panel D ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 86
Name:
Class:
Date:
Chapter 4 245. Figure: Four Panel 3
Which of the panels shows the effect of a negative demand shock? a. panel A b. panel B c. panel C d. panel D ANSWER: a 246. The price of gasoline decreased dramatically in the summer of 2009. One likely reason for this change Copyright Macmillan Learning. Powered by Cognero.
Page 87
Name:
Class:
Date:
Chapter 4 was: a. a shortage in the supply of oil worldwide. b. riots in the Middle East that disrupted oil shipments. c. a decrease in the demand for gasoline brought on by the recession. d. strong economic growth in China that increased the demand for automobiles. ANSWER: c 247. Why is the world unlikely to ever literally run out of oil? a. There is an unlimited supply of oil. b. As the cheap-to-produce oil gets used up, the price of oil will rise, encouraging conservation and production using more expensive techniques. c. The demand for oil is not very high.
d. As the demand for oil increases, the quantity supplied increases as well. ANSWER: b 248. If scientists discover a new form of energy that cuts the cost of producing electricity to the equivalent of $10 a barrel, what will happen to the market for oil? a. The price of oil will rise because of the competition from the new energy source. b. The supply of oil will decrease because few suppliers can profitably produce oil at $10 a barrel. c. There will be no effect on the market for oil. d. Demand for oil will decrease over time since no one will pay more than $10 for a barrel of oil to produce energy.
ANSWER: d 249. The United Nations estimates that Earth's population growth rate will slow down by the year 2050, at which time population may start to decrease. If technological change allows the supply of oil to increase at a constant rate, and nothing else changes, what effect will a slowdown in population growth have on the price of oil? a. Demand will increase during this period, and the price of oil will continue to increase beyond 2050. b. Demand will increase more slowly during this period, but since supply is growing at a constant rate, the rate of price increase will fall, and ultimately the price of oil may begin to fall. c. Demand will increase, raising the quantity supplied. Since the quantity supplied will increase, the price must go down. d. The supply of oil will fall and prices will rise.
ANSWER: b 250. When there is a recession, the price of oil tends to fall because: a. people drive more during recessions while looking for employment. b. the supply of oil increases during a recession, due to technological change. c. the prices of substitutes for oil rise during recessions. d. incomes fall during a recession, and oil is a normal good. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 88
Name:
Class:
Date:
Chapter 4 251. Since improved technology continually lowers the cost of discovering and producing oil, how can rising oil prices in recent years be explained? a. This is evidence against the supply and demand model. b. Demand has increased more than supply has increased, raising prices. c. Prices always rise when supply shifts down and to the right. d. Oil is one of the few commodities that do not follow the supply and demand model. ANSWER: b 252. At the free market equilibrium, the quantity demanded minus the quantity supplied equals zero. a. True b. False ANSWER: a 253. The price of professional sports tickets is high; therefore, you should blame the owners for taking advantage of the fans, not the other buyers for outbidding you. a. True b. False ANSWER: b 254. A market shortage can be defined as a situation in which the quantity supplied in a market is greater than the quantity demanded, at the given price. a. True b. False ANSWER: b 255. A market surplus can be defined as a situation in which the quantity demanded in a market is less than the quantity supplied, at the given price. a. True b. False ANSWER: a 256. At the equilibrium price, quantity demanded is equal to quantity supplied. a. True b. False ANSWER: a 257. Surpluses drive price up while shortages drive price down. a. True b. False ANSWER: b 258. A shortage will occur at any price below equilibrium price, and a surplus will occur at any price above equilibrium price. Copyright Macmillan Learning. Powered by Cognero.
Page 89
Name:
Class:
Date:
Chapter 4 a. True b. False ANSWER: a 259. When a shortage occurs, the market price increases. a. True b. False ANSWER: a 260. When the market price is above the equilibrium, the price will increase over time. a. True b. False ANSWER: b 261. The equilibrium price and quantity are the only price and quantity that are stable in a free market. a. True b. False ANSWER: a 262. If the equilibrium price is achieved, all willing demanders become buyers. a. True b. False ANSWER: b 263. A shortage occurs when consumers want to buy more goods than sellers are making available. a. True b. False ANSWER: a 264. With an equilibrium price of $10, a price of $10.99 would create an excess supply. a. True b. False ANSWER: a 265. With an equilibrium price of $7, a price of $6.45 would create a shortage. a. True b. False ANSWER: a 266. In a free market, the market moves to an equilibrium because buyers compete against sellers to get the lowest possible prices. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 90
Name:
Class:
Date:
Chapter 4 b. False ANSWER: b 267. In a competitive market, sellers compete with other sellers. a. True b. False ANSWER: a 268. In a competitive market, buyers compete with sellers. a. True b. False ANSWER: b 269. In a market diagram, demand and supply cross each other at the equilibrium point. a. True b. False ANSWER: a 270. The equilibrium price is unstable because sellers have an incentive to lower their price to sell more goods. a. True b. False ANSWER: b 271. The free market maximizes the gains from trade, producing the level of output that maximizes consumer surplus plus producer surplus. a. True b. False ANSWER: a 272. In a free market equilibrium, the gains from trade are always greater for consumers than for producers. a. True b. False ANSWER: b 273. The sum of consumer and producer surplus increases when producers sell more than the market equilibrium quantity. a. True b. False ANSWER: b 274. If market transactions equal the equilibrium quantity, there may still be unexploited gains from trade. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 91
Name:
Class:
Date:
Chapter 4 b. False ANSWER: b 275. In a free market, gains from trade are maximized when people act in their own self-interest. a. True b. False ANSWER: a 276. If the equilibrium quantity in a market is 200, resources will be wasted and society made poorer if 250 units are produced. a. True b. False ANSWER: a 277. Free markets maximize consumer plus producer surplus regardless of the level of competition. a. True b. False ANSWER: b 278. The government must subsidize firms to ensure that there are no unexploited gains from trade. a. True b. False ANSWER: b 279. At the free market equilibrium, there are no unexploited gains from trade. a. True b. False ANSWER: a 280. At the competitive market equilibrium, the buyers who purchase the product have the highest willingness to pay. a. True b. False ANSWER: a 281. If firms produce a quantity that is greater than the equilibrium quantity, then unexploited gains from trade exist. a. True b. False ANSWER: b 282. In order for the gains of trade to be maximized, everyone whose willingness to pay for the good is greater than zero must receive it. Copyright Macmillan Learning. Powered by Cognero.
Page 92
Name:
Class:
Date:
Chapter 4 a. True b. False ANSWER: b 283. Economic experiments suggest that the real world closely follows theoretical supply and demand. a. True b. False ANSWER: a 284. Vernon Smith, Nobel Prize–winning economist, revolutionized economics by testing the model of demand and supply in experimental settings. a. True b. False ANSWER: a 285. If a frost destroys half of the orange crop in Florida, the equilibrium price of oranges will rise. a. True b. False ANSWER: a 286. The government plans to increase cigarette taxes in six months. Since consumers should expect the future price of cigarettes to increase, the current demand for cigarettes will increase, and the price of cigarettes will rise even before the tax is implemented. a. True b. False ANSWER: a 287. When the demand curve shifts, equilibrium price and quantity exchanged move in opposite directions. a. True b. False ANSWER: b 288. An increase in the wages of fruit pickers will ultimately lead to a decrease in the supply of fruit and hence an increase in the price of fruit. a. True b. False ANSWER: a 289. A decrease in demand for a good will lead to a decrease in the price of the good, but an increase in the quantity supplied. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 93
Name:
Class:
Date:
Chapter 4 ANSWER: b 290. The equilibrium price will increase if demand and supply both increase by equal amounts. a. True b. False ANSWER: b 291. The equilibrium quantity will increase if demand and supply both increase by equal amounts. a. True b. False ANSWER: a 292. An increase in supply causes a temporary surplus at the old equilibrium price. a. True b. False ANSWER: a 293. An increase in supply raises the equilibrium price and increases the equilibrium quantity. a. True b. False ANSWER: b 294. Oil increased in price from around $20 a barrel in 1997 to over $80 per barrel in 2014. A possible explanation for this increase is that demand increased faster than supply increased. a. True b. False ANSWER: a 295. There is no difference between saying that there is a change in supply and saying that there is a change in the quantity supplied. a. True b. False ANSWER: b 296. An increase in the quantity supplied causes the supply curve to shift down and to the right. a. True b. False ANSWER: b 297. An increase in the price of a good will decrease demand for that good. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 94
Name:
Class:
Date:
Chapter 4 ANSWER: b 298. An increase in quantity demanded is a shift in the entire demand curve. a. True b. False ANSWER: b 299. An increase in quantity demanded is a movement along a fixed demand curve caused by a shift in the supply curve. a. True b. False ANSWER: a 300. An increase in demand causes an increase in quantity supplied, which causes a decrease in price. a. True b. False ANSWER: b 301. A decrease in supply raises the price of a good, but it also decreases the quantity demanded, which lowers the price of a good. The net effect on price is ambiguous. a. True b. False ANSWER: b 302. There is a positive relationship between price and quantity demanded. a. True b. False ANSWER: b 303. There is a positive relationship between price and quantity supplied. a. True b. False ANSWER: a 304. An increase in the price of granite would result in a decrease in the demand for granite countertops. a. True b. False ANSWER: b 305. An increase in the price of corn will lead to a decrease in the demand for corn. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 95
Name:
Class:
Date:
Chapter 4 ANSWER: b 306. A decrease in the supply of milk will lead to a decrease in the quantity demanded of milk. a. True b. False ANSWER: a 307. The formation of the Organization of the Petroleum Exporting Countries (OPEC) made it easier for these oil-producing countries to act together and successfully limit the supply of oil, thus raising prices. a. True b. False ANSWER: a 308. Economic growth in China and India has reduced the world supply of oil. a. True b. False ANSWER: b 309. War in the Middle East tends to cause a decrease in the world supply of oil. a. True b. False ANSWER: a 310. A market can be described by the equations Qd = 100 − P and Qs = −20 + P. Calculate the equilibrium price and quantity in this market. ANSWER: When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price:
We can now use this equilibrium price to find the equilibrium quantity in the market:
Therefore, the equilibrium price is $60 and the equilibrium quantity (supplied and demanded since they have to be equal in equilibrium) is 40 units.
311. A market can be described by the equations Qd = 60 − 6P and Qs = 4P. Calculate the equilibrium price and quantity in this market. ANSWER: When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price:
Copyright Macmillan Learning. Powered by Cognero.
Page 96
Name:
Class:
Date:
Chapter 4
We can now use this equilibrium price to find the equilibrium quantity in the market:
Therefore, the equilibrium price is $6 and the equilibrium quantity (supplied and demanded since they have to be equal in equilibrium) is 24 units.
312. The quantity demanded for wireless computer mouses is Qd = 500 − 1.75P, and the quantity supplied is Qs = 450 + 0.25P. a. Calculate the equilibrium price and quantity. b. Is total surplus maximized at 440 mouses? Explain. c. If the market price is currently $10, is there a shortage or surplus of mouses? How do you know? d. If the market price is $40, is there a shortage or surplus of mouses? How do you know? ANSWER: a. When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price: Qd=Qs 500-1.75P=450+0.25P 50=2P P=$25 We can use this equilibrium price to find the equilibrium quantity in the market: Qd=500-1.75P=500-1.7525=500-43.75=456.25 Qs=450+0.25P=450+0.2525=450+6.25=456.25 Therefore, the equilibrium price is $25 and the equilibrium quantity (supplied and demanded since they have to equal in equilibrium) is 456.25 mouses. b. Total surplus is not maximized at 440 mouses. For total surplus to be maximized, supply and demand must be in equilibrium. Since 440 is below the market equilibrium, total surplus is not maximized. c. If the market price per mouse is currently $10, then there is a shortage of mouses. This is because the market price of $10 is less than the equilibrium price of $25 per mouse. This results in greater quantity demanded than quantity supplied, resulting in a shortage. d. If the market price per mouse is $40, then there is a surplus of mouses. This is because the market price of $40 is greater than the equilibrium price of $25 per mouse. This results in greater quantity supplied than quantity demanded, resulting in a surplus.
313. A market can be described by the equations Qd = 100 − P and Qs = −20 + P. At a price of $40, will this market experience a shortage or a surplus, and what is the amount of this shortage or surplus? ANSWER: When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price:
We can now use this equilibrium price to find the equilibrium quantity in the market:
Therefore, the equilibrium price is $60 and the equilibrium quantity (supplied and demanded since they have to be equal in equilibrium) is 40 units. At a market price of $40 per unit, the market will experience a shortage since the market price is below the equilibrium Copyright Macmillan Learning. Powered by Cognero.
Page 97
Name:
Class:
Date:
Chapter 4 price. At $40 per unit:
Therefore, at a price of $40 per unit, the quantity demanded will be 60 units, and the quantity supplied will be 20 units, resulting in a shortage of 40 units.
314. A market can be described by the equations Qd = 200 − 3P and Qs = −50 + 2P. At a price of $40, will this market experience a shortage or a surplus, and what is the amount of this shortage or surplus? ANSWER: When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price:
We can now use this equilibrium price to find the equilibrium quantity in the market:
Therefore, the equilibrium price is $50 and the equilibrium quantity (supplied and demanded since they have to be equal in equilibrium) is 50 units. At a market price of $40 per unit, the market will experience a shortage since the market price is below the equilibrium price. At $40 per unit:
Therefore, at a price of $40 per unit, the quantity demanded will be 80 units, and the quantity supplied will be 30 units, resulting in a shortage of 50 units.
315. A market can be described by the equations Qd = 300 − 4P and Qs = 6P. At a price of $40, will this market experience a shortage or a surplus, and what is the amount of this shortage or surplus? Will this market return to equilibrium? Why or why not? ANSWER: When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price:
We can now use this equilibrium price to find the equilibrium quantity in the market:
Therefore, the equilibrium price is $30 and the equilibrium quantity (supplied and demanded since they have to be equal in equilibrium) is 180 units. At a market price of $40 per unit, the market will experience a surplus since the market price is above the equilibrium price. At $40 per unit:
Copyright Macmillan Learning. Powered by Cognero.
Page 98
Name:
Class:
Date:
Chapter 4
Therefore, at a price of $40 per unit, the quantity demanded will be 140 units, and the quantity supplied will be 240 units, resulting in a surplus of 100 units. This market will eventually return to equilibrium as competition among sellers will push prices back down to $30 per unit.
316. In the long run, will the market price for a good/service always equal the equilibrium price? Explain why or why not. ANSWER: In the long run, market price for a good/service always equals the equilibrium price. If there is a shortage, due to a market price below the equilibrium price, competition among buyers will eventually push the price up toward the equilibrium price. If there is a surplus, due to a market price above the equilibrium price, competition among sellers will eventually push the price down toward the equilibrium price.
317. A free market can be described by the equations Qd = 100 − P and Qs = −20 + P. What are the equilibrium conditions in this market (i.e., find equilibrium P and Q), and what are the maximum gains from trade in this market? ANSWER: When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price:
We can now use this equilibrium price to find the equilibrium quantity in the market:
Therefore, the equilibrium price is $60 and the equilibrium quantity (supplied and demanded since they have to be equal in equilibrium) is 40 units. The maximum gains from trade are $1,600:
318. A free market can be described by the equations Qd = 180 − 3P and Qs = −50 + 2P. What are the equilibrium conditions in this market (i.e., find equilibrium P and Q), and what are the maximum gains from trade in this market? ANSWER: When the supply and demand are in equilibrium, quantity demanded equals quantity supplied. Thus, we set the two equations equal to one another and solve for the equilibrium price:
We can now use this equilibrium price to find the equilibrium quantity in the market:
Therefore, the equilibrium price is $46 and the equilibrium quantity (supplied and demanded since they have to be equal in equilibrium) is 42 units. Copyright Macmillan Learning. Powered by Cognero.
Page 99
Name:
Class:
Date:
Chapter 4 The maximum gains from trade are $735:
319. Consider the market for electric guitars, a normal good. Use well-labeled supply and demand diagrams to illustrate the effects of these events on the market for electric guitars. a. Consumer income increases. b. The price of wood increases. c. The price of electric amplifiers decreases. d. There is a decrease in the price of bass guitars, a substitute for electric guitars. e. The government eliminates taxes on the producers of electric guitars. f. Many new electric guitar companies are started by an influx of immigrants. ANSWER: a. Demand increases. b. Supply decreases. c. Demand increases. d. Demand decreases. e. Supply increases. f. Supply increases.
320. Suppose the price of oil is falling due to a drop-off in demand after the summer driving season. Explain what a group of oil-producing nations (like OPEC) that control a significant amount of the world's oil supplies could do to keep prices (and hence profits) high. ANSWER: A group of oil-producing nations, such as OPEC, that control a significant amount of the world's oil supplies could restrict supply to keep prices and profits high. This reduction in supply would be seen as a leftward shift of the supply curve, increasing prices while decreasing equilibrium quantity.
321. Draw a market demand curve and market supply curve for automobiles and label these curves D1 and S1, respectively. (Be sure to label all axes!) On the same graph, show what would happen if the auto workers union required all manufacturers of automobiles to now provide health insurance for ALL workers and their dependents. (Note: Assume that prior to this change, manufacturers of automobiles do NOT provide health insurance coverage to 100 percent of their employees and/or their dependents.) What do you expect to happen to the price of automobiles as a result of this change in union policy? ANSWER: This new requirement would raise costs of production for the automobile manufacturers, thus shifting the supply curve leftward, reducing the supply of automobiles. This would result in the equilibrium price of automobiles to increase and the equilibrium quantity to decrease.
322. After the financial crisis in 2007–2009, new rules and regulations regarding mortgage lending made it more difficult for many families to purchase a home. Draw a supply and demand graph illustrating the impact of these new, harsher, mortgage-lending laws on the rental housing market. Predict what will happen to the price of rental housing as a result of these new laws. ANSWER: This would result in an increase in demand in the rental housing market. Rental housing is a substitute for purchasing a home. Since purchasing a home became more difficult and more expensive for families, families will switch over to renting, which will increase demand in the rental housing market. This will result in an increase in price in the rental housing market.
323. Explain why an increase in demand for a good does not lead to an increase in supply. What does an increase in the demand for a good lead to? ANSWER: An increase in demand does not lead to an increase in supply but rather movement up a supply curve. This means that an increase in demand results in an increase in quantity supplied. This, in turn, also results in an increase in Copyright Macmillan Learning. Powered by Cognero.
Page 100
Name:
Class:
Date:
Chapter 4 equilibrium price.
324. What is the difference between a "change in demand" and a "change in quantity demanded"? Graph your answer. ANSWER: A change in demand is a shift in the demand curve. A leftward shift is a decrease in demand, and a rightward shift is an increase in demand. This is a change in quantity demanded at every price point. Change in quantity demanded is just movement along a demand curve, which is affected by change in price. An increase in price results in movement up a demand curve (going backward, as in less quantity will be demanded) and a decrease in price results in movement down a demand curve (going forward, as in more quantity will be demanded). Remember, demand curves are downward sloping.
325. Figure: Demand-Driven Price Change
When the demand curve shifts from D0 to D1, the equilibrium price rises to $: a. 9 and the equilibrium quantity rises to 120. b. 9 and the equilibrium quantity rises to 160. c. 8 and the equilibrium quantity rises to 140. d. 8 and the equilibrium quantity rises to 160. ANSWER: c
Copyright Macmillan Learning. Powered by Cognero.
Page 101
Name:
Class:
Date:
Chapter 5 1. Which statement is TRUE? a. A price ceiling is the minimum price allowed by law. b. An increase in market demand does not lead to an increase in quantity supplied under a price ceiling. c. A shortage occurs whenever the price is set above the equilibrium price. d. When quantity supplied exceeds quantity demanded, the market experiences a shortage. ANSWER: b 2. A price ceiling is a(n): a. legally established minimum price that can be charged for a good. b. illegally established minimum price that can be charged for a good. c. legally established maximum price that can be charged for a good. d. illegally established maximum price that can be charged for a good. ANSWER: c 3. Price ceilings create five important effects: a. shortages, reductions in product quality, wasteful lines, a loss of gains from trade, and a misallocation of resources. b. surpluses, increases in product quality, search costs, gains from trade, and resource attrition.
c. excess demand, long lines, poor service, efficiency, and arbitrage. d. shortages, reduced time costs, low vacancy rates, blat, and deadweight loss. ANSWER: a 4. A legal maximum price at which a good can be sold is a price: a. stabilization. b. ceiling. c. support. d. floor. ANSWER: b 5. A price ceiling creates a _____ when it is set _____ the equilibrium price. a. surplus; below b. surplus; above c. shortage; below d. shortage; above ANSWER: c 6. Figure: Price Ceiling
Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 5
When the government institutes a price ceiling of $10, consumers are able to buy how many units of the product? a. 290 units b. 310 units c. 270 units d. 40 units ANSWER: c 7. Figure: Price Ceiling
A price ceiling of $10 results in a: a. shortage of 270 units. b. shortage of 40 units. c. surplus of 270 units. d. surplus of 40 units. ANSWER: b 8. Figure: Price Ceiling
Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 5
If the government set a price ceiling at $12, there would be a: a. shortage of 50 units. b. surplus of 40 units. c. shortage of 0 units. d. surplus of 20 units. ANSWER: c 9. What is NOT an effect of a price ceiling? a. surpluses b. misallocation of resources c. loss of gains from trade d. wasteful lines ANSWER: a 10. When the maximum legal price is below the market price, we say that there is a price: a. floor. b. stabilization. c. support. d. ceiling. ANSWER: d 11. Economists call the maximum legal price a price ceiling because the price: a. cannot legally go lower than the ceiling. b. cannot legally go higher than the ceiling. c. must match the legally established ceiling price. d. All of these answers are correct. ANSWER: b 12. Price ceilings would create all of these effects EXCEPT: a. shortages. b. reductions in product quality. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 5 c. a misallocation of resources. d. maximum gains from trade. ANSWER: d 13. Figure: Price Controls
Which price control would cause a shortage of 20 units of the good? a. a price ceiling of $10 b. a price floor of $10 c. a price ceiling of $6 d. a price floor of $6 ANSWER: c 14. Figure: Price Controls
If the government imposes a price ceiling in this market at a price of $6, the result will be a: a. surplus of 20 units. b. surplus of 10 units. c. shortage of 20 units. d. shortage of 10 units. ANSWER: c 15. A price ceiling: a. is a maximum price allowed by law. Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 5 b. is a minimum price allowed by law. c. has an effect only when it is set above the market price. d. has little effect on market activity. ANSWER: a 16. When the maximum legal price is set below the market price: I. a price floor is in effect. II. a shortage will develop. III. there will be lost gains from trade. IV. there will be no impact on the quantity demanded or supplied. a. I and II only b. I, II, and III only c. II and III only d. IV only ANSWER: c 17. Price ceilings do not have much effect: a. in times of high inflation. b. ever. c. when market prices are at or below the ceiling. d. in nonmarket economies. ANSWER: c 18. When a price ceiling is in effect: a. suppliers get too strong a signal from demanders about their needs. b. demanders have no incentive to signal their needs to suppliers. c. all demander needs are met at the lower price, so there is no need to signal anything to suppliers. d. demanders cannot signal their needs to suppliers. ANSWER: d 19. In ancient Egypt, the Bronze Law set maximum prices for wages, preventing them from rising above what rulers perceived as the minimum needed to survive. If this was $0.10 a day for a porter (someone who carries things short distances) and the market wage was $0.08 a day, which would be a plausible consequence of this law? a. Porters would travel less quickly than they otherwise would. b. Porters would transport items they normally would not. c. Unemployment for porters would decrease. d. Nothing unusual would happen. ANSWER: d 20. In the case of a binding price ceiling, the price paid in the market will be: a. more than the free-market equilibrium price. Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 5 b. less than the free-market equilibrium price. c. equal to the free-market equilibrium price. d. unable to be compared with the free-market equilibrium price. ANSWER: b 21. In the case of a nonbinding price ceiling, the price paid in the market will be: a. more than the free-market equilibrium price. b. less than the free-market equilibrium price. c. equal to the free-market equilibrium price. d. unable to be compared with the free-market equilibrium price. ANSWER: c 22. A binding price ceiling leads to a(n): a. shortage. b. surplus. c. equilibrium quantity. d. quantity of zero units. ANSWER: a 23. A nonbinding price ceiling leads to a(n): a. shortage. b. surplus. c. equilibrium quantity. d. quantity of zero units. ANSWER: c 24. Under a binding price ceiling, one expects the quality of a good to: a. rise. b. remain the same. c. fall. d. change in an indeterminate direction. ANSWER: c 25. When a price ceiling is in effect, quantity _____ will be greater than quantity _____, creating a _____. a. supplied; demanded; surplus b. demanded; supplied; shortage c. supplied; demanded; shortage d. demanded; supplied; surplus ANSWER: b 26. If quantity supplied equals 85 units and quantity demanded equals 80 units under a price control, then it is a: Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 5 a. binding price ceiling. b. binding price floor. c. nonbinding price ceiling. d. nonbinding price floor. ANSWER: b 27. Figure: Government Price Controls
The government enacts a price control, causing a shortage of 15 units of the good. Therefore, the price _____ is set at _____. a. floor; $31 b. floor; $17 c. ceiling; $10 d. ceiling; $17 ANSWER: c 28. Figure: Government Price Controls
If the government sets the price ceiling at $31, there will be: a. a shortage of 15 units. b. a surplus of 15 units. c. a supply of 20 units. d. no effect on the market. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 5 29. Figure: Price Restrictions
The city of Cherryville sets a price ceiling of $11 on restaurant meals in the city. The effect of the price ceiling is: a. a shortage of 60 units. b. an equilibrium at 65 units. c. a surplus of 60 units. d. 100 units sold in the market. ANSWER: b 30. Figure: Price Restrictions
Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 5
The city of Cherryville sets a price ceiling of $8 on restaurant meals in the city. The effect of the price ceiling is: a. a shortage of 60 units. b. an equilibrium at 65 units. c. a surplus of 60 units. d. 100 units sold in the market. ANSWER: a 31. Figure: Price Restrictions
Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 5
The city of Cherryville sets a price ceiling of $8 on restaurant meals in the city. Which areas reflect the time waiting in line? a. abd b. bd c. dh d. ce ANSWER: b 32. Figure: Price Restrictions
Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 5
The city of Cherryville sets a price ceiling of $8 on restaurant meals in the city. Which areas reflect the lost gains from trade? a. abd b. bd c. dh d. ce ANSWER: d 33. Figure: Price Restrictions
Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 5
The city of Cherryville sets a price ceiling of $8 on restaurant meals in the city. Which area(s) reflect(s) the lost consumer surplus from the price ceiling? a. abd b. ce c. c d. e ANSWER: c 34. Figure: Price Restrictions
Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 5
The city of Cherryville sets a price ceiling of $8 on restaurant meals in the city. Which area(s) reflect(s) the lost producer surplus from the price ceiling? a. abd b. ce c. c d. e ANSWER: d 35. Which statements are true? I. Price controls eliminate competition. II. Price controls make consumers wait in line for a good, which is more efficient than paying bribes. III. Price controls suggest that paying bribes is more efficient than waiting in line for a good. IV. Price controls make consumers wait in line until the time spent plus the price of the good is equal in value to the value of the good itself. a. I, II, and IV only b. I and II only c. I, III, and IV only d. I and IV only ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 5 36. At a price ceiling of $6 per sheet of drywall, quantity demanded is 100 and quantity supplied is 75. What will happen in the drywall market if there is an increased demand for drywall in the construction industry? a. Equilibrium will be restored. b. The shortage of drywall will fall below 25 units. c. The shortage of drywall will increase above 25 units. d. The surplus of drywall will increase above 25 units. ANSWER: c 37. The lower the price ceiling is relative to the market equilibrium price, the: a. larger the surplus. b. smaller the surplus. c. smaller the shortage. d. larger the shortage. ANSWER: d 38. A shortage results when: a. a price floor is imposed. b. a price ceiling is imposed. c. there is excess supply without any price controls. d. a price floor is imposed but it is not binding. ANSWER: b 39. Shortages occur when prices are held below the market price, causing the quantity demanded to exceed the quantity supplied. This is a result of price: a. floors. b. ceilings. c. gouging. d. competition. ANSWER: b 40. Setting the maximum legal price above the market price will cause: a. a shortage to develop. b. the market to reach an equilibrium outcome. c. quantity supplied to exceed quantity demanded. d. market inefficiencies. ANSWER: b 41. Price controls instituted by President Nixon in 1971: a. generated shortages in the markets for construction, wool, oil, steel bars, toilets, jeans, and other products. b. generated shortages, which were confined mostly to just the markets for gasoline and oil. c. were able to control inflation by 1973. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 5 d. were set above the equilibrium price and so made little impact. ANSWER: a 42. Mobile homes are housing units installed on a permanent foundation owned by a landlord. Although a resident owns the home, they rent the foundation from the landlord. In theory, owners of mobile homes can transfer their home to a different foundation if the rent becomes too steep, but uninstalling, transporting, and reinstalling the mobile home is usually prohibitively expensive. This "lock-in" effect encourages state legislatures to create rent controls for mobile home foundations. Which statement describes a plausible, unintended consequence of these laws? a. The price of mobile homes is artificially low. b. There are few new mobile home foundations constructed. c. The price of transporting mobile homes is artificially high. d. There are few new buyers of mobile homes. ANSWER: b 43. Figure: Misallocation of Resources
The government sets a price ceiling of $6 in the market. What is the quantity that will be traded in the market Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 5 after the price ceiling is enacted? a. 400 b. 1,200 c. 900 d. 0 ANSWER: c 44. Figure: Misallocation of Resources
The government sets a price ceiling of $4 in the market. The portion of the demand curve that will be satisfied is line _____. a. AB b. AH c. AM d. BH ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 5 45. Figure: Misallocation of Resources
The government sets a price ceiling of $4 in the market. The portion of the demand curve that would purchase the good if the price were determined by the market is line _____. a. AB b. AH c. AM d. BH ANSWER: b 46. Figure: Misallocation of Resources
Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 5
The government sets a price ceiling of $4 in the market. The portion of the demand curve from point A to point B represents the consumers with a _____. a. high valuation of the good b. low valuation of the good c. low valuation of the good who will not purchase it d. high valuation of the good who will not purchase it ANSWER: a 47. Figure: Misallocation of Resources
Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 5
The government sets a price ceiling of $4 in the market. The consumer surplus earned when the price ceiling is enacted is area: a. AFH. b. ABCD. c. ABJI. d. IJL. ANSWER: c 48. Figure: Misallocation of Resources
Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 5
The government sets a price ceiling of $4 in the market. If the good then is randomly assigned to willing buyers, the loss due to random allocation is area: a. AFH. b. ABDC. c. ABJI. d. IJL. ANSWER: b 49. Figure: Misallocation of Resources
Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 5
The government sets a price ceiling of $4 in the market. If the good then is randomly assigned to willing buyers, the consumer surplus after random allocation is area: a. CDJI. b. ABDC. c. ABJI. d. IJL. ANSWER: a 50. Because of government price controls, a business must now sell soft-serve ice cream at half its original price. This business might respond by: a. offering smaller servings of ice cream. b. skimping on toppings of nuts, fudge sauce, and cherries. c. reducing hours of operation. d. All of the answers are correct. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 5 51. The price controls of the early 1970s caused: a. lead to be removed from gasoline. b. the disappearance of the full-service gas station. c. gas stations to stay open for more hours. d. an excess supply of gasoline. ANSWER: b 52. Why do you think full-service gas stations have largely disappeared across the United States? a. because the government has issued a ban on such gas stations b. because of price controls on gasoline that were issued in 1973 c. because consumers demanded that they should be allowed to pump gas themselves d. None of the answers is correct. ANSWER: b 53. If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, a likely result will be a(n): a. increase in the quantity supplied of the product. b. increase in the price of the product. c. decrease in the quality of the product. d. further decrease in the price of the product. ANSWER: c 54. If a seller facing excess demand is unable to raise the price of the good due to a price ceiling, the seller might: a. increase the quantity supplied of the product. b. decrease the price of the product. c. increase the quality of the product. d. decrease the level of service for that product. ANSWER: d 55. Figure: Price Controls
Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 5
P* represents a price control enacted by the government. Which figure shows an effective price ceiling? a. Figure A b. Figure B c. Figure C d. Figures A and B ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 5 56. Figure: Price Controls
P* represents a price control enacted by the government. Which figure shows an ineffective price ceiling? a. Figure A only b. Figure B only c. Figure C only Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 5 d. Figures A and B ANSWER: d 57. In situations of excess demand, sellers might lower quality when they are unable to raise prices because they wish to: a. reduce excess demand. b. raise their profit levels. c. decrease surpluses. d. raise their sales. ANSWER: b 58. In situations of excess demand, sellers might decrease service levels when they are unable to raise prices because they wish to: a. reduce excess demand. b. decrease surpluses. c. raise their profit levels. d. raise their sales. ANSWER: c 59. Price ceilings set by the government: a. are desirable because they make markets more efficient. b. can restore a market to equilibrium. c. are generally believed to cause reductions in product quality. d. are imposed to assist the poor without having adverse effects. ANSWER: c 60. Price ceilings reduce quality because: a. buyers are willing to accept a lower quality of goods with lower prices. b. sellers facing excess demand cannot raise prices to increase profit. c. the law would mandate the quality of goods to match the price of the goods. d. None of the answers are correct. ANSWER: b 61. Which observation would be consistent with the impact of price ceilings? a. Books are printed on higher-quality paper. b. Full-service gasoline stations stay open for 24 hours. c. New automobiles are painted with more coats of paint. d. Newspapers switch to a smaller font size to decrease bulk. ANSWER: d 62. Which would MOST likely result after setting a price ceiling on automobiles? Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 5 a. a surplus of automobiles b. more friendly automobile salesmen c. fewer safety features d. an increase in demand for automobiles ANSWER: c 63. Which would be the LEAST likely result of setting a price ceiling on rental houses? a. higher quantity demanded for rental houses b. less inside maintenance c. less landscaping d. more rental houses available on the market ANSWER: d 64. If prices are not allowed to rise because of a price ceiling: a. suppliers have an incentive to provide a high level of customer service. b. suppliers will compensate for the lower price by increasing the quality of their goods. c. prices do not provide the correct information about consumers' valuation of the good. d. a shortage will develop, but only temporarily until markets adjust to the lower prices. ANSWER: c 65. When a price ceiling is in effect: a. there is no competition for goods. b. suppliers have an incentive to provide really good customer service. c. demanders compete for goods in short supply by accepting reductions in quality. d. suppliers compete for customers by inefficiently raising quality levels. ANSWER: c 66. The Edict on Maximum Prices, established by the Roman emperor Diocletian, created price ceilings on various jobs and goods in a failed effort to curb inflation. For example, legal pay for a farm laborer could be no more than $0.108 a day (payment set in modern currency). If the market rate of farm labor was $0.12 a day, which would be a plausible consequence of this law? a. Farms would produce more food than they otherwise would. b. Nothing unusual would happen. c. A laborer would work less hard than they otherwise would. d. Unemployment for farm hands would increase. ANSWER: c 67. Typical of price ceilings, the ancient Indian political philosopher known as Kautilya advocated controls to protect against merchant greed, fixing a profit of 5% over the fixed price of local commodities, including textiles. If severe weather were to render the textile market more uncertain (e.g., if transportation routes were damaged), what would reasonably happen? a. There would be no effect. Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 5 b. Textile quality would wastefully increase. c. Fewer merchants would be willing to supply textiles. d. Deadweight loss would fall. ANSWER: c 68. How can sellers increase profits when they face a price ceiling? a. charge a higher price for the good b. charge a lower price for the good to undercut rival sellers c. produce and sell more output d. reduce the quality of the product and provide less customer service ANSWER: d 69. Figure: Effects of Price Ceilings
At a price ceiling of $2.00 per unit, consumers are willing to pay a maximum of: a. $2.00. b. $2.50. c. $3.00. d. $4.00. ANSWER: c 70. Figure: Effects of Price Ceilings
At a price ceiling of $2: Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 5 a. bribes of $1 per unit may be common. b. seller discounts of $1 may be common. c. bribes of $3 per unit may be common. d. seller discounts of $3 per unit may be common. ANSWER: a 71. Figure: Effects of Price Ceilings
Suppose that the data represent the retail gasoline market. At a price ceiling of $2, the total value of wasted time from waiting in line is: a. $5. b. $10. c. $15. d. $20. ANSWER: b 72. Table: Gasoline Market Free Market Price Ceiling Price per gallon of gas $4.00 $3.00 Value of time $20/hour $20/hour Waiting time to buy 20 gallons of gas 0 hours 1.5 hours The total cost of purchasing 20 gallons of gas at the free-market price and the price ceiling is _____ and _____, respectively. a. $100; $80 b. $80; $90 c. $60; $75 d. $80; $60 ANSWER: b 73. Which statement(s) about price ceilings is(are) TRUE? I. Price ceilings cause quantity demanded to exceed quantity supplied. II. When including time costs and bribes, consumers pay a total price in excess of the price ceiling. III. All else equal, it is more wasteful to allocate goods based on bribes than on waiting time costs. a. I only Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 5 b. II and III only c. I and II only d. I, II, and III ANSWER: c 74. Figure: Costs of Price Ceilings 1
What is the dollar amount of the value of wasted time if a price ceiling of $4 is implemented? a. $160 b. $180 c. $320 d. $220 ANSWER: a 75. Figure: Costs of Price Ceilings 1
Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 5
What is the dollar amount of lost consumer surplus if a price ceiling of $4 is implemented? a. $20 b. $10 c. $90 d. $80 ANSWER: b 76. Using a first-come, first-served system to allocate products with long lines is: a. the only way scarce goods can be allocated. b. necessary when waiting is a costless exercise. c. efficient, since people who are willing to wait the longest get the products. d. inefficient because waiting wastes time. ANSWER: d 77. Which would be the LEAST likely result of a price ceiling imposed in the market for gasoline? a. Buyers will line up to buy gasoline. Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 5 b. Buyers will bribe station attendants to fill up their tanks. c. Some buyers will get less gasoline than they want. d. Competition in the market will be eliminated. ANSWER: d 78. Figure: Price Ceiling of Ps
Suppose a price ceiling of Ps is imposed. As a result: a. the quantity supplied in the market is Qs. b. buyers' willingness to pay for the good is Pd. c. the quantity demanded in the market is Qd. d. All of the answers are correct. ANSWER: d 79. Figure: Price Ceiling of Ps
Suppose a price ceiling of Ps is imposed. The shaded area does NOT represent: a. the value of wasted time. b. the amount that buyers bribe sellers. c. the amount of corruption. d. consumer surplus. ANSWER: d 80. If the government imposes a price ceiling on gasoline, the total price of gasoline a buyer pays is likely to equal the legal price: Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 5 a. minus the value of wasted time. b. minus the value of bribery. c. plus the value of consumer surplus. d. plus the value of corruption. ANSWER: d 81. Shortages in economic markets are inefficient because: a. time spent waiting in line is wasted time and hence a wasted resource. b. demanders are willing to pay more for the good, but suppliers are unwilling to supply any more of the good even at higher prices. c. consumers' willingness to pay is less than the controlled price.
d. they lead to increases in quality over and above what would be present in an uncontrolled market. ANSWER: a 82. What do price ceilings NOT cause? a. waiting in line b. speculation c. bribes d. search costs ANSWER: b 83. Figure: Supply and Demand 1
If the government sets the price at $8, demanders are willing to pay _____ per unit for _____ units. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 5 a. $8; 12 b. $8; 6 c. $14; 12 d. $14; 6 ANSWER: d 84. Figure: Supply and Demand 1
If the government sets the price at $8, the total value of the wasted time is: a. $36. b. $48. c. $64. d. $8. ANSWER: a 85. A major hurricane damages many oil refineries, which increases the market price of gasoline from $3.50 to $5.00 per gallon. The attorney general threatens legal action against gas station owners who raise prices above pre-hurricane levels, causing gas station owners to reluctantly sell gas for $3.50 per gallon. At $3.50 per gallon, shortages cause buyers to wait in line for two hours. If the average purchase is 15 gallons and buyers value their time at $20 an hour, is the attorney general helping? a. No, paying $92.50 at $3.50 per gallon is more expensive than $75 at $5.00 per gallon. b. Yes, paying $52.50 at $3.50 per gallon is cheaper than $75 at $5.00 per gallon. c. Yes, gas is cheaper at $3.50 per gallon because the waiting costs keep gas prices low. d. No, $5.00 per gallon would enable the market to maintain the pre-hurricane quantity. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 5 ANSWER: a 86. Suppose a major hurricane damages many trees in a coastal town, increasing the market price of tree removal from $1,000 per tree to $1,250 per tree. The attorney general threatens legal action against tree removal services who raise their prices above pre-hurricane levels. If the average consumer is willing to pay up to $1,300 for such tree removal services, is the attorney general helping the consumer? a. No, consumers value tree removal services at a price higher than they are being charged. b. Yes, it is unfair to raise prices after a hurricane. c. No, the price of tree removal services is always $1,250 per tree. d. Yes, other tree removal services will come to the area if the price remains at $1,000 per tree. ANSWER: a 87. The statement "Price controls do not eliminate competition": a. is false because price controls prevent rich consumers from outbidding poor consumers for goods and
services. b. is false because firms are no longer allowed to exploit consumers by charging higher prices after hurricanes or major snowstorms. c. reflects the idea that consumers will compete for price-controlled products by waiting in line and offering bribes to sellers. d. means that sellers will increase the quality of their product when they cannot legally increase their prices.
ANSWER: c 88. Figure: Losses from Price Ceilings
A price ceiling of $1 causes lost consumer surplus equal to area _____ and lost producer surplus equal to area _____. a. c; e b. bc; de c. a; f d. d; b ANSWER: a 89. Figure: Losses from Price Ceilings
Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 5
At a price ceiling of $1, the area representing the total value of wasted time is _____, and the area of the deadweight loss is _____. a. ab; de b. bd; ce c. abdf; ce d. bc; de ANSWER: b 90. At a price ceiling of $1 per loaf of bread, quantity supplied is 99 loaves, which is less than quantity demanded. What must be true for the 100th loaf of bread? a. Consumers do not value the 100th loaf of bread. b. The cost of producing the 100th loaf of bread is less than $1.00. c. Consumers value the 100th loaf of bread at less than $1.00. d. Consumers value the 100th loaf of bread more than it costs producers to make it. ANSWER: d 91. Figure: Costs of Price Ceilings 2
Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 5
What is the dollar amount of lost producer surplus after the government implements a price ceiling of $4? a. $90 b. $10 c. $160 d. $80 ANSWER: b 92. Figure: Costs of Price Ceilings 2
Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 5
What is the dollar amount of the deadweight loss after the price ceiling of $4 has been implemented? a. $160 b. $180 c. $20 d. $10 ANSWER: c 93. Which statement about price ceilings is correct? a. Whether a price ceiling is placed below or above the equilibrium price, it will always cause deadweight loss. b. A price ceiling will cause deadweight loss only if it is placed above the equilibrium price. c. A price ceiling will cause deadweight loss only if it is placed below the equilibrium price. d. Whether a price ceiling is placed below or above the equilibrium price, it will always cause a shortage of the good.
ANSWER: c 94. Which statement is TRUE in a market with a price ceiling? Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 5 a. Buyers and sellers experience lost gains from trade. b. Resources are allocated to their most efficient uses. c. The supply of goods is sold by the sellers with the lowest costs. d. The supply of goods is bought by the buyers with the highest willingness to pay. ANSWER: a 95. A deadweight loss is the total of: a. consumer and producer surplus when all mutually profitable gains from trade are exploited. b. consumer and producer surplus when all mutually profitable gains from trade are not exploited. c. lost consumer and producer surplus when all mutually profitable gains from trade are exploited. d. lost consumer and producer surplus when all mutually profitable gains from trade are not exploited. ANSWER: d 96. Which does a market with price ceilings FAIL to maximize? a. the gains from trade b. consumer surplus c. excess supply d. producer surplus ANSWER: c 97. A free market maximizes the gains from trade, the sum of consumer and producer surplus, meeting all of these conditions EXCEPT: a. all buyers who are willing to pay positive prices are able to receive goods from trade. b. the supply of goods is bought by the buyers with the highest willingness to pay. c. the supply of goods is sold by the sellers with the lowest costs. d. there are no unexploited gains from trade between buyers and sellers. ANSWER: a 98. Which statement explains why price ceilings result in lost gains from trade? a. Buyers and sellers want to trade, but the threat of fines or jail time prevents them from doing so. b. Sellers want to trade, but buyers prefer the lower prices. c. Buyers want to trade, but sellers are indifferent at the lower prices. d. Neither buyers nor sellers want to trade subject to a price ceiling that results in lost gains from trade. ANSWER: a 99. Deadweight loss is: a. necessary to ensure that resources are channeled to their highest-value use. b. the loss to the economy from firms going out of business due to competition. c. usually offset by deadweight gains. d. the total of lost consumer and producer surplus when not all mutually profitable gains from trade are exploited. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 5 100. When a price ceiling is in effect: a. some mutually beneficial trades between buyers and sellers do not occur. b. no mutually beneficial trades between buyers and sellers occur. c. all mutually beneficial trades between buyers and sellers occur. d. it is impossible to say if any, some, or all beneficial trades between buyers or sellers fail to occur. ANSWER: a 101. In the late 1500s, the city of Antwerp was under siege by the Duke of Parma. The siege caused the price of food to rise, so the government of Antwerp established a price ceiling set at a value similar to that before the siege─this bears a striking resemblance to modern antigouging laws used in times of disaster. Merchants, fearing the duke's ability to sink their ships, refused to ferry food into the city that they could sell only at a normal price. Which important effect of a price control BEST describes this story? a. reduction of product quality b. wasteful lines c. a loss in gains from trade d. a misallocation of resources ANSWER: c 102. The U.S. government establishes a price floor of $1,000 on personal computers. The market price for netbooks (personal computers that specialize in Internet and other basic computer functions) is about $500. How would this price control affect the netbook market? a. Consumers would have a harder time finding conventional netbooks since most would be too powerful. b. There would be long lines for netbooks. c. Producers would leave the market for netbooks. d. There would be no notable effect. ANSWER: a 103. Deadweight loss occurs when: a. consumer surplus transforms into producer surplus. b. there is a shortage of a good or service. c. consumer or producer surplus decreases without the surplus going to anyone. d. the gains from trade are lowered due to shifts in the supply or demand curve. ANSWER: c 104. Figure: Water Market
Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 5
If a price floor gets set at $8 per gallon, how big is the shortage or surplus? a. 60,000 gallons in surplus b. 120,000 gallons in surplus c. 60,000 gallons in shortage d. 12,000 gallons in shortage ANSWER: a 105. Figure: Water Market
Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 5
If a price floor gets set at $8 per gallon, what is the deadweight loss? a. $30,000 b. $60,000 c. $240,000 d. $480,000 ANSWER: a 106. Figure: Water Market
Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 5
If a price floor gets set at $8 per gallon, what is the quality waste? a. $90,000 b. $180,000 c. $480,000 d. $960,000 ANSWER: b 107. Price ceilings: a. increase the gains from trade because lower prices encourage consumers to buy more. b. reduce the size of the market, shrinking both consumer and producer surplus. c. help reduce the deadweight losses owing to taxation. d. increase market output to the point where consumer surplus equals producer surplus. ANSWER: b 108. Figure: Supply and Demand 2
Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 5
If the government sets a price ceiling at $8, it will create a deadweight loss of $: a. 6. b. 36. c. 12. d. 24. ANSWER: c 109. Do price ceilings misallocate resources? a. Yes, because people who value the good the most are unable to bid it away from low-valued uses. b. Yes, because people who value the good the least are unable to afford the good. c. No, because the good is still allocated based on willingness to pay. d. No, because the rich and poor alike stand an equal chance of getting the good. ANSWER: a 110. Suppose that New York sets a price ceiling on electricity but New Jersey does not. Also suppose that swimming pools in New Jersey are heated but swimming pools in New York are not. This is an example of Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 5 a(n): a. misallocation of resources caused by price controls. b. market failure caused by speculators. c. market inefficiency caused by monopoly oil companies. d. excess supply of oil caused by the business cycle. ANSWER: a 111. When an effective price ceiling causes a shortage, some of the buyers who value the good the most may not be able to get the good. Why does this occur? a. The consumers with higher valuations cannot outbid the lower-value users and so the seller cannot distinguish between them. b. The consumers with higher valuations are eliminated from the market due to the price ceiling.
c. The price ceiling causes the price to rise so high that even the highest-value users cannot afford the good. d. The government purchases most of the goods. ANSWER: a 112. When a price ceiling is binding, the goods that are on sale are allocated to buyers using a method: a. of random allocation. b. whereby the highest bidder wins. c. whereby the lowest bidder wins. d. whereby buyers purchase lottery tickets to see who will be able to buy the product. ANSWER: a 113. Price controls cause resources to be _____ not just geographically but also across different _____ those resources. a. overutilized; types of b. properly allocated; demands for c. cheaper; uses for d. misallocated; uses for ANSWER: d 114. Price controls cause resources to be misallocated by distorting the: a. signals of suppliers' willingness to supply and eliminating the incentives for demanders to pay. b. signals of demanders' willingness to pay and eliminating the incentives for suppliers to supply. c. incentives for suppliers to supply and eliminating the signals of demanders' willingness to pay. d. incentives for demanders to pay and eliminating the signals of suppliers' willingness to supply. ANSWER: b 115. Figure: Value of Uses
Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 5
The sections labeled A, B, and C represent, respectively, the: a. highest-valued uses, lower-valued uses, and least-valued uses. b. highest-valued uses, least-valued uses, and lower-valued uses. c. least-valued uses, lower-valued uses, and highest-valued uses. d. lower-valued uses, highest-valued uses, and least-valued uses. ANSWER: a 116. Figure: Price Ceilings and Consumer Surplus
There is a price ceiling of $20. What is the value of consumer surplus if all units of the good are allocated to the highest-valued uses? a. $40 b. $120 c. $200 d. $210 ANSWER: c 117. Figure: Price Ceilings and Consumer Surplus
Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 5
There is a price ceiling of $20. What is the value of consumer surplus if all the goods are allocated randomly? a. $120 b. $180 c. $80 d. None of the answers are correct. ANSWER: a 118. Figure: Price Ceilings and Valuation of Uses
Suppose a price ceiling of $15 goes into effect. If the goods are allocated only to the highest-valued uses, the total consumer surplus in the market will be : a. $3,000. b. $500. c. $2,500. d. $1,000. ANSWER: c 119. Figure: Price Ceilings and Valuation of Uses
Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 5
Suppose a price ceiling of $15 goes into effect. If the highest-valued use and the lowest-valued use are equally likely to be satisfied, then the average value of the product is: a. $45. b. $30. c. $25. d. $35. ANSWER: b 120. Figure: Price Ceilings and Consumer Valuation
Suppose a price ceiling of $3 goes into effect. If the goods sold are allocated only to the consumers with the highest valuations, the total consumer surplus in the market will be: a. $180. b. $30. c. $120. d. $150. ANSWER: d 121. Figure: Price Ceilings and Consumer Valuation
Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 5
Suppose a price ceiling of $3 goes into effect. If the goods sold are allocated to buyers randomly, what is the total consumer surplus in this market? a. $90 b. $120 c. $30 d. $150 ANSWER: a 122. Figure: Price Ceilings and Consumer Valuation
Suppose a price ceiling of $3 goes into effect. What is the loss of consumer surplus due to the random allocation of price-controlled goods compared to the allocation only to the highest-valued uses? a. $90 b. $60 c. $150 d. $30 ANSWER: b 123. Figure: Price Ceilings and Lost Consumer Surplus
Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 5
The figure measures the consumer surplus associated with a price ceiling, assuming: a. the worst-case scenario. b. the best-case scenario. c. random allocation of the product between highest-valued and lowest-valued uses. d. that total consumer surplus is maximized in the market. ANSWER: b 124. Figure: Price Ceilings and Random Allocation
When a controlled price is imposed and the quantity of goods is allocated randomly between the highest-valued uses and lowest-valued uses, total consumer surplus under random allocation is represented by area: a. A. b. B. c. C. d. D. ANSWER: b 125. Figure: Price Ceilings and Random Allocation
Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 5
When a controlled price is imposed and the quantity of goods is allocated randomly between the highest-valued uses and lowest-valued uses, loss due to random allocation instead of allocation to the highest-valued use is represented by area: a. A. b. B. c. C. d. D. ANSWER: a 126. The effects of price ceilings: a. are limited to the price-controlled market. b. weaken over time. c. extend beyond the price-controlled market. d. encourage the entry of new firms. ANSWER: c 127. During the energy crisis of the 1970s, President Nixon ordered gas stations to close between 9:00 PM Saturday and 12:01 AM Monday in an attempt to prevent wasteful and unnecessary Sunday driving. This policy: a. proved effective in reducing the shortage of gasoline. b. gave people the incentive to fill up their tanks earlier in the week. c. indirectly caused many churches to close on Sunday. d. All of the answers are correct. ANSWER: b 128. Which event occurred during the 1973–1974 oil crisis in the United States? a. Gas stations were ordered to be closed between 9 pm on Saturday and 12:01 am on Monday. b. Daylight savings time was implemented. c. There were shortages of steel drilling equipment. d. All of the answers are correct. ANSWER: d 129. Which events occurred during the 1973–1974 oil crisis in the United States? Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 5 I. Gas stations were ordered to be closed between 9 PM on Saturday and 12:01 AM on Monday. II. The government decided to allocate oil by command. III. The 55-mph speed limit was repealed. IV. Daylight savings time was implemented. a. I and IV only b. I, II, and III only c. I, II, and IV only d. I, III, and IV only ANSWER: c 130. Economists blame the long lines at gasoline stations in the United States during the 1970s, as well as the long delays in construction projects, on: a. consumers who bought gas too frequently. b. the Organization of Petroleum Exporting Countries (OPEC). c. major oil companies operating in the United States. d. U.S. government regulation of gasoline prices. ANSWER: d 131. Which BEST represents the misallocation of resources that would occur under a price ceiling on bottled water following a major hurricane? a. Bottles of water sit on the shelves because nobody can afford them. b. A family in a distant state takes time off work to bring bottled water to the hurricane-ravaged area. c. A family in a distant state gives bottled water to its dog, but a family in the hurricane area cannot find bottled water to drink. d. Families in the hurricane area brush their teeth with bottled water but cannot find enough to drink.
ANSWER: c 132. Flexible prices ensure that: a. resources are allocated to their highest-valued uses. b. suppliers will always profit from necessity goods. c. self-interested individuals will not interfere with the efficiency of the market. d. prices will always be minimized. ANSWER: a 133. When a price ceiling is in effect, goods and services: a. are still allocated efficiently. b. are not necessarily supplied by their lowest-cost producer. c. do not necessarily flow to their highest-valued use. d. are not necessarily supplied by their lowest-cost producer, nor do they flow to their highest-valued use. ANSWER: c 134. If a price ceiling on gasoline results in long lines at the gas station and the parents of young children and an Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 5 elderly retiree both need gasoline, who would have the higher-valued use for gasoline, and who would have the lower opportunity cost of waiting in line? a. The parents would have the higher-valued use and the lower opportunity cost. b. The parents would have the higher-valued use, and the retiree would have the lower opportunity cost. c. The retiree would have the higher-valued use and the lower opportunity cost. d. The retiree would have the higher-valued use, and the parents would have the lower opportunity cost. ANSWER: b 135. If there are 100 tickets to a concert and 200 fans who would like to go to the concert, each placing a slightly different value on the tickets, is it more efficient to hold an auction for the tickets or to hold a random drawing for the tickets? a. hold an auction b. hold a random drawing c. Both are equally efficient. d. It is impossible to say which is more efficient. ANSWER: a 136. Universal price controls in the Soviet Union: a. led to widespread prosperity. b. harmed powerful interests in the short run. c. caused never-ending shortages and misallocations. d. meant that no one ever had to wait in line. ANSWER: c 137. Price ceilings: a. improve the allocation of resources because consumers with the greatest need for the product are more likely to be able to afford the product. b. misallocate resources because consumers who buy the product may not be the ones who value it the most.
c. misallocate resources because they allow consumers to compete against one another by offering sellers
higher prices. d. improve the allocation of resources because consumers are prevented from bidding up the price of products.
ANSWER: b 138. Impeding price signals by imposing price ceilings can have serious consequences. Which item is such a consequence? a. improved product quality b. gains from trade c. surpluses d. misallocation of resources ANSWER: d 139. For a given demand curve, the high-valued uses are at the _____, and the low-valued uses are at the _____. Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 5 a. top; bottom b. bottom; top c. top; top d. bottom; bottom ANSWER: a 140. Figure: Supply and Demand 3
If the good is randomly allocated between those with the highest and lowest willingness to pay, what is the value of consumer surplus at the price ceiling of $8? a. $54 b. $136 c. $36 d. $45 ANSWER: c 141. Figure: Price Ceiling in a Generic Market
Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 5
If the government imposes a price ceiling at the price of $4, the result will be a: a. surplus of 40 units. b. shortage of 40 units c. surplus of 20 units. d. shortage of 20 units. ANSWER: b 142. Which president ended the price controls on oil? a. Richard Nixon b. Gerald Ford c. Jimmy Carter d. Ronald Reagan ANSWER: d 143. What happened as a result of the elimination of price controls on oil and gasoline in 1981? a. The supply of gas and oil declined. b. The shortage of gasoline was eliminated nearly overnight. c. The price of oil increased dramatically and stayed high until the early 1990s. d. The shortage of gasoline was eliminated, but it took several years. ANSWER: b 144. After President Reagan repealed the price controls on gasoline: a. the supply of gasoline fell dramatically. b. the market experienced a period of vast surpluses as a result of the lack of regulation. c. prices rose a little at first, but supply quickly began to increase and prices fell. d. prices rose dramatically as a result of the repealed legislation. ANSWER: c 145. Ultimately, repealing the price controls on gasoline and oil: a. led to permanently higher gasoline prices. b. led to a higher supply of gasoline and lower prices. Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 5 c. was disastrous, since the market collapsed due to a lack of government regulation. d. was not able to eliminate the shortages of gasoline in the United States. ANSWER: b 146. When the price ceilings on oil and gas were lifted in January 1981: I. the price of oil rose immediately. II. the price of oil continued to rise more than two years after the controls were eliminated. III. higher prices gave an incentive to suppliers to increase supply, thus leading eventually to lower prices. a. I only b. I and II only c. I and III only d. I, II, and III ANSWER: c 147. The shortage of oil ended when: a. Ronald Reagan eliminated price controls on oil in January 1981. b. the government instituted minimum miles-per-gallon requirements for cars. c. Congress passed the Energy Saver Act of 1985. d. the U.S. Senate began regulating oil industry profits. ANSWER: a 148. Uber uses information about the supply and demand for rides when setting prices. This means that rates following a concert at Madison Square Garden will: a. increase to reflect higher demand and encourage more drivers to drive and satisfy the increase in demand. b. be equal to the rates charged by taxis. c. decrease and there will be more taxis around the venue. d. remain the same, but more drivers will be willing to work after the concert. ANSWER: a 149. Uber introduced surge pricing, by which an increase in demand causes an increase in price, to: a. encourage more drivers to drive and satisfy the increase in demand. b. encourage riders to take Uber during peak times. c. encourage governments to enact price controls. d. discourage new drivers seeking to drive for Uber. ANSWER: a 150. Which statement about price controls is MOST correct? a. Price controls often hurt the people they are designed to help. b. Price controls always help the people they are designed to help. c. Price controls have minimal adverse effects. d. Price controls make economic sense even if they have adverse effects. Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 5 ANSWER: a 151. Rent controls are: a. an efficient and equitable way to help the poor. b. inefficient but a pretty good way to solve a serious social problem. c. an inefficient way to help the poor in raising their standard of living. d. an efficient way to allocate housing. ANSWER: c 152. A rent control is a regulation that: a. ensures that there are apartments available for rent. b. controls rents at constant levels. c. upholds rents to above equilibrium levels. d. prevents rents from rising to equilibrium levels. ANSWER: d 153. Rent controls are: a. price floors on rental housing. b. price ceilings on rental housing. c. quality freezes on rental housing. d. quantity freezes on rental housing. ANSWER: b 154. Which is the MOST correct statement about the impact of rent controls? a. The short-run supply curve for apartments is inelastic, so rent controls create larger shortages in the short run than in the long run. b. The short-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the short run than in the long run. c. The long-run supply curve for apartments is inelastic, so rent controls create larger shortages in the long run than in the short run. d. The long-run supply curve for apartments is inelastic, so rent controls create smaller shortages in the long run than in the short run.
ANSWER: b 155. Over time, housing shortages caused by rent control _____ because the supply of housing is _____ elastic in the long run. a. increase; less b. increase; more c. decrease; less d. decrease; more ANSWER: b 156. Figure: Short- and Long-Run Shortages Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 5
At a rent-controlled price of $800, the short-run shortage of apartments is _____, and the long-run shortage is _____. a. 12,000; 4,000 b. 4,000; 12,000 c. 8,000; 4,000 d. 8,000; 12,000 ANSWER: b 157. Why is the long-run supply curve of rent-controlled apartments typically more elastic than the short-run supply curve? a. In the long run, fewer new apartments are built, and older apartments are torn down or turned into condominiums. b. In the long run, many more new apartments are built, and this increases the supply of rent-controlled apartments. c. In the long run, rent controls are always removed.
d. In the long run, the shortage of rent-controlled apartments becomes significantly less. ANSWER: a 158. How did economists try to prove that reductions in new apartment building in Ontario, Canada, during the 1970–1975 period were a result of debates on rent control? a. They showed that the economy was declining during this period. b. They pointed to the fact that the OPEC oil crisis occurred at this time. c. They showed that apartment building was declining while new house building was rising, in the same state of the economy. d. They pointed to the fact that rent controls had not been implemented during the OPEC oil crisis.
ANSWER: c 159. A rent control is a price: a. floor on car rentals. b. ceiling on car rentals. c. floor on rental housing. d. ceiling on rental housing. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 5 160. Rent controls do NOT create: a. shortages. b. search costs. c. wasteful quality increases. d. resource misallocations. ANSWER: c 161. New housing takes some time to build, so rent control creates larger shortages in the: a. long run than in the short run because short-run supply is more elastic. b. long run than in the short run because long-run supply is more elastic. c. short run than in the long run because short-run supply is more elastic. d. short run than in the long run because long-run supply is more elastic. ANSWER: b 162. Some economists compare the destructiveness of rent control to that of aerial bombardment because it causes: a. landlords to neglect their buildings, allowing them to deteriorate over time. b. high search costs in apartment hunting. c. there to be unexploited gains from trade. d. apartments to go to renters who do not have the highest-valued use of the apartments. ANSWER: a 163. In your city, it is illegal to charge more than a certain amount of money for an apartment. People have been signing leases for the highest legal amount but also agreeing to pay a monthly bribe "on the side" to their landlord in order to get the apartment in the first place and to get timely maintenance. What is the effect of the bribes? a. The bribes make it harder to find an apartment. b. The bribes cause there to be unexploited gains from trade. c. The bribes cause apartments to be allocated to renters who do not have the highest-valued use of the apartments. d. The bribes minimize the damage from the rent control.
ANSWER: d 164. Figure: Supply and Demand 4
Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 5
In this market for apartments, a rent-controlled price of $800 will cause a short-run: a. shortage of 6,000 apartments. b. shortage of 8,000 apartments. c. shortage of 3,000 apartments. d. surplus of 14,000 apartments. ANSWER: c 165. Figure: Supply and Demand 4
Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 5
In this market for apartments, with a rent-controlled price of $800, the long-run supply curve will be _____ elastic than the short-run supply curve, causing the _____. a. more; shortage to increase to 6,000 apartments b. more; shortage to decrease to 3,000 apartments c. less; shortage to increase to 6,000 apartments d. less; surplus to decrease to 8,000 apartments ANSWER: a 166. Which statement(s) is(are) TRUE? I. In the long run, rent control laws create incentives to turn apartments into hotels or parking garages. II. Apartment owners are less likely to do routine maintenance when the government controls apartment rents. III. Rent-controlled apartments are more likely to be allocated by discrimination than non–rent-controlled apartments. a. I, II, and III b. I and II c. I only Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 5 d. II only ANSWER: a 167. Under a policy of rent control, the short-run shortage _____ the long-run shortage. a. is smaller than b. is larger than c. is equal to d. overshadows ANSWER: a 168. Rent control is an example of a: a. price ceiling. b. price floor. c. tax. d. quota. ANSWER: a 169. Vietnam's foreign minister said, "The Americans couldn't destroy Hanoi, but we have destroyed our city by very low rents." He was referring to the fact that: a. very low rents provided very little income for carrying out warfare. b. very low rents turned portions of city housing into a state of disrepair and slum-like conditions. c. the Americans did not install proper city housing codes in Hanoi. d. bombing a city is always worse than using rent control. ANSWER: b 170. Under rent control, tenants can expect: a. lower rent and higher-quality housing. b. lower rent and lower-quality housing. c. higher rent and a shortage of housing. d. higher rent and a surplus of housing. ANSWER: b 171. Which is NOT a result of rent control? a. higher-quality housing b. bribery c. fewer new apartments offered for rent d. less maintenance provided by landlords ANSWER: a 172. Which would be the LEAST likely result of a price ceiling imposed in the market for rental cars? a. slow replacement of old rental cars with new ones Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 5 b. poor maintenance of rental cars c. dirtier exteriors and interiors of rental cars d. free gasoline given to people as an incentive to rent a car ANSWER: d 173. Because rent controls on apartments reduce profits: a. developers build and rent more apartments to make up for lost profit. b. condominiums are converted into apartments. c. landlords are less likely to discriminate against minorities when renting out apartments. d. apartment managers will give less consideration to renters' complaints. ANSWER: d 174. Under rent control, bribery is used to: a. allocate housing to the most deserving tenants. b. make the total price of a rental property, including the bribe, less than the market price that would prevail without rent controls. c. make the total price of a rental property, including the bribe, closer to the market price that would prevail without rent controls. d. allocate the housing to the poorest individuals in the market.
ANSWER: c 175. Rent control in New York City has resulted in: a. people living in luxury apartments and paying low rents. b. people having to bribe landlords to get apartments. c. people having difficulty finding apartments. d. All of the answers are correct. ANSWER: d 176. From an efficiency standpoint, rent controls: a. increase efficiency by allowing those households who could not afford high rents before to be able to purchase housing. b. increase efficiency by increasing consumer surplus.
c. decrease efficiency because both buyers and sellers would be better off if the price of rents were allowed to rise. d. decrease efficiency because they make it illegal to trade.
ANSWER: c 177. Under rent controls: a. some mutually profitable trades are illegal and therefore the benefits never materialize. b. producer surplus is zero. c. the quantity demanded of apartments is typically less than the quantity supplied. d. buyers are better off at the expense of sellers. Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 5 ANSWER: a 178. Which statement would be the LEAST likely result of rent controls? a. Landlords are more selective with respect to the people to whom they rent apartments. b. Landlords provide less maintenance on the apartments. c. More new apartments are available for rent. d. More people look for apartments for rent than the number of apartments available. ANSWER: c 179. Which statement(s) is(are) TRUE? I. Rent controls prevent apartments from being allocated to people who value them the most. II. With a system of rent controls, landlords are more likely to make needed repairs to their properties as a way of attracting renters. III. Although inefficient, rent controls are the best way to help the poor afford housing. a. I only b. I and III only c. I, II, and III d. II and III only ANSWER: a 180. An alternative to rent control that has been used in some cities since the 1990s is: a. confiscation of property from landlords. b. policies that prevent evictions. c. rent regulation that limits the rate of increase in rent. d. higher taxes on the rental income of landlords. ANSWER: c 181. Which statement(s) is(are) TRUE? I. Regulations that limit the rate of increase in rents are equally as inefficient as rent controls. II. Rent regulations increase the incentive for landlords to cut back on maintenance. III. Regulations that limit the rate of increase in rents allow the price of rental housing to respond to market forces. a. I only b. I and III only c. I, II, and III d. II and III only ANSWER: d 182. Of these options, the BEST way to help the poor afford housing is by: a. using rent control. b. raising the minimum wage. c. issuing housing vouchers. Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 5 d. raising payroll taxes. ANSWER: c 183. Housing vouchers are a better option than rent controls when a government is attempting to make housing affordable for the poor. The reason is that the housing voucher entitles the tenants to: a. live in a rent-controlled apartment. b. free maintenance of their apartment. c. a certain dollar amount off the rent of any apartment they choose. d. live in a luxury apartment of their choice. ANSWER: c 184. An alternative to rent controls that increases the quantity of housing and targets consumers that need lowcost rental property is: a. tax credits. b. vouchers. c. subsidies to landlords. d. not available. ANSWER: b 185. If affordable housing is a concern, then a better policy than rent controls may be for the government to provide: a. subsidized housing. b. additional jobs. c. housing vouchers. d. mortgage discounts. ANSWER: c 186. Which statement is FALSE? a. A frost that destroys half the orange crop will create a surplus of oranges. b. It is possible to have a shortage of a good even if its supplies are abundant. c. Politicians often blame speculators and profiteers, rather than changes in supply and demand, for rising prices. d. To eliminate a shortage, prices must rise.
ANSWER: a 187. If price controls are so harmful, why would a country ever impose them? a. No one really knows. b. Price controls are usually thought to be beneficial. c. Politicians have strong incentives to respond to public opinion with price controls when prices increase sharply. d. People usually see the consequences of price controls but think they will be a good policy.
ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 5 188. Governments usually impose price controls in response to an: a. expected increase in prices. b. expected decrease in prices. c. unexpected increase in prices. d. unexpected decrease in prices. ANSWER: c 189. The shortages that result from imposing price controls: a. are rarely recognized by the public as a result of the price controls themselves. b. typically lead the public to lobby politicians to repeal the price controls. c. last for only a short while until markets can adjust to the new lower prices. d. create higher prices. ANSWER: a 190. Dramatic price increases, such as those seen in the markets for gas and oil in the 1970s, are typically the result of: a. price gouging by big businesses. b. shortages. c. reductions in supply. d. foreign intervention in markets. ANSWER: c 191. Why do many consumers and politicians advocate for price controls? a. Price controls are the only way for the poor to obtain certain goods when prices rise. b. Most consumers and politicians do not advocate for price controls because they understand their negative consequences. c. Price controls appear to be a straightforward response to the problem of price increases.
d. The gains in consumer surplus typically outweigh the loss in producer profits. ANSWER: c 192. Ancient Athens had strict controls on the price of wheat, and punishment for violation of the price control was death. The speech by a politician imploring a jury to convict an alleged violator of the law survives to this day: "And consider that in consequence of this vocation, very many have already stood trial for their lives; and so great the [earnings] which they are able to derive from it that they prefer to risk their life every day, rather than cease to draw from you, the public, their improper profits." Which is the MOST likely reason merchants were willing to risk their lives to charge more than the legal price? a. Merchants were irrationally blinded by greed. b. Merchants were not aware of the law, since it was not publicly declared. c. Merchants could not stay in business if they didn't raise prices. d. Merchants did not like the general public, who approved of these laws, and this is how some chose their revenge.
ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 5 193. After a hurricane, the prices of many items rise. How BEST might the government help poor people afford to buy goods and services? a. institute price controls at pre-hurricane prices b. set prices at zero so that consumers can buy what they need without financial distress c. give poor people debit cards for use in purchasing essential items, but leave prices unregulated d. institute a wage freeze to keep the costs of production from rising too rapidly ANSWER: c 194. An economy with permanent, universal price controls is in essence a: a. market economy. b. social economy. c. free economy. d. command economy. ANSWER: d 195. The blat economy described in the text results when price controls are: a. extensive and cause chronic shortages in the economy. b. extensive, but the causes of shortages in the economy are only temporary. c. short lasting but cause chronic shortages in the economy. d. short lasting and cause only temporary shortages in the economy. ANSWER: a 196. What does the Russian concept of blat refer to? a. a Russian brand of vodka b. having connections that enable one to obtain favors c. the amount of time people spend waiting in lines to buy things d. There is no such word. ANSWER: b 197. To what does the Russian concept of blat refer? a. the barter system that developed in Russia as a result of the shortages of goods b. the command economy system that was instituted in Russia c. the act of standing in lines to buy goods d. having connections that one can use to get favors ANSWER: d 198. Which scenario shows how the Russian concept of blat works during a beef shortage? a. A politician acquires some steak through their friendship with the owner of the beef factory. b. A beef factory owner hoards some steak at their own house. c. A beef factory owner realizes that there is a surplus of plastic wrapping. d. More people than usual stand in line to try to buy steak. Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 5 ANSWER: a 199. The chronic shortages of goods in the Soviet Union were: a. caused by the CIA's manipulation of the Soviet currency. b. limited to luxury items, like yachts and airplanes. c. the result of too much defense spending that hoarded resources away from the production of consumer goods. d. beneficial to the party elite, who traded scarce goods for favors and other scarce goods.
ANSWER: d 200. What is blat? a. a long line b. the time costs associated with buying price-controlled goods c. the use of political connections to get favors d. a dilapidated rent-controlled apartment ANSWER: c 201. Likely the MOST significant example of federal price controls in the United States came in the market for: a. coal. b. housing. c. automobiles. d. oil. ANSWER: d 202. Which is NOT a cost of binding price controls? a. misallocation b. deadweight loss c. search costs d. equity costs ANSWER: d 203. Likely the MOST significant example of federal price controls in the United States came under President: a. Barack Obama. b. Richard Nixon. c. Bill Clinton. d. Ronald Reagan. ANSWER: b 204. Airlines in the United States were subject to _____ regulation from 1938 to 1978. a. binding price ceiling b. binding price floor c. nonbinding price ceiling Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 5 d. nonbinding price floor ANSWER: b 205. Which statement(s) is(are) TRUE? Price floors set above the equilibrium price cause: I. shortages. II. surpluses. III. deadweight losses. a. I and III only b. II and III only c. III only d. I is true if demand is elastic; however, II is true if demand is inelastic. ANSWER: b 206. The presence of price floors in a market is usually an indication that: a. there is an insufficient quantity of a good or service being produced. b. the forces of supply and demand are unable to establish an equilibrium price. c. the sellers of the good or service outnumber the buyers. d. policymakers believe the price floor does not involve inequities. ANSWER: c 207. A price floor is: a. a maximum price allowed by law. b. a minimum price allowed by law. c. able to produce an efficient outcome. d. a tool used to increase government revenues. ANSWER: b 208. The most common example of a price being controlled above market levels involves a good for which the: a. sellers outnumber the buyers. b. buyers outnumber the sellers. c. market is controlled by a monopolist. d. market is controlled by the government. ANSWER: a 209. When the minimum price that can be legally charged is above the market price, we say there is a price: a. support. b. stability. c. ceiling. d. floor. ANSWER: d 210. Figure: Price Floors Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $8. What will be the effect of this wage floor? a. There will be a shortage of 6,000 workers. b. There will be a surplus of 6,000 workers. c. There will be a shortage of 3,000 workers. d. The wage floor will have no effect on the market. ANSWER: d 211. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What will be the effect of this wage floor? a. There will be a shortage of 7,000 workers. b. There will be a surplus of 7,000 workers. c. There will be a shortage of 4,000 workers. d. The wage floor will have no effect on the market. ANSWER: b 212. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 70
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What is the lost consumer surplus from the wage floor? a. area ABC b. area C c. area F d. area A ANSWER: b 213. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 71
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What is the lost producer surplus from the wage floor? a. area ABC b. area C c. area F d. area A ANSWER: c 214. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 72
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What is the quality waste from the wage floor? a. area ABC b. area C c. area BE d. area ABEI ANSWER: c 215. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 73
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What are the lost gains from trade from the wage floor? a. area ABC b. area CF c. area BE d. area ABEJ ANSWER: b 216. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 74
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What does area EB represent? a. quality waste b. lost gains from trade c. lost consumer surplus d. lost producer surplus ANSWER: a 217. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 75
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What does area C represent? a. quality waste b. lost gains from trade c. lost consumer surplus d. lost producer surplus ANSWER: c 218. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 76
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What does area F represent? a. quality waste b. lost gains from trade c. lost consumer surplus d. lost producer surplus ANSWER: d 219. Figure: Price Floors
Copyright Macmillan Learning. Powered by Cognero.
Page 77
Name:
Class:
Date:
Chapter 5
Suppose the town of Drippling Springs enacts a wage floor of $20. What does area CF represent? a. quality waste b. lost gains from trade c. lost consumer surplus d. lost producer surplus ANSWER: b 220. Price floors would NOT result in: a. surpluses. b. deadweight loss. Copyright Macmillan Learning. Powered by Cognero.
Page 78
Name:
Class:
Date:
Chapter 5 c. wasteful decreases in product quality. d. misallocation of resources. ANSWER: c 221. A price floor: a. is a maximum price allowed by law. b. is a minimum price allowed by law. c. has an effect only when it is set below the market price. d. has little effect on market activity. ANSWER: b 222. Which would NOT happen as the result of a price floor? a. a surplus of the good b. lost gains from trade c. misallocation of resources d. decreases in product quality ANSWER: d 223. A large increase in the minimum wage is NOT an effective way to eliminate poverty because increases in the minimum wage: a. do not increase incomes. b. create incentives for workers to exit the labor force. c. create higher unemployment. d. tend to increase birth rates among low-income households. ANSWER: c 224. Suppose Los Angeles introduces a price floor on taxi rides. Which will likely happen in the market for taxi rides? a. Taxi owners will decrease the number of taxis in operation. b. Riders will increase their demand for taxi rides. c. Taxi owners will increase the quality of the ride by improving the interior of their taxis. d. Taxi owners will decrease the quality of the ride by allowing the interior of their taxis to deteriorate. ANSWER: c 225. Suppose Los Angeles introduces a price floor on taxi rides. Which will likely happen in the market for taxi rides? a. There will be lost gains from trade as there will be a surplus of rides available. b. There will be lost gains from trade as there will be a shortage of rides available. c. Taxi drivers competing for rides will be of a lower quality. d. Taxi drivers will choose not to operate in the market. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 79
Name:
Class:
Date:
Chapter 5 226. Which statement(s) is(are) TRUE? I. Price floors are legally established minimum prices for goods and services. II. Price floors create surpluses, whereas price ceilings create shortages. III. Price floors reduce the quality of goods and services. a. I and II only b. II only c. I, II, and III d. I only ANSWER: a 227. In the case of a binding price floor, the price paid in the market will be: a. greater than the free-market equilibrium price. b. less than the free-market equilibrium price. c. equal to the free-market equilibrium price. d. difficult to compare with the free-market equilibrium price. ANSWER: a 228. When airlines were regulated, many offered wider seats and fancy meals. This is an example of: a. quality waste. b. consumer surplus. c. producer surplus. d. lost gains from trade. ANSWER: a 229. The minimum wage: a. has very little influence on the American economy because a majority of workers earn more than the minimum wage. b. improves the American economy because a majority of workers earn more because of the minimum wage.
c. improves the American economy because a majority of workers are able to work because of the higher wage. d. hurts the American economy because a majority of workers would work for less than the minimum wage but cannot find a job.
ANSWER: a 230. The regulation of airline fares led to which results? I. Low-cost airlines were limited to flying within state lines. II. Airlines offered wider seats and fancy meals to compete for fliers. III. Fewer new airlines entered the market. IV. Airlines lowered the quality of their services. a. I and II only b. I, II, and IV only c. I, II, and III only d. I and IV only ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 80
Name:
Class:
Date:
Chapter 5 231. In the case of a nonbinding price floor, the price paid in the market will be: a. more than a free-market equilibrium price. b. less than a free-market equilibrium price. c. equal to a free-market equilibrium price. d. unable to be compared with a free-market equilibrium price. ANSWER: c 232. A binding price floor leads to a(n): a. shortage. b. surplus. c. equilibrium quantity. d. quantity of zero units. ANSWER: b 233. A nonbinding price floor leads to a(n): a. shortage. b. surplus. c. equilibrium quantity. d. quantity of zero units. ANSWER: c 234. The quantity exchanged of a good _____ under a binding price floor. a. rises b. remains the same c. falls d. changes in an indeterminate direction ANSWER: c 235. Figure: Price Controls
Copyright Macmillan Learning. Powered by Cognero.
Page 81
Name:
Class:
Date:
Chapter 5
P* represents a price floor enacted by the government. Which graph shows an effective price floor? a. Figure A b. Figure B c. Figure C d. Figures B and C ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 82
Name:
Class:
Date:
Chapter 5 236. Figure: Price Controls
P* represents a price floor enacted by the government. Which graph shows an ineffective price floor? a. Figure A only b. Figure B only c. Figures B and C Copyright Macmillan Learning. Powered by Cognero.
Page 83
Name:
Class:
Date:
Chapter 5 d. Figures A and C ANSWER: d 237. When a price floor is in effect: a. demanders get too strong of a signal from suppliers about product availability. b. suppliers have no incentive to signal product availability to demanders. c. all of the suppliers' product is purchased at the lower price, so there is no need to signal anything to demanders. d. suppliers cannot signal their product availability to demanders.
ANSWER: d 238. If an American teenager will work for $5.00 an hour and an employer is willing to pay that wage, but the minimum wage is $7.25 an hour and the employer is not willing to pay that much, the teenager goes unemployed and the market experiences: a. lost gains from trade. b. wasteful increases in quality. c. resource misallocations. d. reductions in product quality. ANSWER: a 239. Which statements are true? I. The majority of workers earning the minimum wage are above the age of 25 years. II. The majority of workers earning the minimum wage are below the age of 25 years. III. Most workers less than 25 years old make more than the minimum wage. IV. Most workers less than 25 years old make just the minimum wage. a. I and II b. I and IV c. II and III d. II and IV ANSWER: c 240. Which statement(s) is(are) NOT true? I. An increase in the minimum wage will not affect employment. II. About 15% of all hourly workers in the United States earn the minimum wage. III. Raising the minimum wage is an effective method to combat poverty. IV. Raising the minimum wage decreases employment of low-skilled workers. a. I and II only b. II and III only c. I and III only d. IV only ANSWER: c 241. Figure: Minimum Wage Copyright Macmillan Learning. Powered by Cognero.
Page 84
Name:
Class:
Date:
Chapter 5
At a minimum wage of $8, firms are willing to hire _____ workers. a. 45 b. 25 c. 35 d. more than 45 ANSWER: b 242. Figure: Minimum Wage
How many workers are unemployed at a minimum wage of $8? a. 10 b. 20 c. 25 d. 35 ANSWER: b 243. Figure: Unskilled Labor Market
Copyright Macmillan Learning. Powered by Cognero.
Page 85
Name:
Class:
Date:
Chapter 5
Based on the figure, what is the number of unemployed workers if a minimum wage of $6 is set in this market for unskilled labor? a. 40 b. 55 c. 20 d. 95 ANSWER: a 244. The federal minimum wage causes unemployment mostly among: a. middle-class workers. b. young, unskilled workers. c. college graduates. d. highly skilled workers. ANSWER: b 245. For a price floor to prevent market forces from finding the equilibrium price, it must be set: a. above the equilibrium price, causing a market shortage. b. below the equilibrium price, causing a market shortage. c. below the equilibrium price, causing a market surplus. d. above the equilibrium price, causing a market surplus. ANSWER: d 246. A price floor causes: a. excess demand. b. a shortage. c. a surplus. d. quantity demanded to exceed quantity supplied. ANSWER: c 247. The minimum wage is an example of a(n): a. price ceiling. b. price floor. Copyright Macmillan Learning. Powered by Cognero.
Page 86
Name:
Class:
Date:
Chapter 5 c. wage subsidy. d. efficient policy. ANSWER: b 248. Figure: Labor Market 1
Which statement is correct? a. A price floor set at W1 would cause a labor surplus best labeled by A. b. A price floor set at W1 would cause a labor surplus best labeled by B. c. A price floor set at W2 would cause a labor surplus best labeled by A. d. A price floor set at W2 would cause a labor surplus best labeled by B. ANSWER: c 249. If a minimum wage is posted in the labor market: a. the demand for labor will increase. b. the supply of labor will decrease. c. a surplus of labor will develop. d. All of the answers are correct. ANSWER: c 250. An increase in the minimum wage would likely increase unemployment among which group of workers? a. college graduates b. unskilled workers c. female workers d. older workers ANSWER: b 251. Figure: Labor Market 2
Copyright Macmillan Learning. Powered by Cognero.
Page 87
Name:
Class:
Date:
Chapter 5
There will be 10 unemployed workers at a minimum wage of: a. $4. b. $5. c. $8. d. $10. ANSWER: d 252. The higher the minimum wage is above the equilibrium wage, the: a. greater is the number of low-skilled unemployed workers. b. smaller is the labor surplus among teenagers. c. smaller is the number of low-skilled unemployed workers. d. more likely it is for students to stay in high school and receive their diploma. ANSWER: a 253. Minimum wage laws cause _____ low-skilled employment. a. an increase in b. a decrease in c. no change in d. an indeterminate change in ANSWER: b 254. In the case of a binding price floor, economists expect the quality level of a good to: a. rise. b. remain the same. Copyright Macmillan Learning. Powered by Cognero.
Page 88
Name:
Class:
Date:
Chapter 5 c. fall. d. change in an indeterminate direction. ANSWER: a 255. We commonly associate _____ with agricultural products. a. price ceilings b. price floors c. unregulated markets d. rent control ANSWER: b 256. If, under price control, quantity supplied equals 50 units and quantity demanded equals 40 units, then the price control is a: a. binding price ceiling. b. binding price floor. c. market equilibrium. d. nonbinding price floor. ANSWER: b 257. Minimum Wage for Country A
The deadweight loss from the $8 minimum wage is area: a. bc. b. ad. c. ce. d. bd. ANSWER: c 258. Ben is willing to work for $4/hour, and an employer is willing to hire Ben for $7/hour. Which statement is TRUE? a. A minimum wage of $7.50/hour would prevent this mutually beneficial exchange. b. Minimum wages do not prevent mutually beneficial exchanges. c. A minimum wage of $4.50/hour would prevent this mutually beneficial exchange. Copyright Macmillan Learning. Powered by Cognero.
Page 89
Name:
Class:
Date:
Chapter 5 d. A minimum wage of $3.50/hour would prevent this mutually beneficial exchange. ANSWER: a 259. Figure: Price Floor
How much unemployment results from the imposition of a price floor set at $10? a. 100 workers b. 310 workers c. 50 workers d. 210 workers ANSWER: a 260. Figure: Price Floor
What are the lost gains from trade as a result of the imposition of the price floor at $10? a. area BC b. area D c. area CF d. area BE ANSWER: c 261. Figure: Deadweight Loss
Copyright Macmillan Learning. Powered by Cognero.
Page 90
Name:
Class:
Date:
Chapter 5
What areas represent the deadweight losses in the labor market as a result of the imposition of a minimum wage at $4? a. CF b. BC c. D d. There is no deadweight loss in this market as a result of the $4 minimum wage. ANSWER: d 262. The U.S. Congress first instituted the minimum wage in: a. 1914. b. 1974. c. 1938. d. 1925. ANSWER: c 263. If the minimum wage were lowered to be closer to the market level, the: a. gains from trade would decrease, compared to a higher minimum wage. b. gains from trade would increase, compared to a higher minimum wage. c. lost gains from trade would increase, compared to a higher minimum wage. d. deadweight loss would increase, compared to a higher minimum wage. ANSWER: b 264. The influence of the minimum wage in the American economy is very small because MOST workers earn: a. more than the minimum wage. b. less than the minimum wage. c. more or less than the minimum wage. d. near the minimum wage. ANSWER: a 265. Which would likely result from an increase in the minimum wage? a. an increase in the price of hamburgers b. an increase in unemployment among teenagers Copyright Macmillan Learning. Powered by Cognero.
Page 91
Name:
Class:
Date:
Chapter 5 c. increased incomes for those who keep minimum wage jobs d. All of the answers are correct. ANSWER: d 266. Figure: Labor Market 3
A minimum wage of $7 causes a deadweight loss of: a. WX. b. XZ. c. VY. d. YW. ANSWER: b 267. Minimum wages cause: a. loss of gains from trade. b. excessive quality of products. c. shortages of labor. d. a higher supply of the goods that labor produces. ANSWER: a 268. Price floors encourage firms to provide _____ quality. a. too little b. too much c. the right amount of d. no Copyright Macmillan Learning. Powered by Cognero.
Page 92
Name:
Class:
Date:
Chapter 5 ANSWER: b 269. The deregulation of the airline industry caused: a. lower prices and more flights. b. higher prices and fewer flights. c. higher prices and more flights. d. lower prices and fewer flights. ANSWER: a 270. The price floor regulation of the airline industry: a. was the leading factor in the development of low-cost airlines. b. led to a misallocation of resources by preventing the entry of innovative airlines. c. gave the middle class the opportunity to fly at reduced rates. d. was based on the principle of low prices and low quality. ANSWER: b 271. What would be the LEAST likely result of a price floor in the market for airline travel? a. rapid replacement of old airliners with new aircraft b. narrow seats and basic meals like peanuts or chips with a coffee or soda c. special incentives like airline mileage clubs to attract customers d. excellent engine maintenance ANSWER: b 272. Deregulation of the airline markets reduced waste, increased efficiency, and: a. eliminated competition. b. improved allocation of resources. c. raised prices. d. caused an increase in costs. ANSWER: b 273. Figure: Airline Industry
Suppose that airlines are regulated and prices are kept above the market level. The areas A and B represent, Copyright Macmillan Learning. Powered by Cognero.
Page 93
Name:
Class:
Date:
Chapter 5 respectively, the: a. deadweight loss and quality waste. b. deadweight loss and consumer surplus. c. quality waste and deadweight loss. d. quality waste and consumer surplus. ANSWER: c 274. Price floors make it illegal to compete for more customers by lowering prices, so firms compete by offering customers: a. various options. b. more quantity. c. more discount. d. higher quality. ANSWER: d 275. If firms are unable to lower prices because of a legally mandated price floor: a. firms are better off (have higher profits) at the expense of consumers. b. firms will often compete by offering higher-quality goods than consumers are willing to pay for. c. consumers will decrease their demand due to the high prices. d. quantity supplied will be less than quantity demanded. ANSWER: b 276. An employer has work that can be done in the same time by one high-skilled worker paid $50.00 an hour or by eight low-skilled workers who would work for $5.00 an hour each, and the minimum wage is $7.25 an hour. In this scenario, who benefits from the minimum wage, the high-skilled worker or the low-skilled workers? (Hint: Whom would you hire for the job?) a. the high-skilled worker b. the low-skilled workers c. Both benefit equally. d. It is impossible to say who benefits more. ANSWER: a 277. Price floors on airlines: a. kept ticket prices much lower than unregulated ticket prices. b. caused airlines to compete by offering customers higher-quality services, such as better meals and wider seats. c. reduced the quality of airline services (e.g., less frequent flights, peanuts instead of meals).
d. gave airlines an incentive to lower ticket prices to increase ticket sales. ANSWER: b 278. A quality waste refers to a(n): a. increase in quality under a price ceiling. Copyright Macmillan Learning. Powered by Cognero.
Page 94
Name:
Class:
Date:
Chapter 5 b. increase in quality under a price floor. c. decrease in quality under a price ceiling. d. decrease in quality under a price floor. ANSWER: b 279. Southwest Airlines was able to enter the national market in 1978 as a result of: a. winning a series of lawsuits. b. accumulating market share. c. airline deregulation. d. establishment of new price controls. ANSWER: c 280. Which is NOT an effect of a price floor? a. misallocation of resources b. deregulation c. surpluses d. wasteful increases in quality ANSWER: b 281. One of the virtues of the market process is that it is open to new ideas, innovations, and: a. reallocation of property. b. central planning by government. c. profits. d. experiments. ANSWER: d 282. Deregulation of the airline industry has led to: a. an increase in the quality and safety of air travel. b. increases in the costs of production in air travel. c. more firms providing air travel services. d. fewer firms providing air travel services. ANSWER: c 283. Which statement is CORRECT regarding the restrictions on entry into the airline industry? a. Resources were equally allocated because new airlines were kept out of the industry. b. Resources were misallocated because low-cost airlines were kept out of the industry. c. Resources were efficiently allocated because high-cost airlines were kept out of the industry. d. Resources were reallocated because only low-cost airlines were allowed to enter the industry. ANSWER: b 284. Deregulation improves the allocation of resources by: Copyright Macmillan Learning. Powered by Cognero.
Page 95
Name:
Class:
Date:
Chapter 5 a. allocating more resources to the firms. b. decreasing the number of firms in the market. c. allowing low-cost, innovative firms to enter the market. d. creating more market opportunities for firms. ANSWER: c 285. Airline regulation from 1938 to 1978 was successful in keeping prices high because: a. it controlled price but not entry into the airline market. b. it controlled both price and entry into the airline market. c. it listened to the requests of suppliers during this time at the expense of consumers. d. of declining production costs. ANSWER: b 286. Labor unions are composed of high-skilled workers but generally support minimum wage laws that typically affect only low-skilled workers. Their support makes more sense if one considers that low-skilled labor is a _____ high-skilled labor and minimum wages _____ the quantity demanded of low-skilled labor. a. complement to; increase b. complement to; decrease c. substitute for; increase d. substitute for; decrease ANSWER: d 287. When price floors are in effect, goods and services: a. are still allocated efficiently. b. are not necessarily supplied by their lowest-cost producer. c. do not necessarily flow to their highest-valued use. d. are neither necessarily supplied by their lowest-cost producer nor flow to their highest-valued use. ANSWER: b 288. Regulation of airline fares under the Civil Aeronautics Board: a. meant that the government prevented the entry of new competitors to maintain high ticket prices. b. led to greater innovation in the airline industry at the cost of higher ticket prices. c. created incentives for optimal resource allocation. d. made it possible for lower-income Americans to afford air travel for the first time. ANSWER: a 289. In a market, the equilibrium price is $20. A price ceiling of $15 creates a bigger shortage than a price ceiling of $10. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 96
Name:
Class:
Date:
Chapter 5 290. A price ceiling is a legal maximum on the price of a good or service. a. True b. False ANSWER: a 291. Most economists favor price controls as a way of allocating resources. a. True b. False ANSWER: b 292. A price ceiling is a minimum price below the market price that can be legally charged. a. True b. False ANSWER: b 293. A price ceiling set below the equilibrium price always results in a shortage. a. True b. False ANSWER: a 294. If a price ceiling is below equilibrium price, the willingness to pay for the quantity provided will be above equilibrium price. a. True b. False ANSWER: a 295. President Richard Nixon froze all prices and wages in 1971, which led to shortages of goods throughout the economy. a. True b. False ANSWER: a 296. Businesses may respond to price ceilings by closing down, reducing product quality, and accepting bribes to sell their product. a. True b. False ANSWER: a 297. Rent control laws are most commonly a form of price ceiling. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 97
Name:
Class:
Date:
Chapter 5 298. Minimum wage laws are an example of price ceilings. a. True b. False ANSWER: b 299. Minimum wage laws are sometimes a price floor and sometimes a price ceiling. a. True b. False ANSWER: b 300. Price ceilings are always good for consumer welfare. a. True b. False ANSWER: b 301. Suppose that supply is fixed at 100 units and demand is Q = 500 – P. A price ceiling of $100 creates a shortage of 400 units. a. True b. False ANSWER: b 302. Price ceilings cause the quantity demanded to be less than the quantity supplied. a. True b. False ANSWER: b 303. Even though shortages typically result from the imposition of price ceilings, the overall gains in economic efficiency outweigh the costs. a. True b. False ANSWER: b 304. Price controls such as those instituted by President Richard Nixon in 1971 led to severe shortages in many markets across the United States. a. True b. False ANSWER: a 305. When he was president, Richard Nixon froze all prices and wages in the United States. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 98
Name:
Class:
Date:
Chapter 5 306. If price ceilings do not allow prices to rise, then consumers will be unable to signal their needs to firms. a. True b. False ANSWER: a 307. Once one accounts for time costs and bribes, it may be more expensive to make purchases at the government-controlled price than at the free-market price. a. True b. False ANSWER: a 308. Suppose a $3 per gallon price ceiling is imposed on gasoline and the equilibrium price of gasoline is $2 per gallon. Such a price ceiling would lead to long lines at gas stations. a. True b. False ANSWER: b 309. One benefit of shortages is that they eliminate competition, since buyers cannot compete for goods by paying higher prices. a. True b. False ANSWER: b 310. Once search and waiting costs are considered, price ceilings can cause consumers to spend more for a good than if prices were unregulated. a. True b. False ANSWER: a 311. The producer and consumer surplus lost as a result of price ceilings is often referred to as deadweight loss. a. True b. False ANSWER: a 312. The minimum wage causes unemployment mainly among poor, unskilled workers. a. True b. False ANSWER: a 313. The quantity traded with a binding price ceiling is lower than the quantity traded without a price ceiling, which means that price ceilings create lost gains from trade. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 99
Name:
Class:
Date:
Chapter 5 ANSWER: a 314. If price controls are imposed, gains from trade, including consumer and producer surplus, are likely to increase. a. True b. False ANSWER: b 315. When prices are not allowed to rise, there is no incentive for suppliers to ship resources to where they are needed most. a. True b. False ANSWER: a 316. Under airline regulation, within-state flights were cheaper than interstate flights of comparable length. a. True b. False ANSWER: a 317. Price ceilings misallocate resources because resources are not necessarily allocated to their highest-valued use. a. True b. False ANSWER: a 318. When price ceilings are effective, gains from trade are usually lower than if the available goods are allocated to the highest-valued uses. a. True b. False ANSWER: a 319. Effective price ceilings cause misallocation of resources because scarce resources are usually not allocated to their highest-valued uses. a. True b. False ANSWER: a 320. Housing shortages caused by rent controls are larger in the long run because the supply of housing is more elastic in the long run. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 100
Name:
Class:
Date:
Chapter 5 321. When a crisis in the Middle East reduces the supply of oil, the price system rationally responds by reallocating oil from highest-valued uses to lower-valued uses. a. True b. False ANSWER: b 322. When a price ceiling exists in the oil market, suppliers cannot move oil from low-valued uses to highvalued uses. a. True b. False ANSWER: a 323. Rent controls create large shortages in the long run rather than the short run because the long-run supply curve for apartments is inelastic. a. True b. False ANSWER: b 324. The long-run supply curve for rent-controlled apartments is generally more inelastic than the short-run supply curve. a. True b. False ANSWER: b 325. The poor state of the economy was the dominant factor that caused the fall in the number of new apartments built in Ontario, Canada, during the first half of the 1970s. a. True b. False ANSWER: b 326. People typically blame price controls for the problems caused by price controls. a. True b. False ANSWER: b 327. The Soviet Union's experience with price controls demonstrated that, with careful planning, shortages and surpluses were a rare event. a. True b. False ANSWER: b 328. When the maximum price that can be legally charged is above the market price, we say that there is a price floor. Copyright Macmillan Learning. Powered by Cognero.
Page 101
Name:
Class:
Date:
Chapter 5 a. True b. False ANSWER: b 329. A price floor is a legal maximum on the price of a good or service. a. True b. False ANSWER: b 330. If a price floor is above the equilibrium price, it will have no effect in the market. a. True b. False ANSWER: b 331. If a price floor is below the equilibrium price, a shortage will result. a. True b. False ANSWER: b 332. The minimum wage is an example of a price floor in the labor market. a. True b. False ANSWER: a 333. A minimum wage mostly creates unemployment among older workers. a. True b. False ANSWER: b 334. Although a minimum wage increases unemployment, it doesn't create a deadweight loss. a. True b. False ANSWER: b 335. A price floor makes it illegal for firms to compete for more customers by lowering prices, causing firms to compete by offering customers higher quality. a. True b. False ANSWER: a 336. The Civil Aeronautics Board regulated airline fares above the free-market rates, which led airlines to compete by offering fancy meals, wide seats, and frequent flights. Copyright Macmillan Learning. Powered by Cognero.
Page 102
Name:
Class:
Date:
Chapter 5 a. True b. False ANSWER: a 337. Price floors and price ceilings both result in lost gains from trade and decreases in the quality of the product. a. True b. False ANSWER: b 338. Regulation of entry into the airline industry increased costs and reduced innovation. a. True b. False ANSWER: a 339. Price floors set above equilibrium encourage quality waste and wasteful lines. a. True b. False ANSWER: b 340. If the equilibrium wage is $10 an hour and the government sets a minimum wage of $8, there will be a shortage of labor. a. True b. False ANSWER: b 341. Minimum wage laws are an example of price floors. a. True b. False ANSWER: a 342. In the presence of a price floor, some suppliers are willing to take a lower price for their goods, but these trades never take place because they are illegal. This illustrates the problem of misallocation of resources. a. True b. False ANSWER: b 343. Briefly discuss the U.S. experience with price ceilings during the early 1970s. What effects of the price ceilings became apparent during this period, and how did that period eventually end? ANSWER: To combat inflation, President Richard Nixon imposed nearly universal price controls in August, 1971. Shortages in many markets followed. To increase profits, producers cut quality on many goods and reduced service. Long lines emerged, especially at gas stations. Less obvious were the deadweight losses from the lost transactions and the misallocation of resources, which often did not go to the highest-value activities. Most controls ended in April, 1974, but it was not until President Ronald Reagan took office in January, 1981, that controls ended on oil and gasoline. Prices Copyright Macmillan Learning. Powered by Cognero.
Page 103
Name:
Class:
Date:
Chapter 5 shot up but the shortages disappeared, and when the supply side had time to adjust prices moderated.
344. Assume that a market is defined by two equations: the demand equation is Qd = 60 – 5P, and the supply equation is Qs = 5P. Now suppose that the government imposes a price ceiling at $3. Use this information to answer the questions below. a. What are the equilibrium price and quantity in this market? b. What is the amount of the shortage at the price ceiling? c. What is the total value of time wasted by consumers standing in line? ANSWER: a. To find the equilibrium price, set the supply and demand equations equal and solve for P, and then use that price to find Q. 60 – 5P = 5P 60 = 10P P=6 Qs = 5P Qs = 5 × 6 = 30 b. To find the shortage, substitute 3 into each equation, then subtract the quantity supplied from the quantity demanded. Qd = 60 – 5(3) Qd = 60 – 15 Qd = 45 Qs = 5(3) Qs = 15 45 – 15 = 30 c. To find the total value of time wasted, first find the demand price for the quantity supplied. Qd = 60 – 5P 15 = 60 – 5P 5P = 60 P = 12 The total value of wasted time is the difference between the demand price and the ceiling price times the quantity under the price ceiling. The difference between the controlled price and the demand price is $9. The quantity supplied under the price control is 15. $9 × 15 = $135.
345. Illustrate on a supply and demand diagram how price ceilings may distort the market outcome and specify what secondary effects price ceilings can create.
Copyright Macmillan Learning. Powered by Cognero.
Page 104
Name:
Class:
Date:
Chapter 5 ANSWER:
The price ceiling results in a shortage equal to QD − QS. In addition, since sellers have more customers than they can Copyright Macmillan Learning. Powered by Cognero.
Page 105
Name:
Class:
Date:
Chapter 5 sell to, but cannot raise the price, they will increase profits by reducing quality. Buyers value the units available at price PD, so they will have an incentive to pay bribes up to the difference between the demand price and the controlled price to get the good. They may also stand in line up to the time when the value of the time in line equals the difference between the demand price and the controlled price. Since the market is not in equilibrium, there is a deadweight loss and resources are not put to their most valuable uses.
346. A market's demand and supply curves are given by: Qd = 400 – 3P Qs = 100 + 2P where Qd is quantity demanded, Qs is quantity supplied, and P is the price. a. Suppose the government enacts a price ceiling of $60. What are the quantity demanded and quantity supplied? Is the market characterized by a shortage? b. Suppose that supply conditions in the market change to Qs = 80 + 2P. Given the price ceiling of $60, what happens to quantity demanded and quantity supplied? Is the market characterized by a shortage? How much are consumers willing to pay per unit for the quantity transacted? ANSWER: a. Find Qd and Qs at $60. Qd = 400 – 3P Qd = 400 – 3(60) = 400 – 180 = 220 Qs = 100 + 2P Qs = 100 + 2(60) = 100 + 120 = 220 Since Qd equals Qs there is no shortage. b. Find the new Qs. Qs = 80 + 2P Qs = 80 + 2(60) = 80 + 120 = 200 There is now a shortage of 20 units. Use the new quantity supplied to find the demand price. 200 = 400 – 3P 3P = 200 P = 66.67
347. When the price of gasoline rose to $4 per gallon in the summer of 2008, many people were outraged at how gas companies were "price gouging" individuals and called for price controls on gasoline. If the government had agreed to legally cap the price of gasoline, would this have lowered the cost to consumers? Explain. ANSWER: No, the cost per gallon to consumers would not have gone down—in fact, it would probably have risen. The price ceiling would have caused a shortage. Each gallon at the lower quantity would have been valued more highly by consumers, who would have most likely repeated the behavior of gas consumers in the 1970s: wait in line. The value of the time spent in line would eventually equal the difference between the demand price and the ceiling price, so the true cost of a gallon of gas would actually have risen with the ceiling.
348. Using a supply and demand diagram as a reference, discuss the way a price ceiling causes a reduction in gains from trade.
Copyright Macmillan Learning. Powered by Cognero.
Page 106
Name:
Class:
Date:
Chapter 5 ANSWER:
In a free market, the volume of trade would be at the equilibrium quantity. The price ceiling causes suppliers to limit the quantity supplied. The triangle represents lost gains from trade, or deadweight loss. The shaded area is the sum of the producer and consumer surplus lost because all the mutually beneficial trades are not completed. Copyright Macmillan Learning. Powered by Cognero.
Page 107
Name:
Class:
Date:
Chapter 5 349. Many times after natural disasters such as hurricanes, prices are controlled so that it is illegal to charge any price greater than pre-hurricane levels. For consumers who value these goods very highly, is this a good policy? If prices were allowed to increase, what do you think would happen to the quantity supplied of these highly valued goods? Explain. ANSWER: After a natural disaster, items like ice, water, rebuilding materials, et cet. are in greater demand, putting upward pressure on prices. Attempts to help people by controlling prices are misguided, since below-equilibrium prices will lead to shortages, just when people need these goods more. As suppliers cut quantities, buyers waste valuable time standing in line for the limited goods—or resort to bribes. The goods may not go to their highest-valued uses because people with lower-valued uses may simply get in line first. If the market were allowed to go to equilibrium, as the price rose the quantity supplied would rise as well. Everyone who wanted to buy a good at the equilibrium price would be able to, and customers with lower-valued uses would remove themselves from the market when the price rose higher than the use value.
350. Figure: Allocating Goods Under Price Ceilings
Refer to the figure and answer the questions, assuming a price ceiling of $6. a. If the goods are allocated to only the highest-valued uses, find the total dollar amount of consumer surplus. b. If the goods are allocated randomly between the high-valued uses and the low-valued uses, then what is the average value of the good? c. If goods are allocated randomly, what is the total dollar amount of consumer surplus? ANSWER: a. The quantity supplied is 120 units. The 120 highest-valued uses are on the demand curve above $14. Consumer surplus (CS) is the area between the price line and the demand curve for those 120 units. CS = ½ × ($20 – $14) × 120 + ($14 – $6) × 120 CS = $360 + $960 = $1320 b. The average value to consumers with a random allocation is halfway between the ceiling price and the demand curve's vertical intercept: ($20 + $6)/2 = $13. c. Consumer surplus is the area between the average value and the ceiling price times the quantity. CS = ($13 – $6) × 120 CS = $7 × 120 = $840
351. Figure: Random Allocation Under Price Ceilings
Copyright Macmillan Learning. Powered by Cognero.
Page 108
Name:
Class:
Date:
Chapter 5
Refer to the figure. The government enacted a price ceiling of $20 per unit. Calculate the following: a. If the goods are allocated randomly between the high-valued uses and the low-valued uses, what is the total amount of consumer surplus in dollars? b. What is the lost amount of consumer surplus when goods are allocated randomly, when compared to a situation in which the goods are allocated only to the highest-valued uses? ANSWER: a. With random allocation, the average value (AV) is the midpoint between the ceiling price and the demand curve's vertical intercept. Consumer surplus (CS) is the area from the price ceiling to the average value to the quantity supplied. Copyright Macmillan Learning. Powered by Cognero.
Page 109
Name:
Class:
Date:
Chapter 5 AV = ($40 + $20) ÷ 2 = $30 CS = ($30 − $20) × 1200 = $12,000 b. Consumer surplus with highest-valued allocation is the area above the ceiling price below the demand curve to the quantity supplied. CS = ½ × ($40 – $35) × 1200 + ($35– $20) × 1200 CS = ½ × $5 × 1200 + $15 × 1200 CS = $21,000 The loss when the allocation is random is $21,000 − $12,000 = $9,000.
352. Rent controls are typically implemented as a means of helping low-income families afford housing. Is this a good way to help poor families in general? Explain why or why not. ANSWER: There are better ways to help low-income families. A price ceiling will eventually reduce the quantity of housing offered. The result will be that the families who get into those units—not necessarily the families in the most need—will benefit, but other families in need may not be able to find a unit. Landlords will have less incentive to maintain their units, so there will be a reduction in quality. Since tenants and landlords would both be willing to make transactions at higher rental rates, there are lost gains from trade, which indicates a misallocation of resources. Search costs for housing seekers will rise. A better plan would be to provide low-income families with housing vouchers which they could use to subsidize rent. This would create an incentive to increase the supply of housing, and, since the vouchers would be means-tested, the policy would specifically benefit the families most in need.
353. Do shortages caused by rent controls tend to be larger in the short run or the long run? Use a supply and demand diagram to help illustrate your answer.
Copyright Macmillan Learning. Powered by Cognero.
Page 110
Name:
Class:
Date:
Chapter 5 ANSWER:
When rent controls are imposed, landlords have few choices in the short run because the apartments cannot quickly be Copyright Macmillan Learning. Powered by Cognero.
Page 111
Name:
Class:
Date:
Chapter 5 reassigned to some other use. Over time, however, they can be transformed into condominiums or torn down and rebuilt as more profitable assets. Since there is much less incentive to build more apartment buildings, as population grows and the demand curve shifts to the right the shortage grows larger over time.
354. Rent controls have five important effects on the market for apartments. List and describe the impact of each effect. ANSWER: Shortages: With a price ceiling pushing legal rental rates below the market rental rate, there is movement down both the supply and demand curves. The quantity demanded will exceed the quantity supplied, but the price cannot rise to eliminate the shortage. Reductions in Product Quality: Repairs and upkeep are expensive for landlords, and if they cannot recoup those costs, they will not undertake the required maintenance. The eventual result is dilapidated or abandoned apartment blocks. Wasteful Lines, Search Costs: Potential renters are faced with higher search costs to find artificially scarce apartments. Lost Gains from Trade: Both renters and landlords would prefer more apartments at higher rents but cannot alleviate the shortage with higher rents. The result is that mutually beneficial trades do not take place. Furthermore, the shortages give landlords the ability to pick and choose their tenants, with the possibility that discriminatory practices play a role. Misallocation of Resources: Apartments will be in short supply, so renters will feel compelled to take any apartment they find. The result is that some tenants will be in apartments that are much smaller than they would prefer, whereas others will be in apartments that are, for them, too large.
355. Specify the argument in favor of rent controls and the arguments against rent controls. Explain what other possible policies can create affordable housing. ANSWER: The main argument in favor of rent controls is that some people would not be able to afford a place to live at market rent levels. There are, however, several arguments against rent controls. These include a shortage of housing, inadequate maintenance of existing housing, higher search costs for renters, the deadweight loss from the foregone mutually beneficial transactions, and the misallocation of resources. This seems to provide two choices: housing some families cannot afford, or affordable housing that some families cannot find. There is, however, another option. Housing vouchers for low-income people would enable them to pay market rents in an equilibrium market and avoid the other problems resulting from price ceilings. Vouchers would also eliminate the unintended benefits higher-income renters get from rent controls.
356. Would you expect shortages due to rent controls to be more or less severe in the short run or in the long run? Does the elasticity of supply have a role to play? ANSWER: When rent controls are imposed, landlords have few choices in the short run. The apartments cannot quickly be reassigned to another use, so the elasticity of supply is low. Over time, supply elasticity grows because apartment buildings can be transformed into condominiums or torn down and rebuilt as more profitable assets. In addition, since the incentive to build more apartment buildings is much less, as population grows over time and the demand curve shifts to the right, the shortage grows larger.
357. Illustrate on a demand and supply diagram how the existence of a price floor would distort the market outcome, and specify what effect—i.e., shortage or surplus—the price floor may create.
Copyright Macmillan Learning. Powered by Cognero.
Page 112
Name:
Class:
Date:
Chapter 5 ANSWER:
At the higher-than-equilibrium price floor, there is movement from equilibrium up both the demand and supply curves, but the demand side of the market determines how many transactions are completed. The quantity supplied will rise as the quantity demanded falls, resulting in a surplus.
358. The demand and supply of labor are given by: Qd = 1,000 – 10W Copyright Macmillan Learning. Powered by Cognero.
Page 113
Name:
Class:
Date:
Chapter 5 Qs = 800 + 40W where Qd is the quantity demanded of labor, Qs is the quantity supplied of labor, and W is the hourly wage. a. What are the equilibrium wage and level of employment? b. Suppose the government mandates a minimum wage of $7. How many workers will firms employ? c. How many workers are unemployed because of the minimum wage of $7? ANSWER: a. Set the supply and demand equations equal to one another and solve for W. 1,000 – 10W = 800 + 40W 200 = 50W W=4 Substitute 4 for W into one of the equations to find Q. Qd = 1,000 – 10(4) Qd = 1,000 – 40 Qd = 960 b. Use the demand equation to find the quantity demanded at W = $7. Qd = 1,000 – 10W Qd = 1,000 – 10(7) Qd = 1,000 – 70 Qd = 930 c. Repeat with the supply equation to find quantity supplied. Qs = 800 + 40W Qs = 800 + 40(7) Qs = 800 + 280 Qs = 1080 Unemployment is the difference between quantity supplied and quantity demanded. Qs – Qd = 1080 – 930 = 150.
359. Currently, the federal minimum wage is set at $7.25 per hour. A survey conducted by Newsweek magazine (June 27, 2011) indicated that many Americans would be willing to work for far less than the minimum wage— some as low as 25¢ per hour! What would happen if the U.S. government eliminated the minimum wage and instead let wages be set by the marketplace? ANSWER: The impact may be less than most people expect, because such a small percentage of the workforce is paid the minimum wage. It is unclear how many people are willing to work for $0.25 an hour, but it is hard to believe there are many. The most likely result of repealing the minimum wage would be a drop in the wages paid to young and inexperienced workers, which would cause some of them to leave the labor force. The ultimate result would be that the labor market for low-skilled workers would move toward equilibrium, whereupon every worker willing to work at the market wage would be able to find a job, and employers could find people to fill their positions.
360. Graphically illustrate supply and demand in a market where a price floor has been instituted above the equilibrium price. Is there a shortage or a surplus of this good because of the price floor? On your graph, shade in the area of lost gains from trade and explain why a price floor results in market inefficiency.
Copyright Macmillan Learning. Powered by Cognero.
Page 114
Name:
Class:
Date:
Chapter 5 ANSWER:
The price floor causes a surplus in the market because the increase in price increases the quantity supplied and reduces the quantity demanded. The shaded triangle shows the lost gains from trade. Since sellers cannot compete with price, they will inefficiently increase the quality of the good above that desired by buyers. Resources that buyers would prefer be used to increase output in other markets are inefficiently used to produce this good that consumers value less.
361. Which statement is NOT true? Copyright Macmillan Learning. Powered by Cognero.
Page 115
Name:
Class:
Date:
Chapter 5 a. Markets not in equilibrium do not always have a deadweight loss. b. A market with a deadweight loss may produce more consumer surplus than a market in equilibrium. c. A market with a deadweight loss may produce more producer surplus than a market in equilibrium. d. Markets in equilibrium generate the maximum combined consumer and producer surplus. ANSWER: a 362. Figure: Price Ceilings and Consumer Valuation
The government imposes a price ceiling of $3 in this market. What is producer surplus before and after the price ceiling? a. $100 before and $30 after b. $200 before and $60 after c. $100 before and $90 after d. $200 before and $160 after ANSWER: a 363. Which statement is TRUE? a. Whether governments impose price controls to help buyers or sellers, the result is a net loss for society. b. Price ceilings benefit buyers so much that they negate the deadweight losses and produce net positive benefits for society. c. The main intent of price floors is to increase consumer surplus.
d. Because of market inefficiencies, gains from trade are larger with price regulations. ANSWER: a 364. Which statement is TRUE? a. In a command economy, markets do not move toward equilibrium, whereas in a market economy, markets
tend to move toward equilibrium. b. In a command economy, markets tend to move toward equilibrium, whereas in a market economy, markets tend to remain in disequilibrium. c. There is never a market in surplus in a command economy.
d. Because prices are relatively lower in a command economy, consumer surplus is greater than in a market economy.
ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 116
Name:
Class:
Date:
Chapter 5 365. The demand and supply of protective medical kits are given by Qd = 50 – 3P Qs = 15 + 4P where Qd is the quantity demanded, Qs is the quantity supplied, and P is the price. Suppose the government imposed a minimum price of $10 to encourage production. What is the deadweight loss? a. $65.63 b. $17.50 c. $204.75 d. $175.00 ANSWER: a 366. The demand and supply of protective medical kits are given by Qd = 100 – 2P Qs = 2P where Qd is the quantity demanded, Qs is the quantity supplied, and P is the price. Suppose the government imposed a minimum price of $40 to encourage production. What is the change in consumer surplus? a. $525 b. $625 c. $100 d. $450 ANSWER: a 367. The demand and supply of home virus-test kits are given by Qd = 100 – 2P Qs = 2P where Qd is the quantity demanded, Qs is the quantity supplied, and P is the price. Suppose the government imposed a maximum price of $10 to encourage consumption. What is the change in consumer surplus? a. $75 b. $625 c. $700 d. $225 ANSWER: a 368. Which is MOST likely to happen if there are price gouging laws imposed after a natural disaster? a. Some people will buy milk for their coffee or tea but parents may not be able to find milk for their children. b. Plywood manufacturers will divert plywood to the affected area to quicken rebuilding. c. Vendors will increase the amount of ice available to prevent food from spoiling. d. Markets will find new equilibria at the controlled prices that eliminate any shortages. ANSWER: a 369. You wake up in a strange land and, over time, notice that there always seem to be long lines at some stores whereas in other stores merchandise is stacked in the aisles. To get goods or services, you have to curry favor with certain people. You MOST likely woke up in a(n): Copyright Macmillan Learning. Powered by Cognero.
Page 117
Name:
Class:
Date:
Chapter 5 a. command economy. b. market economy. c. economy with maximum consumer surplus. d. economy with universal market equilibrium. ANSWER: a 370. Figure: Price Ceilings and Consumer Valuation
If businesses compete with quality improvements when the government imposes a price floor of $7 in this market, how many mutually beneficial transactions are eliminated, and what is the value of wasted resources? a. 20; $120 b. 30; $40 c. 20; $40 d. 30; $30 ANSWER: a
Copyright Macmillan Learning. Powered by Cognero.
Page 118
Name:
Class:
Date:
Chapter 6 1. Which of these is the best measure of a country's standard of living? a. nominal GDP b. real GDP c. nominal GDP per capita d. real GDP per capita ANSWER: d 2. Real GDP per capita is calculated as the total real GDP divided by the: a. GDP deflator. b. nominal GDP. c. total population. d. price level. ANSWER: c 3. Table: Small-Town GDP Town Real GDP (U.S. dollars) Population A 4,859,307 250 B 10,000,050 175 C 6,000,000 320 D 3,549,289 90 Which of the four towns has the highest standard of living? a. town A b. town B c. town C d. town D ANSWER: b 4. Table: Small-Town GDP Town Real GDP (U.S. dollars) Population A 4,859,307 250 B 10,000,050 175 C 6,000,000 320 D 3,549,289 90 Which of the four towns has the lowest standard of living? a. town A b. town B c. town C d. town D ANSWER: c 5. The United States has the largest _____ of any country in the world and China has a larger _____. a. GDP; GDP per capita b. population; GDP Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 6 c. GDP per capita; GDP d. GDP; population ANSWER: d 6. GDP per capita is GDP divided by: a. population. b. the price level. c. the inflation rate. d. the unemployment rate. ANSWER: a 7. Gross domestic product is the market value of all: a. goods and services sold within a country in a year. b. finished goods and services produced within a country in a year. c. goods and services produced within a country in a year. d. finished goods and services produced by a country's permanent residents, wherever located, in a year. ANSWER: b 8. Which of these would be included in GDP for the United States? a. Toyota, a Japanese car company, producing cars in the United States b. a U.S. professor taking a year off to teach at the London School of Economics c. a tire manufacturer making and selling tires to Ford to be used in its new cars d. Jane's purchase of a used car after her old car is destroyed in an accident ANSWER: a 9. Which of these would NOT be included in GDP for the United States? a. Toyota, a Japanese car company, producing cars in the United States b. an immigrant from Mexico working legally in the United States as a childcare worker for a U.S. family c. Chrysler manufacturing cars in the United States d. Matt purchasing an antique desk for a new home office ANSWER: d 10. Gross domestic product (GDP) is the market value of: a. all finished goods and services produced within a country in a year. b. both intermediate and finished goods and services produced within a country in a year. c. all finished goods, but not services produced, within a country in a year. d. both intermediate and finished goods, but not services produced, within a country in a year. ANSWER: a 11. GNP measures: a. the same things as GDP but also includes financial assets. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 6 b. production by a country's citizens wherever they work in the world. c. the production of both intermediate and finished goods and services. d. goods and services produced by foreign businesses inside U.S. borders. ANSWER: b 12. National wealth refers to the value of a nation's entire stock of: a. assets. b. savings. c. gold. d. currency. ANSWER: a 13. What makes a bigger contribution to GDP, 12 million cars sold at $28,000 each or 20 million computers sold at $1,000 each? a. 12 million cars b. 20 million computers c. Both make the same contribution. d. It is impossible to say without knowing the costs of production. ANSWER: a 14. What makes a bigger contribution to GDP, 95,000 graphing calculators sold at $140 each or 890,000 candles sold at $10 each? a. 95,000 graphing calculators b. 890,000 candles c. Both make the same contribution. d. It is impossible to say without knowing the costs of production. ANSWER: a 15. The difference between a finished good and an intermediate good is that: a. finished goods are not counted as part of GDP. b. intermediate goods are of lower quality than finished goods. c. an intermediate good is sold for use as a component in a finished good. d. a finished good is sold for use as a component of an intermediate good. ANSWER: c 16. Suppose a doctor spends half of the year in the United States and the other half in Canada and works in both places. How does the doctor's production get allocated between U.S. and Canadian GDP? a. Half of the doctor's income counts toward U.S. GDP and half toward Canadian GDP. b. The full income is counted in the GDP of the country in which the doctor is a permanent resident. c. The full income gets counted in both U.S. GDP and Canadian GDP. d. The value of the services produced in the United States gets counted in U.S. GDP and the value of the services produced in Canada gets counted in Canadian GDP.
Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 6 ANSWER: d 17. Suppose a doctor spends half of the year in the United States and the other half in Canada and works in both places. How is the doctor's production allocated between U.S. and Canadian GNP? a. Half of the doctor's income counts toward U.S. GNP and half toward Canadian GNP. b. It depends on whether the doctor is a permanent resident of the United States or Canada. c. The full income gets counted in both U.S. GNP and Canadian GNP. d. The value of the services produced in the United States is counted in U.S. GNP and the value of the services produced in Canada is counted in Canadian GNP.
ANSWER: b 18. GDP: a. is a measure of national wealth. b. measures the stock of assets, while national wealth measures production in a year. c. measures the value of production in a year, while national wealth measures a stock of assets. d. is usually higher than national wealth. ANSWER: c 19. The most common measure of the size of an economy is its: a. national wealth. b. GDP. c. GDP per capita. d. population. ANSWER: b 20. If a country produced nothing but 20 smartphones and 10 Blu-ray players in 2017, priced at $100 per smartphone and $200 per Blu-ray player, its GDP in 2017 would be $: a. 1,000. b. 2,000. c. 4,000. d. 5,000. ANSWER: c 21. If a country produced nothing but 45 computers and 30 automobiles in 2021, priced at $750 per computer and $25,000 per automobile, its GDP in 2021 would be $: a. 783,750. b. 1,147,500. c. 33,750. d. 750,000. ANSWER: a 22. A set of tires installed on a vehicle produced by an automobile factory is counted as a(n): Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 6 a. finished good, and its market price is part of GDP. b. finished good, and its market price is not part of GDP. c. intermediate good, and its market price is part of GDP. d. intermediate good, and its market price is not part of GDP. ANSWER: d 23. The market value of all finished goods and services produced by a country's residents in a year, whether at home or abroad, is called: a. GDP. b. GNP. c. GDI. d. FDI. ANSWER: b 24. GDP includes the: a. current market value of government purchases of goods and services. b. sales of stocks and bonds at current market prices. c. current market value of used cars. d. current market value of all existing homes, regardless of when they were built. ANSWER: a 25. When a German firm produces a vehicle in the United States, the production is part of: a. U.S. GDP but not GNP. b. U.S. GNP but not GDP. c. both U.S. GDP and GNP. d. neither U.S. GDP nor GNP. ANSWER: a 26. Suppose you spent $10,000 in 2016 remodeling your house, which you originally built for $200,000 in 2000. As a result, GDP in 2016 would: a. not change. b. increase by $10,000. c. increase by $200,000. d. increase by $210,000. ANSWER: b 27. Suppose you spent $2,500 in 2020 refurbishing your car, which you originally bought brand new for $22,000 in 2009. As a result, GDP in 2020 would: a. not change. b. increase by $2,500. c. increase by $22,000. Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 6 d. increase by $24,500. ANSWER: b 28. The market value of all finished goods and services produced within a given country in a year divided by the country's population is: a. GNP. b. GNP per capita. c. GDP. d. GDP per capita. ANSWER: d 29. The value of a car produced and sold in 2015 and sold again in 2017 is included in: a. 2015's GDP only. b. 2017's GDP only. c. both 2015's GDP and 2017's GDP. d. neither 2015's nor 2017's GDP. ANSWER: a 30. Which of these would be included in 2017's GDP? a. the 2017 resale of a house built in 2015 b. the sale of bonds in 2017 c. the sale of stocks in 2017 d. the real estate agent's commission on the 2017 resale of a house built in 2015 ANSWER: d 31. When GDP is calculated, goods are valued using the: a. cost of all inputs used in the production. b. consumer price index. c. producer price index. d. current market price. ANSWER: d 32. To avoid double accounting, the value of: a. finished goods, but not intermediate goods, is included in GDP. b. intermediate goods only is included in GDP. c. both finished goods and intermediate goods is included in GDP. d. neither finished goods nor intermediate goods is included in GDP. ANSWER: a 33. The value of production by a U.S. worker employed by a firm located in Canada is included in: a. Canada's GDP only. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 6 b. U.S. GDP only. c. GDP for both Canada and the United States. d. neither country's GDP. ANSWER: a 34. The value of production by a U.S. worker employed by a firm located in Canada is included in: a. both Canada's GDP and Canada's GNP. b. both U.S. GDP and U.S. GNP. c. Canada's GDP and U.S. GNP. d. U.S. GDP and Canada's GNP. ANSWER: c 35. Which of these is a finished good and should be included in GDP? a. antivirus software preloaded on computers b. computer chips c. notebook computers d. power cords packaged with new computers ANSWER: c 36. GNP is the market value of all finished goods and services produced: a. within a country's borders in a year. b. within a country's borders over time. c. by a country's permanent residents within the country's borders in a year. d. by a country's permanent residents, wherever they are located, in a year. ANSWER: d 37. Akemi, who is a Japanese citizen, works in the United States as a computer programmer. The value of Akemi's output is included in: a. both U.S. and Japan's GDP. b. both U.S. and Japan's GNP. c. U.S. GDP and Japan's GNP. d. U.S. GNP and Japan's GDP. ANSWER: c 38. The value of a country's GDP exceeds that of the country's GNP if the value of the: a. country's exports exceeds the value of its imports. b. country's imports exceeds the value of its exports. c. output produced by foreign workers in the country exceeds the value of output produced by the country's
permanent residents in other countries. d. output produced by the country's permanent residents in other countries exceeds the value of output produced by foreign workers in the country.
ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 6 39. A tractor built in 2001 and still in operation today is: a. part of today's national wealth and GDP. b. part of today's national wealth but not part of today's GDP. c. part of today's GDP but not part of today's national wealth. d. neither part of today's national wealth nor today's GDP. ANSWER: b 40. National wealth refers to the value of a nation's entire stock of: a. physical assets accumulated over time. b. physical assets produced in a given year. c. financial assets accumulated over time. d. financial assets sold in a given year. ANSWER: a 41. GDP is calculated by: a. adding the quantities of all goods and services that exist in an economy. b. adding the prices of all goods and services that exist in an economy. c. dividing the quantity of all goods and services produced that year by their prices and adding together the
results. d. multiplying the quantity of all goods and services produced that year by their prices and adding together the results.
ANSWER: d 42. What data are needed to calculate GDP? a. only the quantities of goods and services produced b. only the prices of goods and services produced c. both quantities and prices of goods and services produced d. only the costs of producing goods and services ANSWER: c 43. Table: Prices and Quantities in a Four-Good Economy Product Price Quantity Shovels $20 50 Books $50 100 Tomatoes $1 500 Pizzas $10 120 Suppose an economy produces only the four goods listed. What is the GDP in this country? a. $6,200 b. $6,700 c. $7,200 d. $7,700 ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 6 44. Table: Prices and Quantities in a Five-Good Economy Product Price Quantity Picture frames $10 75 Leather belts $40 50 Running shoes $65 250 Pens $1 4,000 Denim jackets $55 150 Suppose an economy produces only the five goods listed. What is the GDP in this country? a. $31,250 b. $27,250 c. $30,500 d. $29,250 ANSWER: a 45. The calculation of GDP includes: a. neither finished goods nor intermediate goods. b. only intermediate goods. c. only finished goods. d. both intermediate and finished goods. ANSWER: c 46. Which of these goods is an intermediate good that would NOT be counted in GDP in the year it is produced? a. a tractor b. wood used for making furniture c. an oven for installation in a bakery d. flour sold in a grocery store ANSWER: b 47. Which of these goods is a finished good that would be counted in GDP in the year it is produced? a. tomatoes used by an Italian restaurant b. wood used for making furniture c. an oven for installation in a bakery d. a computer chip used in a laptop computer ANSWER: c 48. A sound system produced by a supplier to Ford Motor Company is an example of a(n): a. inferior good. b. finished good. c. public good. d. intermediate good. Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 6 ANSWER: d 49. The sale of sugar will contribute to GDP when the buyer is: a. Krispy Kreme Doughnuts. b. a person who is baking cookies at home. c. a Mexican food restaurant. d. a grocery store chain. ANSWER: b 50. Birmingham Steel sells steel to Winston Golf Club Manufacturers for $300,000. Winston sells its golf clubs to Academy Sports for $1,000,000. Academy Sports sells these golf clubs to consumers for $1,500,000. How much is added to GDP? a. $1,000,000 b. $1,500,000 c. $2,500,000 d. $2,800,000 ANSWER: b 51. Intel sells computer chips to Hewlett-Packard for $1,500,000. Hewlett-Packard uses the computer chips to make computers and sells the computers to Best Buy for $4,300,000. Best Buy sells these computers to consumers for $5,500,000. How much is added to GDP? a. $4,300,000 b. $5,500,000 c. $9,800,000 d. $11,300,000 ANSWER: b 52. Finished goods are goods: a. used to produce other goods. b. consumed or held in inventories. c. used up in the production process. d. that cannot be exported. ANSWER: b 53. Intermediate goods are goods: a. used in production as parts of other goods. b. consumed or held in inventories. c. used as equipment in the production process. d. that cannot be exported. ANSWER: a 54. A computer chip sold to Dell is an example of a(n): Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 6 a. finished good. b. intermediate good. c. service. d. inferior good. ANSWER: b 55. A computer chip that you purchase to repair your home computer is an example of a(n): a. finished good. b. intermediate good. c. service. d. inferior good. ANSWER: a 56. Orrin mines iron ore, which is sold to Thorin, who turns iron ore into steel. The steel is sold to Gorin, who turns the steel into battle axes. The battle axes are sold by a merchant in the city to adventurers. Which of these would be considered a finished good? a. the iron ore b. the steel c. the battle axes sold to the merchant d. the battle axes sold to the adventurers ANSWER: d 57. Imagine that Jack and Jill buy $500 worth of milk and $200 worth of crayons and coloring books each year for use in their day-care business. Jack and Jill also hire a day-care attendant at a salary of $14,000 per year. If Jack and Jill sell $100,000 worth of day care to parents each year, what is the contribution to GDP by Jack and Jill's Day Care? a. $700 b. $100,000 c. $100,700 d. $114,700 ANSWER: b 58. Table: Prices and Quantities in a Four-Good Economy Product Price Quantity Shovels $20 50 Books $50 100 Tomatoes $1 500 Pizzas $10 120 Suppose an economy produces only the four goods listed. All of the country's tomatoes are used in the production of pizzas. What is the GDP in this country? a. $6,200 b. $6,700 Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 6 c. $7,200 d. $7,700 ANSWER: c 59. Today, the biggest portion of U.S. GDP comes from: a. services. b. goods. c. intermediate goods. d. used goods. ANSWER: a 60. The calculation of GDP includes: a. both goods and services. b. goods, but not services. c. services, but not goods. d. neither goods nor services. ANSWER: a 61. An increase in the price you pay for a haircut will: a. contribute to GDP as a purchase of a good. b. contribute to GDP as a purchase of a service. c. not contribute to GDP. d. contribute to GDP only if your hair stylist is a U.S. citizen. ANSWER: b 62. Services involve production that provides: a. a benefit along with the production of a tangible physical product. b. a benefit without the production of a tangible physical product. c. no benefit to the producer. d. no benefit to the consumer. ANSWER: b 63. The value of a car produced and sold in 2000 and sold again to a second owner in 2008 would be included in GDP for: a. 2000 only. b. 2008 only. c. both 2000 and 2008. d. either 2000 or 2008, but not both. ANSWER: a 64. Which of these transactions occurring in 2017 would contribute to GDP for 2017? Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 6 a. A contractor sells a new house that was built in 2009. b. Mario sells his used car. c. Sally buys $10,000 worth of U.S. government bonds as an investment. d. Boeing sells a 787 aircraft produced in 2017 to a Korean airline. ANSWER: d 65. Which transaction will be included in GDP? a. the purchase of a used bicycle on eBay b. the purchase of a home built in 1957 c. the purchase of a real estate agent's services d. the purchase of 1,000 shares of IBM stock ANSWER: c 66. You sell your old bedroom set to your roommate for $1,800 and buy new custom-built furniture for $6,000. How much is added to GDP? a. $1,800 b. $4,200 c. $6,000 d. $7,800 ANSWER: c 67. Tim buys a house from Betty in 2017 for $200,000. Betty receives $185,000 and $15,000 goes to Mary, the real estate agent. Betty originally purchased the house in 2007 for $240,000. What value is added to GDP in 2017 for this transaction? a. −$40,000 b. $15,000 c. $185,000 d. $200,000 ANSWER: b 68. A car produced by the American company GM in a plant located in Canada would be included in: a. U.S. GDP, but not U.S. GNP. b. U.S. GNP, but not U.S. GDP. c. both U.S. GDP and U.S. GNP. d. neither U.S. GDP nor U.S. GNP. ANSWER: b 69. A car produced by the Japanese company Honda in a plant located in Ohio would be included in: a. U.S. GDP, but not U.S. GNP. b. U.S. GNP, but not U.S. GDP. c. both U.S. GDP and U.S. GNP. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 6 d. neither U.S. GDP nor U.S. GNP. ANSWER: a 70. Which of these would be included in U.S. GDP? a. the purchase of stocks and bonds by a retiree living in Florida b. wages earned by an American working on an oil rig in Mexico c. cars produced in a Honda (a Japanese company) plant in Marysville, Ohio d. cars produced in a GM plant located in Canada ANSWER: c 71. Which of these would be included in U.S. GNP? a. the purchase of stocks and bonds by a retiree living in Florida b. wages earned by a Canadian teaching at an American university c. cars produced in a Honda (a Japanese company) plant in Marysville, Ohio d. cars produced in a Ford (a U.S. company) plant located in Canada ANSWER: d 72. This summer, a U.S. citizen has a paid internship at the South Korean carmaker Kia Motors at its offices located in Canada. The intern's work contributes to the GDP of which nation(s)? a. the United States b. Canada c. South Korea d. Canada, South Korea, and the United States ANSWER: b 73. Gross domestic product (GDP) differs from gross national product (GNP) in that: a. GNP measures the production of a country's permanent residents and property wherever in the world they are located. b. GNP measures the production of both permanent residents and foreign workers within a country's borders.
c. GNP measures the production of a country's permanent residents and property within a country's borders. d. GNP measures only the production of foreign workers within a country's borders. ANSWER: a 74. If a U.S. citizen accepts a job in Mexico after college, the U.S. citizen's income will be part of GDP in: a. Mexico only. b. the United States only. c. both Mexico and the United States. d. neither Mexico nor the United States. ANSWER: a 75. If an American citizen or permanent resident accepts a job in Mexico after college, that person's income will be part of GNP in: Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 6 a. Mexico only. b. the United States only. c. both Mexico and the United States. d. neither Mexico nor the United States. ANSWER: b 76. GDP tells us: a. the value of production within a nation in a year. b. how much wealth the nation has accumulated in its entire history. c. the value of the nation's entire stock of assets, excluding financial assets. d. the value of the nation's entire stock of assets, excluding natural resources. ANSWER: a 77. In general, during any given year: a. GDP in the United States will exceed wealth in the United States. b. wealth in the United States will exceed GDP in the United States. c. U.S. wealth and U.S. GDP will be approximately equal. d. U.S. wealth and U.S. GDP will be unrelated. ANSWER: b 78. GDP is calculated by the: a. Council of Economic Advisors. b. Federal Reserve Board. c. Bureau of Economic Analysis. d. U.S. Treasury. ANSWER: c 79. How often is GDP reported for the U.S. economy? a. weekly b. monthly c. quarterly d. annually ANSWER: c 80. What is the term for the value of a nation's entire stock of assets? a. gross domestic product b. gross national product c. national wealth d. real gross domestic product ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 6 81. The basic concept of GDP is the _____ for all goods and services produced in an economy. a. sum of the quantity b. sum of the price times the quantity c. quantity plus the price d. average price times the average quantity ANSWER: b 82. The computation of GDP avoids double counting of output because _____ are included. a. only finished goods b. only intermediate goods c. both finished and intermediate goods d. finished, intermediate, and used goods ANSWER: a 83. Which would NOT be included in the calculation of GDP? a. a new car purchased at an automobile dealership b. a haircut obtained from a barbershop c. shares of stock traded on a stock exchange d. a new tractor purchased by a farmer ANSWER: c 84. The main difference between GDP and GNP is that GDP includes the output produced _____ and GNP includes the output produced _____. a. by the country's labor and capital regardless of location; within the geographical boundaries of the country b. within the geographical boundaries of the country; by the country's labor and capital regardless of location c. for inputs and finished products; for inputs only d. for inputs only; for inputs and finished products ANSWER: b 85. If a French citizen designs custom-sewn garments in Canada, the value of the design work is included in: a. Canada's GDP and France's GNP. b. Canada's GNP and France's GDP. c. Canada's GNP but not France's GNP. d. the GDP of both Canada and France. ANSWER: a 86. Which is false regarding GDP? a. GDP measures the value of the production from labor and capital of a certain country. b. GDP does not include the value of used items that are sold. c. GDP does not add in the value of intermediate goods. d. GDP reflects both the quantity and value of production in a certain country. Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 6 ANSWER: a 87. The growth rate of real GDP tells how rapidly the country's level of _____ is rising or falling over time. a. debt b. trade activity c. investment d. production ANSWER: d 88. A country's GDP (in billions) was $5,690 in 2016 and $5,899 in 2017. What was the growth rate of GDP? a. 1.03% b. 3.54% c. 3.67% d. 9.64% ANSWER: c 89. A country's GDP (in billions) was $7,540 in 2018 and $6,770 in 2019. What was the growth rate of GDP? a. −10.21% b. 11.37% c. 1.37% d. −11.58% ANSWER: a 90. A country had a 2016 GDP growth rate of 4.2% and a 2015 GDP of $8,222 (in billions). What was the GDP in 2016? a. $7,876 b. $8,355 c. $8,567 d. $8,635 ANSWER: c 91. A country had a 2019 GDP growth rate of −5.3% and a 2018 GDP of $9,370 (in billions). What was the GDP in 2019? a. $8,873 b. $8,738 c. $9,867 d. $9,678 ANSWER: a 92. If nominal GDP in 2016 was $5.43 (in trillions) and in 2017 the level of nominal GDP rose to $6.11 (in trillions), what was the 2017 growth rate of nominal GDP? a. –11.1% Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 6 b. –12.5% c. 11.1% d. 12.5% ANSWER: d 93. GDP in the United States was $14,119 billion in 2014 and grew to $14,660.4 billion in 2015. This represents an annual growth rate of: a. $541.4 billion. b. 1.04%. c. 3.7%. d. 3.8%. ANSWER: d 94. Given the GDP at the end of both 2004 and 2005, the growth rate of GDP for 2005 is calculated as: a. (GDP2005 − GDP2004) divided by GDP2005 × 100. b. (GDP2004 − GDP2005) divided by GDP2005 × 100. c. (GDP2005 − GDP2004) divided by GDP2004 × 100. d. (GDP2004 − GDP2005) divided by GDP2004 × 100. ANSWER: c 95. If GDP was $10 billion in 2016 and $11 billion in 2017 and the population grew 5% between 2016 and 2017, the growth rate of GDP per capita between 2016 and 2017 was: a. −10%. b. −5%. c. 5%. d. 10%. ANSWER: c 96. If GDP was $20 billion in 2019 and $22 billion in 2020 and the population grew 10% between 2019 and 2020, the growth rate of GDP per capita between 2019 and 2020 was: a. 0. b. 2%. c. 20%. d. 10%. ANSWER: a 97. Table: Wheat and Corn Year Price of Wheat (per Quantity of Wheat bushel) (million bushels) 2005 $56 1,250 2006 $64 1,360 2007 $72 1,420 Copyright Macmillan Learning. Powered by Cognero.
Price of Corn (per Quantity of Corn bushel) (million tons) $44 940 $52 1,050 $55 1,120 Page 18
Name:
Class:
Date:
Chapter 6 2008 $80 1,500 $62 1,260 Consider a country that produces only wheat and corn. Based on the data in the table, the growth rate of nominal GDP from 2005 to 2006 was: a. 8%. b. 16%. c. 21%. d. 27%. ANSWER: d 98. Table: Wheat and Corn Year Price of Wheat (per Quantity of Wheat Price of Corn (per Quantity of Corn bushel) (million bushels) bushel) (million tons) 2005 $56 1,250 $44 940 2006 $64 1,360 $52 1,050 2007 $72 1,420 $55 1,120 2008 $80 1,500 $62 1,260 Consider a country that produces only wheat and corn. Based on the data in the table, the growth rate of real GDP from 2007 to 2008 (in 2005 dollars) was: a. 8.3%. b. 15.7%. c. 25.2%. d. 27%. ANSWER: a 99. What is the formula for computing a certain country's GDP growth rate for 2017? a. (GDP2018 + GDP2017) / GDP2016 b. (GDP2018 − GDP2017) / GDP2017 c. (GDP2017 − GDP2016) / GDP2016 d. (GDP2017 − GDP2016) / GDP2017 ANSWER: c 100. What is the term for GDP when price levels are held constant? a. annual GDP b. nominal GDP c. real GDP d. aggregate GDP ANSWER: c 101. The measure of GDP that is based on each year's prices is called: a. annual GDP. b. nominal GDP. c. real GDP. Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 6 d. aggregate GDP. ANSWER: b 102. The measure of GDP that has been adjusted for changes in prices is called: a. annual GDP. b. nominal GDP. c. real GDP. d. aggregate GDP. ANSWER: c 103. Nominal GDP is calculated using: a. prices at the time of sale. b. the cost of production. c. the same prices in all years. d. a correction for inflation. ANSWER: a 104. Real GDP is calculated using: a. prices at the time of sale. b. the cost of production. c. the same prices in all years. d. a correction for intermediate goods. ANSWER: c 105. A real variable is one that: a. uses prices at the time of sale. b. uses the cost of production. c. has not been adjusted for inflation. d. includes an adjustment for inflation. ANSWER: d 106. A nominal variable is one that: a. uses prices in a base year. b. uses the cost of production. c. has not been adjusted for inflation. d. includes a correction for inflation. ANSWER: c 107. Table: Three-Good Economy 1 Product Quantity (2008) Price (2008) Quantity (2009) Computers 25 $800.00 30 Pizzas 90 $9.00 100 Copyright Macmillan Learning. Powered by Cognero.
Price (2009) $1,000.00 $10.00 Page 20
Name:
Class:
Date:
Chapter 6 Burgers 180 $1.80 200 $2.00 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. What was the nominal GDP in 2008? a. $20,134 b. $21,134 c. $25,260 d. $26,260 ANSWER: b 108. Table: Three-Good Economy 1 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 25 $800.00 30 $1,000.00 Pizzas 90 $9.00 100 $10.00 Burgers 180 $1.80 200 $2.00 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and price of goods sold in 2008 and 2009. What was the nominal GDP in 2009? a. $20,134 b. $21,134 c. $26,260 d. $31,400 ANSWER: d 109. Table: Three-Good Economy 1 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 25 $800.00 30 $1,000.00 Pizzas 90 $9.00 100 $10.00 Burgers 180 $1.80 200 $2.00 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. If prices in 2008 are used to calculate real GDP, what was the real GDP in 2008? a. $20,134 b. $21,134 c. $25,260 d. $26,260 ANSWER: b 110. Table: Three-Good Economy 1 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 25 $800.00 30 $1,000.00 Pizzas 90 $9.00 100 $10.00 Burgers 180 $1.80 200 $2.00 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. If prices in 2008 are used to calculate real GDP, what was the real GDP in 2009? Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 6 a. $20,134 b. $21,134 c. $25,260 d. $31,400 ANSWER: c 111. Table: Three-Good Economy 1 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 25 $800.00 30 $1,000.00 Pizzas 90 $9.00 100 $10.00 Burgers 180 $1.80 200 $2.00 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. What was the growth rate of nominal GDP in 2009? a. 10.5% b. 19.5% c. 22.2% d. 48.6% ANSWER: d 112. Table: Three-Good Economy 1 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 25 $800.00 30 $1,000.00 Pizzas 90 $9.00 100 $10.00 Burgers 180 $1.80 200 $2.00 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. If prices in 2008 are used to calculate real GDP, what was the growth rate of real GDP in 2009? a. 4.0% b. 19.5% c. 24.3% d. 48.6% ANSWER: b 113. Table: Three-Good Economy 2 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 30 $1,000 28 $995 Pizzas 100 $10 150 $15 Burgers 200 $20 210 $20 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. What was the growth rate of real GDP in 2009 if 2008 prices are used in the calculation of real GDP? a. −3.71% b. −5.62% Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 6 c. 1.00% d. 2.94% ANSWER: a 114. Table: Three-Good Economy 2 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 30 $1,000 28 $995 Pizzas 100 $10 150 $15 Burgers 200 $20 210 $20 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. If 2008 prices are used in the calculation of real GDP, then nominal GDP in 2009 was $_____ and real GDP in 2009 was $_____. a. 34,310; 33,700 b. 35,350; 34,310 c. 33,700; 35,000 d. 35,000; 33,700 ANSWER: a 115. Table: Three-Good Economy 2 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 30 $1,000 28 $995 Pizzas 100 $10 150 $15 Burgers 200 $20 210 $20 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. What was the growth rate of real GDP in 2009 if 2009 prices are used in the calculation of real GDP? a. −3.71% b. −2.94% c. −1.97% d. 1.00% ANSWER: b 116. Table: Three-Good Economy 2 Product Quantity (2008) Price (2008) Quantity (2009) Price (2009) Computers 30 $1,000 28 $995 Pizzas 100 $10 150 $15 Burgers 200 $20 210 $20 Suppose an economy produces only the three finished goods shown in the table. The table gives information on the quantities produced and the prices of goods sold in 2008 and 2009. What was the real GDP in 2009 if 2009 prices are used in the calculation of real GDP? a. $33,700 b. $35,000 c. $34,310 d. $35,350 Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 6 ANSWER: c 117. Growth in nominal GDP can be caused by: a. only an increase in prices over time. b. only an increase in production over time. c. an increase in either prices or production over time. d. neither an increase in prices nor an increase in production over time. ANSWER: c 118. For an industrialized country experiencing a 3% growth rate in real GDP, what is the MOST likely reason that real GDP per capita is decreasing? a. The country's population is growing faster than the growth of real GDP. b. The country's government is hoarding large amounts of the country's production. c. The country's population is growing slower than the growth of nominal GDP. d. The country's nominal GDP is growing slower than its real GDP. ANSWER: a 119. Increases in real GDP per capita are considered the best measure of increases in living standards because they measure: a. only increases in prices. b. only increases in production. c. both increases in prices and increases in production. d. only increases in the cost of living. ANSWER: b 120. Increases in _____ are considered the best measure of increases in living standards because they measure increases in production. a. national wealth b. consumer spending c. nominal GDP d. real GDP per capita ANSWER: d 121. If 2009 prices are used in the calculation of real GDP, then nominal GDP will be _____ real GDP in 2009. a. greater than b. less than c. equal to d. unrelated to ANSWER: c 122. If 2016 prices are used in the calculation of real GDP and inflation occurs between 2016 and 2017, then nominal GDP will be _____ real GDP in 2017. Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 6 a. greater than b. less than c. equal to d. unrelated to ANSWER: a 123. Economists prefer using real GDP per capita as a measure of average individual prosperity because, other things held constant, increases in _____ represent true increases in the standard of living. a. per person production b. prices c. inflation d. consumer spending ANSWER: a 124. If real GDP rose in 2016, we can conclude that: a. production rose in 2016. b. the price level rose in 2016. c. either production or the price level, or both, rose in 2016. d. neither production nor the price level rose in 2016. ANSWER: a 125. If nominal GDP rose in 2016, we can conclude that: a. production rose in 2016. b. the price level rose in 2016. c. either production or the price level, or both, rose in 2016. d. neither production nor the price level rose in 2016. ANSWER: c 126. The difference between nominal GDP and real GDP is that nominal GDP: a. measures the total value of only finished goods and services, whereas real GDP measures the value of all
goods and services, both intermediate and finished. b. measures a country's production of finished goods and services at current market prices, whereas real GDP measures a country's production of finished goods and services at the same prices in all years. c. is measured in terms of numbers of goods and services produced, whereas real GDP is measured in dollar terms. d. measures a country's production of finished goods and services at fixed prices, whereas real GDP measures a country's production of all finished goods and services at current market prices.
ANSWER: b 127. Which statement is TRUE? a. Nominal GDP is always larger than real GDP. b. Nominal GDP can rise from one year to the next only because of price increases. c. Nominal GDP can rise from one year to the next only because of production increases. Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 6 d. Nominal GDP can rise from one year to the next because of price increases or because of production increases, or both.
ANSWER: d 128. Which statement is TRUE? a. Real GDP is always less than nominal GDP. b. Real GDP can rise from one year to the next only because of price increases. c. Real GDP can rise from one year to the next only because of an increase in the production of goods and
services. d. Real GDP can rise from one year to the next because of price increases or because of production increases, or both.
ANSWER: c 129. If a country is experiencing inflation, it means that: a. nominal GDP and real GDP are growing at the same rate. b. nominal GDP is growing faster than real GDP. c. real GDP is growing faster than nominal GDP. d. nominal GDP is growing and real GDP is falling. ANSWER: b 130. Table: GDP Data 2000 GDP in 2000 dollars $11.6 trillion 1995 GDP in 2000 dollars $10.0 trillion 1995 GDP in 1995 dollars $8.8 trillion Using the GDP data in the table, how much did nominal GDP grow between 1995 and 2000? a. −14.50% b. 16.00% c. 13.63% d. 31.82% ANSWER: d 131. Table: GDP Data 2000 GDP in 2000 dollars $11.6 trillion 1995 GDP in 2000 dollars $10.0 trillion 1995 GDP in 1995 dollars $8.8 trillion Using the GDP data in the table, how much did real GDP grow between 1995 and 2000, in 2000 dollars? a. −14.50% b. 16.00% c. 13.63% d. 31.80% ANSWER: b 132. Table: Wheat and Corn Year Price of Wheat (per Quantity of Wheat Copyright Macmillan Learning. Powered by Cognero.
Price of Corn (per Quantity of Corn Page 26
Name:
Class:
Date:
Chapter 6 bushel) (million bushels) bushel) (million tons) 2005 $56 1,250 $44 940 2006 $64 1,360 $52 1,050 2007 $72 1,420 $55 1,120 2008 $80 1,500 $62 1,260 Consider a country that produces only wheat and corn. Based on the data in the table, the country's nominal GDP for year 2008 was $: a. 111,360 million. b. 141,640 million. c. 163,840 million. d. 198,120 million. ANSWER: d 133. Table: Wheat and Corn Year Price of Wheat (per Quantity of Wheat Price of Corn (per Quantity of Corn bushel) (million bushels) bushel) (million tons) 2005 $56 1,250 $44 940 2006 $64 1,360 $52 1,050 2007 $72 1,420 $55 1,120 2008 $80 1,500 $62 1,260 Consider a country that produces only wheat and corn. Based on the data in the table, the country's real GDP for year 2008 (in 2005 dollars) was $: a. 111,360 million. b. 128,800 million. c. 139,440 million. d. 141,640 million. ANSWER: c 134. Table: Wheat and Corn Year Price of Wheat (per Quantity of Wheat Price of Corn (per Quantity of Corn bushel) (million bushels) bushel) (million tons) 2005 $56 1,250 $44 940 2006 $64 1,360 $52 1,050 2007 $72 1,420 $55 1,120 2008 $80 1,500 $62 1,260 Consider a country that produces only wheat and corn. Based on the data in the table, the country's GDP deflator for 2008 (using 2005 prices for the calculation of real GDP) was: a. 100. b. 116. c. 127. d. 142. ANSWER: d 135. To compare levels of production from different years, the appropriate measure to use is: Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 6 a. nominal GDP. b. real GDP. c. GDP − GNP. d. the GDP deflator. ANSWER: b 136. Real GDP for the year 2000 (measured in 2005 dollars) is equal to: a. 2000 prices × 2000 quantities. b. 2005 prices × 2000 quantities. c. 2000 prices × 2005 quantities. d. 2005 prices × 2005 quantities. ANSWER: b 137. A real variable is one that corrects for: a. sales outside of a country's borders. b. inflation. c. population growth. d. unemployment. ANSWER: b 138. Table: iPhones Year Quantity Produced Price 2000 100 $100 2010 90 $110 This table shows data for a country producing only iPhones. Its nominal GDP in 2010 was $: a. 9,000. b. 9,900. c. 10,000. d. 10,800. ANSWER: b 139. Table: iPhones Year Quantity Produced Price 2000 100 $100 2010 90 $110 This table shows data for a country producing only iPhones. Its real GDP in 2010 (in 2000 dollars) was $: a. 9,000. b. 9,900. c. 10,000. d. 10,800. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 6 140. Table: iPhones Year Quantity Produced Price 2000 100 $100 2010 90 $110 This table shows data for a country producing only iPhones. The growth rate of real GDP between 2000 and 2010 (in 2000 dollars) was: a. −10%. b. 0%. c. 8%. d. 10%. ANSWER: a 141. Table: iPhones Year Quantity Produced Price 2000 100 $100 2010 90 $110 This table shows data for a country producing only iPhones. If 2000 prices are used in the calculation of real GDP, the GDP deflator for 2010 was: a. 10.0. b. 90.9. c. 110.0. d. 900.0. ANSWER: c 142. Table: iPhones Year Quantity Produced Price 2000 100 $100 2010 90 $110 This table shows data for a country producing only iPhones. Based on the GDP deflator, the increase in prices between 2000 and 2010 was: a. 1.0%. b. 9.9%. c. 10.0%. d. 110.0%. ANSWER: c 143. If in 2010, nominal GDP was $220 million and real GDP was $200 million, the GDP deflator in 2010 was: a. 88. b. 91. c. 100. d. 110. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 6 144. If a country's nominal GDP increases by 5% between two years while its GDP deflator increases by 4%, the country's real GDP: a. increases by 9%. b. increases by 1%. c. decreases by 1%. d. decreases by 9%. ANSWER: b 145. The GDP deflator is a price index that can be used to measure: a. changes in the standard of living. b. inflation. c. changes in population. d. changes in GDP. ANSWER: b 146. The GDP deflator is _____ multiplied by 100. a. real GDP divided by nominal GDP b. nominal GDP divided by real GDP c. real GDP divided by the population d. nominal GDP divided by the population ANSWER: b 147. In 2010, real GDP was $13.2 trillion and nominal GDP was $14.6 trillion. What was the GDP deflator for that year? a. 90.4 b. 110.6 c. 192.7 d. 140.0 ANSWER: b 148. In 2016, real GDP was $13.2 trillion and the GDP deflator was 110.6. What was nominal GDP for that year? a. $14.6 trillion b. $14.3 trillion c. $12.1 trillion d. $11.9 trillion ANSWER: a 149. In 2017, nominal GDP was $14.6 trillion and the GDP deflator was 110.6. What was real GDP for that year? a. $16.1 trillion b. $14.3 trillion Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 6 c. $13.2 trillion d. $12.1 trillion ANSWER: c 150. In 2014, real GDP was $16,244 billion and nominal GDP was $17,550 billion. What was the GDP deflator for that year? a. 92.56 b. 101.08 c. 107.44 d. 108.04 ANSWER: d 151. In 2014, real GDP was $16,244 billion and the GDP deflator was 108.04. What was nominal GDP for that year? a. $150 billion b. $15,035 billion c. $16,244 billion d. $17,550 billion ANSWER: d 152. In 2014, nominal GDP was $17,550 billion and the GDP deflator was 108.04. What was real GDP for that year? a. $162 billion b. $16,244 billion c. $17,550 billion d. $18,961 billion ANSWER: b 153. In 2010, real GDP was $13.2 trillion (using 2005 prices) and nominal GDP was $14.6 trillion. Based on the GDP deflator, prices in 2010 were about _____ than prices in 2005. a. 9.6% lower b. 9.6% higher c. 10.6% lower d. 10.6% higher ANSWER: d 154. What will cause a country's GDP to change? a. a change in output but not a change in prices b. a change in prices but not a change in output c. changes in output, prices, or both output and prices d. changes in the population Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 6 ANSWER: c 155. Nominal GDP for 2019 is calculated using the prices in: a. a designated base year. b. 2018. c. 2019. d. the average of the previous decade. ANSWER: c 156. If real GDP increases in a certain country, what has also definitely increased? a. investment b. population c. prices d. output ANSWER: d 157. When inflation is occurring in a certain country, its _____ will rise faster than its _____. a. nominal GDP; per capita GDP b. per capita GDP; nominal GDP c. nominal GDP; real GDP d. real GDP; nominal GDP ANSWER: c 158. What is the GDP deflator if nominal GDP = $20 trillion and real GDP = $18.4 trillion? a. 76.1 b. 80.0 c. 92.0 d. 108.7 ANSWER: d 159. What does a real GDP growth rate of 3% mean? a. The value of output is rising by 3%. b. Output is rising by 3%. c. The value of output per person is rising by 3%. d. Output per person is rising by 3%. ANSWER: b 160. In a certain year, the GDP growth rate was 5% and the real GDP growth rate was 2%. What does this mean? a. The market value of output rose by 2% and prices rose by 3%. b. The market value of output rose by 3% and prices rose by 5%. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 6 c. Output rose by 2% and prices rose by 3%. d. Output rose by 3% and prices rose by 5%. ANSWER: c 161. Population Growth Rates Country GDP Growth GDP per Capita Real GDP Growth Real GDP per Capita Rate Growth Rate Rate Growth Rate A 6% 3% 3% 0% B 5% 4% 3% 1% C 4% 3% 3% 2% D 3% 2% 2% 1% Which country, on average, is experiencing the most rapid increase in prosperity across its population? a. country A b. country B c. country C d. country D ANSWER: c 162. Population Growth Rates Country A Country B Country C Country D Real GDP growth rate 6% 5% 4% 3% Population growth rate 4% 3% 1% 1% In which country is prosperity of the average person rising MOST rapidly? a. country A b. country B c. country C d. country D ANSWER: c 163. Most economists prefer _____ as the best indicator of current economic performance. a. the GDP deflator b. consumer spending c. nominal GDP growth d. real GDP growth ANSWER: d 164. Most economists prefer _____ as the best indicator of changing living standards in a country. a. real GDP growth per capita b. real GDP growth c. real GDP per capita d. real GDP ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 6 165. Between 1993 and 2003, Guatemala experienced real GDP growth of about 3.6% a year. Over that same period, population grew at 2.8% a year, so real GDP per capita in Guatemala grew at: a. 0.8% a year. b. 2.8% a year. c. 3.2% a year. d. 6.4% a year. ANSWER: a 166. If a country has 5% real GDP growth and 5% population growth, what is the growth rate of real GDP per capita? a. 0% b. 1% c. 5% d. 10% ANSWER: a 167. If a country has 8% real GDP growth, 10% nominal GDP growth, and 5% population growth, what is the growth rate of real GDP per capita? a. 3% b. 5% c. 7% d. 13% ANSWER: a 168. Which statement is TRUE about a recession? a. It can be concentrated only in a single geographic area, but it must be widespread across many sectors of the economy within that area. b. It must be a significant decline in economic activity that lasts for at least 3 years in a row.
c. It is a significant decline in economic activity lasting more than a few months and must be widespread geographically. d. It can be a significant and widespread decline lasting only a month or two.
ANSWER: c 169. Which of these is the best definition of a recession? a. a period of general apprehension about job security and future economic success as measured by polls and studies conducted by the government b. a period of significant, widespread decline in real income and employment lasting more than a few months
c. a decline in the stock market of 10% or more over a period of one year d. a period of increasing unemployment rates lasting more than a year ANSWER: b 170. Business cycles are short-term movements in: a. real GDP around its long-term trend. Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 6 b. nominal GDP around its long-term trend. c. the unemployment rate above and below zero. d. inflation around its long-term trend. ANSWER: a 171. The single best indicator of a recession is: a. negative real GDP growth. b. negative nominal GDP growth. c. increasing unemployment. d. falling prices. ANSWER: a 172. An expansion is a period of significant, widespread increases in: a. real GDP. b. real income and unemployment. c. exports and imports. d. inflation and unemployment. ANSWER: a 173. A recession is a period of significant, widespread declines in: a. real income and employment. b. real income and unemployment. c. exports and imports. d. inflation and unemployment. ANSWER: a 174. When a country's real GDP rises and falls for more than a few months at a time around its long-term trend, the country is experiencing: a. a factor income approach. b. underground growth. c. deflator measurements. d. business cycles. ANSWER: d 175. A country that sees a significant widespread decline in economic activity that lasts for more than a few months is said to experiencing: a. a recession. b. deflation. c. a nominal to real conversion. d. business fluctuations. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 6 176. It can be difficult to identify when an economy enters a recession for all the reasons below EXCEPT that: a. quarterly GDP data are released a month after the quarter ends. b. quarterly GDP data may be revised several times after initial publication. c. recessions must be widespread across the economy. d. recessions can be masked by inflated prices. ANSWER: d 177. In the national spending approach to GDP, investment spending involves the acquisition of which of these? a. capital goods b. stocks and bonds c. money d. any of a number of financial instruments ANSWER: a 178. Most investment spending is carried out by: a. consumers. b. businesses. c. government. d. foreigners. ANSWER: b 179. According to the national spending approach, which of these is counted in investment? a. A restaurant buys a new wood-fired oven for baking pizzas. b. A college graduate buys a new car after graduating. c. A student pays for tuition at a university. d. A retiree buys newly issued U.S. government bonds. ANSWER: a 180. In the national spending approach, government purchases include spending by: a. the federal government only, including transfer payments. b. the federal government only, not including transfer payments. c. all levels of government, including transfer payments. d. all levels of government, not including transfer payments. ANSWER: d 181. Which of these is NOT considered a government purchase? a. new rifles for the military b. unemployment checks c. salaries for public school teachers d. a bridge built by the United States Army Corps of Engineers Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 6 ANSWER: b 182. What are the components of the national spending approach to splitting GDP? a. consumption expenditures, transfer payments, and government investment b. private investment, sale of new and used goods, net exports, and transfer payments c. consumption, investment goods, government purchases, and net exports d. wages, rent, interest, and profit ANSWER: c 183. In the national spending approach, consumption expenditures refer to: a. government and private spending on finished goods and services. b. private spending during all stages of production of goods and services. c. private spending on all finished goods and services. d. private spending on tools, plants, and equipment used for future production. ANSWER: c 184. Why are transfer payments NOT counted as part of GDP? a. Transfer payments do not involve the purchase of a finished good or service. b. Transfer payments are not spent within the United States. c. Spending by the unemployed and senior citizens is not included in GDP. d. Transfer payments are not counted because they must ultimately be paid back. ANSWER: a 185. Which of these government outlays is a transfer payment that would NOT be included in GDP? a. The Veteran's Administration pays a doctor to care for a wounded veteran. b. The National Security Agency builds a new building for its headquarters. c. The Social Security program sends a monthly payment to a senior citizen. d. The Defense Department buys a new aircraft carrier. ANSWER: c 186. In the national spending approach, net exports refer to: a. U.S. purchases of imported goods only. b. foreign purchases of exported goods only. c. exports minus imports. d. exports plus imports. ANSWER: c 187. Which statement is NOT true about net exports? a. Net exports will be negative if imports exceed exports. b. Spending on imports in the United States cannot contribute to the GDP of other nations. c. Spending on imports in the United States contributes to U.S. GDP. Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 6 d. Foreign spending on U.S. exports contributes to U.S. GDP. ANSWER: b 188. GDP is equal to: a. consumption + investment − net exports. b. consumption + investment + wages + profits. c. consumption + investment + government purchases − net exports. d. consumption + investment + government purchases + net exports. ANSWER: d 189. Private spending on finished goods and services is part of: a. consumption. b. investment. c. government purchases. d. net exports. ANSWER: a 190. Private spending on tools, plant, and equipment that are used to produce future output is called: a. consumption. b. investment. c. government purchases. d. net exports. ANSWER: b 191. The largest spending component of GDP in the United States is: a. consumption. b. investment. c. government purchases. d. net exports. ANSWER: a 192. An economy has $10 trillion in consumption, $2.5 trillion in investment, $3 trillion in government purchases, $1 trillion in exports, and $1.5 trillion in imports. What is GDP in this economy? a. $15.0 trillion b. $15.5 trillion c. $16.5 trillion d. $18.0 trillion ANSWER: a 193. An economy has $14,440 billion in consumption, $4,750 billion in investment, $4,900 billion in government purchases, $1,230 billion in exports, and $880 billion in imports. What is GDP in this economy? Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 6 a. $23,740 billion b. $24,440 billion c. $25,320 billion d. $26,200 billion ANSWER: b 194. Table: Economic Data Component of GDP Amount Consumption $875.50 Investment $415.50 Wages and salaries $794.80 Rent $300.20 Profit $391.00 Government purchases $380.00 Interest $345.00 Exports $520.00 Imports $360.00 Based on the data in the table, what is the level of net exports in this economy? a. $160 b. $520 c. $880 d. $1,831 ANSWER: a 195. Table: Economic Data Component of GDP Amount Consumption $875.50 Investment $415.50 Wages and salaries $794.80 Rent $300.20 Profit $391.00 Government purchases $380.00 Interest $345.00 Exports $520.00 Imports $360.00 Based on the data in the table, what is the GDP for this economy, based on the national spending approach? a. $1,831.0 b. $2,120.5 c. $2,191.0 d. $2,551.0 ANSWER: a 196. Table: Economic Data Component of GDP Amount Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 6 Consumption $875.50 Investment $415.50 Wages and salaries $794.80 Rent $300.20 Profit $391.00 Government purchases $380.00 Interest $345.00 Exports $520.00 Imports $360.00 Based on the data in the table, what is the GDP for this economy based on the factor income approach? a. $1,486.0 b. $1,831.0 c. $1,901.5 d. $2,246.5 ANSWER: b 197. According to the factor income approach, GDP is the sum of: a. consumption, investment, government purchases, and exports. b. consumption, investment, government purchases, and net exports. c. employee compensation, interest, rent, and profit. d. employee compensation, investment, rent, and profit. ANSWER: c 198. Table: Data from Europia Account Amount Consumption expenditures $9,000 Business profits $2,500 Exports $800 Imports $1,000 Wages and salaries $8,000 Government purchases $3,000 Rent receipts $500 Investment expenditures $2,000 Based on the data in the table, what is GDP in the economy of Europia? a. $13,000 b. $13,800 c. $14,800 d. $15,800 ANSWER: b 199. Table: Data from Europia Account Amount Consumption expenditures $9,000 Business profits $2,500 Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 6 Exports $800 Imports $1,000 Wages and salaries $8,000 Government purchases $3,000 Rent receipts $500 Investment expenditures $2,000 Based on the data in the table, what is net exports in the economy of Europia? a. −$1,800 b. −$200 c. $1,000 d. $2,800 ANSWER: b 200. Table: Data from Europia Account Amount Consumption expenditures $9,000 Business profits $2,500 Exports $800 Imports $1,000 Wages and salaries $8,000 Government purchases $3,000 Rent receipts $500 Investment expenditures $2,000 Based on the data in the table, what is interest income in the economy of Europia? a. −$1,800 b. $2,000 c. $2,800 d. $3,000 ANSWER: c 201. Which approach measures GDP by adding together employee compensation, rent, interest, and profit earnings? a. the national spending approach b. the factor income approach c. the product approach d. the value-added approach ANSWER: b 202. Which approach measures GDP by adding together consumption, investment, government purchases, and net exports? a. the national spending approach b. the factor income approach c. the product approach Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 6 d. the value-added approach ANSWER: a 203. The national spending approach to calculating GDP states that GDP is equal to: a. consumption + investment + government purchases + net exports. b. employee compensation + rent + interest + profit. c. employee compensation + profit. d. consumption + investment + government purchases + net exports − imports. ANSWER: a 204. The factor income approach to calculating GDP states that GDP is equal to: a. consumption + investment + government purchases + net exports. b. investment + employee compensation + rent + profit. c. investment + profit. d. employee compensation + rent + interest + profit. ANSWER: d 205. Which of these represents the national spending approach to splitting GDP? a. Y = C + G + NX − M b. Y = C + I + G c. Y = C + I + G + NX d. Y = C + I + G − NX ANSWER: c 206. Which of these represents the factor income approach to splitting GDP? a. GDP = employee compensation + profit b. GDP = employee compensation + rent + interest c. GDP = employee compensation + rent + profit d. GDP = employee compensation + rent + interest + profit ANSWER: d 207. Which of these would NOT be included in this year's GDP for the United States? a. A U.S. business spends $100 million to build a new factory in South Carolina. b. The U.S. government distributes $10 million in Social Security payments. c. A foreign country purchases $2 billion worth of U.S. exports. d. U.S. consumers spend $40 million on domestically produced medical services. ANSWER: b 208. Table: Components of GDP Private investment $1,640 billion Government spending $2,872 billion Profits $1,565 billion Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 6 Consumption spending $9,913 billion Wages $3,574 billion Exports $1,520 billion Imports $1,890 billion Use the data in this table to calculate GDP. a. $11,171 billion b. $14,055 billion c. $15,945 billion d. $19,519 billion ANSWER: b 209. Table: Components of GDP Private investment $1,640 billion Government spending $2,872 billion Profits $1,565 billion Consumption spending $9,913 billion Wages $3,574 billion Exports $1,520 billion Imports $1,890 billion Use the data in this table to calculate the contribution of rent and interest income to GDP. a. $6,032 billion b. $8,916 billion c. $10,806 billion d. $14,380 billion ANSWER: b 210. Which of these would NOT be included in the calculation of GDP as an investment expenditure? a. A contractor purchases a new circular saw. b. Ford Motor Company builds a new manufacturing plant. c. A community college spends $200,000 to upgrade its computer labs. d. An individual purchases $5,000 in shares of Apple stock. ANSWER: d 211. Which of these would NOT be included in the calculation of GDP as a government purchase? a. military payrolls b. distribution of food stamps c. purchase of 100 new C-5A aircraft d. hiring 1,000 workers to build a new interstate roadway ANSWER: b 212. Using the national spending approach to measuring GDP, if Tyler buys 50 shares of Apple stock, it is included in GDP as part of: a. consumption. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 6 b. investment. c. government purchases. d. nothing; it is not included as part of GDP. ANSWER: d 213. Using the national spending approach to measuring GDP, the Social Security checks the government sends retirees each month get included in GDP as part of: a. consumption. b. investment. c. government purchases. d. nothing; they are not included as part of GDP. ANSWER: d 214. Economists call household spending on finished goods and services: a. net exports. b. government purchases. c. investment. d. consumption. ANSWER: d 215. Economists call private spending on the tools, plant, and equipment used to produce future output: a. net exports. b. government purchases. c. investment. d. consumption. ANSWER: c 216. Economists call spending by all levels of government on finished goods and services: a. net exports. b. government purchases. c. investment. d. consumption. ANSWER: b 217. Economists call the value of exports minus imports: a. net exports. b. government purchases. c. investment. d. consumption. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 6 218. Spending on goods imported into the United States is included in the GDP of: a. the United States. b. the country that produced the goods. c. both the United States and the country that produced the goods. d. no country. ANSWER: b 219. The value of goods exported from the United States to other countries is included in the GDP of: a. the United States. b. the country that purchases the goods. c. both the United States and the country that produces the goods. d. no country. ANSWER: a 220. Which of these activities is NOT considered an investment for calculating GDP? a. A farmer buys a new tractor. b. An investor purchases 100 shares of IBM stock. c. A family builds a new house. d. A college builds a new lab. ANSWER: b 221. Which of these is NOT included in the consumption component of GDP? a. monthly rent for a two-bedroom apartment b. spending on health care c. payment for college tuition d. the purchase of a new house ANSWER: d 222. The factor income approach divides GDP into the categories of: a. consumption, investment, government purchases, and net exports. b. employee compensation, rent, interest, and profits. c. consumption, interest, government purchases, and compensation. d. employee compensation, investment, rent, and net exports. ANSWER: b 223. Government transfer payments _____ included in the national spending approach to GDP because transfer payments are _____. a. are; part of total government purchases of production b. are; payments for production rather than government benefit checks c. are not; payments for services rather than tangible goods d. are not; like government benefit checks rather than a payment for production Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 6 ANSWER: d 224. Net exports refer to the market value of exports: a. minus the value of exports that were produced abroad. b. adjusted for differences in price levels abroad. c. minus the market value of imports. d. adjusted for changes in the country's price level. ANSWER: c 225. If a consumer purchases a foreign-produced hair dryer at a department store, the value of the hair dryer is: a. included in both consumer purchases and exports. b. added to capital investment in equipment but then subtracted from consumer purchases. c. included in consumer purchases but then subtracted as part of imports. d. added to imports but then subtracted as part of exports. ANSWER: c 226. Either the national spending approach or the factor income approach can be used to calculate GDP. This equivalence is based on the idea that: a. purchases of goods and services cause a reduction in income. b. when taxes rise, government purchases rise. c. money used for the purchases of goods and services comes from income. d. income is the primary source of savings. ANSWER: c 227. The share of income going to labor through employee compensation in the United States has been _____ over time. a. increasing steadily b. decreasing steadily c. relatively stable d. varying unpredictably ANSWER: c 228. Which of these is counted as part of GDP? a. The government sends a Social Security check to a retiree. b. A person mows their lawn. c. People in a country are healthy and happy. d. A state government hires workers to repave the streets. ANSWER: d 229. GDP provides a measure of: a. economic welfare and income equity. Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 6 b. well-being that includes the value of both production and leisure. c. the impact of production on the environment. d. the total value of various types of legally earned income. ANSWER: d 230. In nations that have large underground, or illegal, sectors: a. GDP will overestimate total production in the economy. b. GDP will underestimate total production in the economy. c. GDP will provide an accurate account of production in the economy. d. poverty will be significantly greater than in countries with fewer illegal market activities. ANSWER: b 231. The presence of illegal and off-the-books activities causes measured GDP to _____ the value of production within the country. a. overstate b. understate c. correctly state d. be more volatile than ANSWER: b 232. Which of these activities is counted as part of U.S. GDP? a. John purchases a counterfeit DVD. b. Joe watches a free video on YouTube. c. Jake takes a vacation at a Caribbean resort. d. Jeff stays in a hotel in Colorado while on a skiing trip. ANSWER: d 233. Which of these would NOT be included in this year's GDP? a. Tom and Amy pay $75 for a meal in a restaurant. b. Cameron pays an accountant $200 to do their taxes. c. Jim mows a neighbor's lawn as a favor. d. Megan buys a new Coach purse. ANSWER: c 234. Nonmarket production is not counted in GDP because these activities: a. are not priced. b. are considered intermediate goods. c. do not contribute to economic activity. d. happen inside the home. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 6 235. In the past 100 years, there has been a decline in the use of unpaid child labor on family farms. Therefore: a. changes in GDP overstate the true increase in production over the past 100 years. b. changes in GDP understate the true increase in production over the past 100 years. c. there has been no change in GDP over the past 100 years. d. there has been no change in production over the past 100 years. ANSWER: a 236. Programmers produce a large amount of software on an unpaid, open-source basis. As a result: a. GDP double-counts some software production. b. GDP undercounts some software production. c. no software should be counted in GDP. d. GDP is a good measure of software productivity. ANSWER: b 237. Which of these are underground goods or services that would NOT be counted in GDP? a. illegal sales of firearms in Texas b. legal sales of medical marijuana in California c. legal clubs on Bourbon Street in New Orleans d. massages given in a resort spa ANSWER: a 238. The portion of women in the workforce has nearly doubled since 1950. As a result, fewer mothers are providing home and child care services. How has this trend affected GDP? a. This trend has had no predictable effect on GDP. b. The GDP in 1950 is underestimated relative to today. c. The GDP in 1950 is overestimated relative to today. d. The share of GDP attributable to women has declined. ANSWER: b 239. The value of volunteer services is: a. included in GDP, but should not be because nothing tangible is produced. b. not included in GDP, but should be because a service is produced. c. included in GDP and should be because a service is produced. d. not included in GDP and should not be because nothing tangible is produced. ANSWER: b 240. Which of these is TRUE in the calculation of GDP? a. GDP is positively adjusted to include production in the underground economy. b. GDP is negatively adjusted to account for environmental damage caused by businesses. c. GDP does not include goods and services produced privately inside the home. d. GDP includes a positive adjustment for leisure activities, even if no purchase is required. Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 6 ANSWER: c 241. Which of these would MOST likely NOT be counted in GDP? a. Marijuana is legally sold for medical purposes in the state of California. b. You build a shed in your back yard with scraps of wood to store your lawn mower. c. An outside company is hired to clean up a chemical spill at a local factory. d. You pay a fee to snorkel with manatees while on vacation in Florida. ANSWER: b 242. Which of these services MOST likely would NOT be counted in GDP? a. You hire a real estate agent to sell a house you have owned for 10 years. b. You pay commission to the salesperson on the purchase of a used car. c. You pay your neighbor's teenage son in cash to cut your grass while you are away on vacation. d. You hire a painting company to paint your 10-year-old house. ANSWER: c 243. Suppose you spend half the summer building a garage in your back yard. You purchase tools that cost $350 and wood that costs $4,000. A contractor would charge $25 per hour for the 40 hours of work necessary to build the garage. After you build the garage, your mother gives you a present of $500 in stocks. How much will GDP rise as a result of these activities? a. $5,350 b. $5,850 c. $4,350 d. $4,850 ANSWER: c 244. Suppose you spend a couple of days helping your friend modify their brand-new car they just purchased for $24,000. To help out, you purchase the tools which cost $125, while they purchase the materials which cost $2,500. A mechanic would charge $70 per hour for the 10 hours of work necessary to make the changes on the car. After you help modify the car, your friend gives you a gift of $250 in shares of IBM. How much will GDP rise as a result of these activities? a. $25,925 b. $26,625 c. $26,875 d. $27,325 ANSWER: b 245. Which of these statements is TRUE about GDP? a. GDP includes all known goods and services in the underground economy. b. GDP includes a negative adjustment for damage caused by pollution. c. GDP does not account for the distribution of income in a country. d. GDP includes a positive adjustment for the value of leisure and well-being. Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 6 ANSWER: c 246. When people can purchase more goods and services, _____ become(s) more important. a. health and longevity b. fewer goods and services produced c. wealth d. increased wages ANSWER: a 247. The cost of negative externalities that harm the environment, such as pollution costs: a. negatively affect the level of GDP by the full amount of the damage. b. cause GDP to decline, but by only the cost of cleanup. c. cause GDP to underestimate true welfare in the economy. d. are not included in GDP. ANSWER: d 248. Imagine a nation that has automobile factories that emit pollution, grows (illegal) marijuana, and does not allow its women to work outside the home. Which activities will be counted in GDP? a. the sale of automobiles and marijuana b. the sale of automobiles and marijuana and the value of the women's work c. the sale of automobiles minus the damage from pollution d. the sale of automobiles ANSWER: d 249. When GDP per capita goes up by 10%: a. everyone's income goes up by 10%. b. only the most wealthy peoples' incomes will go up by 10%. c. no one's income goes up by 10%. d. the distribution of the increase in incomes may vary. ANSWER: d 250. If a country's GDP per capita rises, this means that: a. everyone in the country has less wealth. b. the country has fewer poor people. c. at least some people in the country have more wealth. d. everyone in the country has more wealth. ANSWER: c 251. Which is NOT a reason that GDP is an inaccurate measure of the total value of output within a country in a year? a. GDP does not reflect the level of health of the population. Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 6 b. GDP includes imports, which are produced abroad. c. GDP is not adjusted for harm done to the environment. d. GDP excludes output sold in the underground economy. ANSWER: b 252. A college student spends $5 on ingredients to bake cookies instead of spending $12 to buy cookies from a bakery. How much is GDP impacted by the college student's production of cookies? a. $5 b. $7 c. $12 d. $17 ANSWER: a 253. A mother earns $500 during the year by babysitting to supplement her household income but does not report this income when she completes her annual tax return. The production of $500 worth of child care services in this example will: a. increase GDP by $500. b. decrease GDP by $500. c. have no impact on GDP. d. increase GDP by $500 minus taxes paid on income. ANSWER: c 254. The distribution of income deals with: a. how the price level impacts the purchasing power of income. b. the proportions of total income that go to employee compensation, interest, rent, and profit. c. the methods used by employers to transfer pay to employees. d. how equally or unequally income is spread across a population. ANSWER: d 255. A country's real GDP per capita rises by 5%. This would increase the prosperity of each member of the country's population by 5% ONLY if: a. the population grew by 5%. b. income was distributed equally. c. there was no harm done to the environment associated with the production of goods and services. d. prices were constant. ANSWER: b 256. Which situation will cause a country's GDP to rise by $100? a. Counterfeit goods are produced and sold for $100 in the underground economy. b. A mother spends an extra $100 at a child care center to not be interrupted while studying for her final exams. c. The average health-care expenditure in a country falls by $100 per person. Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 6 d. The average income in a country rises by $100. ANSWER: b 257. China has a larger economy than the United Kingdom (Great Britain), but the British are still better off in terms of living standards based on GDP per capita. a. True b. False ANSWER: a 258. Real GDP per capita in China is higher than real GDP per capita in the United States. a. True b. False ANSWER: b 259. Based on the level of GDP, India is one of the five largest economies in the world. a. True b. False ANSWER: a 260. Based on the level of GDP, Brazil is one of the five largest economies in the world. a. True b. False ANSWER: b 261. Currently, India's growth rate is low compared to that of most countries. a. True b. False ANSWER: b 262. Purchases of lumber, such as a sheet of plywood, are always considered intermediate goods, and those transactions are not counted in GDP. a. True b. False ANSWER: b 263. GDP can be calculated by adding up the physical quantities of goods and services produced in a given year. a. True b. False ANSWER: b 264. Goods that have higher prices have greater weight in calculated GDP. Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 6 a. True b. False ANSWER: a 265. GDP measures the total value of production within a country in a year. a. True b. False ANSWER: a 266. GDP is the market value of all finished goods and services produced within a country in a year. a. True b. False ANSWER: a 267. GDP is the market value of all finished goods and services produced by a country's permanent residents, wherever located, in a year. a. True b. False ANSWER: b 268. GNP is the market value of all finished goods and services produced by a country's permanent residents, wherever located, in a year. a. True b. False ANSWER: a 269. A computer chip is one example of a finished good. a. True b. False ANSWER: b 270. GDP includes total spending on all goods in different stages of production. a. True b. False ANSWER: b 271. Total production of services in the United State is nearly 80% of GDP. a. True b. False ANSWER: a 272. National wealth and GDP are two names for the same thing. Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 6 a. True b. False ANSWER: b 273. GDP is meant to measure spending, so sales of used goods are included in GDP. a. True b. False ANSWER: b 274. The value of a car produced by Ford (an American company) in a factory located in Europe would be included in U.S. GDP. a. True b. False ANSWER: b 275. The value of a car produced by Ford (an American company) in a factory located in Europe would be included in U.S. GNP. a. True b. False ANSWER: a 276. The value of a car produced by Kia (a South Korean company) in a factory located in Tennessee would be included in U.S. GDP. a. True b. False ANSWER: a 277. The value of a car produced by Kia (a South Korean company) in a factory located in Tennessee would be included in U.S. GNP. a. True b. False ANSWER: b 278. Nominal GDP measures the value of production in current-year prices. a. True b. False ANSWER: a 279. Real GDP measures the value of production in current-year prices. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 6 280. Real GDP is calculated using the same prices in all years. a. True b. False ANSWER: a 281. Suppose nominal GDP in a country grew by 6.37% from 1998 to 1999. This means that there was an increase in production and living standards from 1998 to 1999. a. True b. False ANSWER: b 282. Suppose real GDP in a country grew by 4.83% from 2010 to 2012. This means that there was an increase in production from 2010 to 2012. a. True b. False ANSWER: a 283. Real GDP is equal to nominal GDP adjusted for changes in prices over time. a. True b. False ANSWER: a 284. Nominal GDP always grows faster than real GDP. a. True b. False ANSWER: b 285. Nominal GDP will grow more slowly than real GDP only when there is deflation. a. True b. False ANSWER: a 286. Nominal GDP will grow faster than real GDP only when there is inflation. a. True b. False ANSWER: a 287. Real GDP per capita is the measure of a country's standard of living preferred by most economists. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 6 288. When comparing living standards across time, one should use nominal GDP rather than real GDP. a. True b. False ANSWER: b 289. The GDP deflator is the ratio of real to nominal GDP (multiplied by 100). a. True b. False ANSWER: b 290. If real GDP grows by 3% and the GDP deflator grows by 2%, then nominal GDP must grow by 5%. a. True b. False ANSWER: a 291. If nominal GDP grows by 3% and the GDP deflator grows by 2%, then real GDP must grow by 5%. a. True b. False ANSWER: b 292. If nominal GDP grows by 5% and the GDP deflator grows by 4%, then real GDP must grow by 1%. a. True b. False ANSWER: a 293. If pressed to choose a single indicator of current economic performance, most economists would probably choose nominal GDP growth. a. True b. False ANSWER: b 294. If pressed to choose a single indicator of current economic performance, most economists would probably choose real GDP growth. a. True b. False ANSWER: a 295. If pressed to choose a single indicator of changing living standards, most economists would probably choose real GDP growth per capita. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 6 296. If pressed to choose a single indicator of changing living standards, most economists would probably choose nominal GDP growth per capita. a. True b. False ANSWER: b 297. Economic growth has been the normal state of affairs throughout most of human history. a. True b. False ANSWER: b 298. A recession is typically defined as any decrease in real GDP. a. True b. False ANSWER: b 299. A recession is a significant, widespread decline in real income and employment. a. True b. False ANSWER: a 300. Once economic data are released in the United States, they are never revised. a. True b. False ANSWER: b 301. A decline in nominal GDP is the single best indicator of a recession. a. True b. False ANSWER: b 302. A recession can be as short as 1 or 2 months. a. True b. False ANSWER: b 303. A recession can be concentrated in one geographical part of the economy, even while other parts of the economy flourish. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 6 304. A common indicator of a recession would be negative growth in real GDP lasting more than a few months. a. True b. False ANSWER: a 305. An economic expansion occurs when real GDP grows at a faster rate than normal. a. True b. False ANSWER: a 306. Business cycles are fluctuations of real GDP around its long-term trend. a. True b. False ANSWER: a 307. The causes of business cycles are well understood, and their beginning and ending points are easily predicted. a. True b. False ANSWER: b 308. Since 1982, recessions have become less frequent. a. True b. False ANSWER: a 309. Imported goods purchased in the United States are counted as part of U.S. GDP. a. True b. False ANSWER: b 310. The purchase of a new home is considered a personal consumption expenditure. a. True b. False ANSWER: b 311. The purchase of a new home is considered an investment expenditure. a. True b. False ANSWER: a 312. According to the national spending approach, education is classified as a consumption expenditure when Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 6 splitting GDP. a. True b. False ANSWER: a 313. The purchase of stocks and bonds is considered an investment expenditure for calculating GDP. a. True b. False ANSWER: b 314. A farmer's purchase of a new tractor counts as consumption in the national spending approach to measuring GDP. a. True b. False ANSWER: b 315. A farmer's purchase of a new tractor counts as investment in the national spending approach to measuring GDP. a. True b. False ANSWER: a 316. The factor income approach classifies all of the spending in a nation as consumption, investment, government purchases, or net exports. a. True b. False ANSWER: b 317. The factor income approach splits GDP into consumption, investment, interest, and rent. a. True b. False ANSWER: b 318. The national spending approach classifies all of the spending in a nation as consumption, investment, government purchases, or net exports. a. True b. False ANSWER: a 319. The factor income approach splits GDP into wages, profit, interest, and rent. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 6 ANSWER: a 320. Spending on goods imported into the United States would be included in U.S. GNP, but not in U.S. GDP. a. True b. False ANSWER: b 321. According to the national spending approach, net exports must be subtracted from all other spending in the economy in the calculation of GDP. a. True b. False ANSWER: b 322. According to the national spending approach, imports must be subtracted from all other spending in the economy in the calculation of GDP. a. True b. False ANSWER: a 323. In calculating GDP with the national spending approach, the total value of exports is subtracted from the sum of all other spending components. a. True b. False ANSWER: b 324. Government spending, including transfer payments, is included in the calculation of GDP. a. True b. False ANSWER: b 325. Transfer payments are NOT included in government purchases in the calculation of GDP. a. True b. False ANSWER: a 326. Social Security benefits paid to current retirees are an example of government purchases that would be included in GDP. a. True b. False ANSWER: b 327. Social Security benefits paid to current retirees are an example of a transfer payment that would NOT be included in GDP. Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 6 a. True b. False ANSWER: a 328. A large part of what government does is transfer money from one citizen to another citizen. a. True b. False ANSWER: a 329. Personal consumption expenditure is the largest spending component in GDP. a. True b. False ANSWER: a 330. Government purchases of goods and services are the largest component of GDP in the national spending approach. a. True b. False ANSWER: b 331. None of the spending components of GDP (based on the national spending approach) can be negative values. a. True b. False ANSWER: b 332. None of the income components of GDP (based on the factor income approach) can be negative values. a. True b. False ANSWER: a 333. It is possible for net exports to be a negative value. a. True b. False ANSWER: a 334. Net exports will be negative if imports exceed exports. a. True b. False ANSWER: a 335. Net exports will be negative if exports exceed imports. Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 6 a. True b. False ANSWER: b 336. Consumption spending tends to be more stable than investment spending in the U.S. economy. a. True b. False ANSWER: a 337. In the factor income approach, income to owners of capital is called rent. a. True b. False ANSWER: b 338. In the factor income approach, income to owners of capital is called interest. a. True b. False ANSWER: a 339. In the factor income approach, income to landlords is called rent. a. True b. False ANSWER: a 340. In the factor income approach, income to landlords is called profit. a. True b. False ANSWER: b 341. In the factor income approach, income to workers is called employee compensation. a. True b. False ANSWER: a 342. In the factor income approach, income to businesses is called profit. a. True b. False ANSWER: a 343. In the factor income approach, income to businesses is called interest. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 6 ANSWER: b 344. The national spending approach and the factor income approach are equivalent ways of measuring GDP because every dollar spent in the economy is ultimately received as income by someone. a. True b. False ANSWER: a 345. It is useful to have different approaches to measuring GDP (such as the national spending approach and the factor income approach) because each approach provides a different value of GDP. a. True b. False ANSWER: b 346. GDP measures the total spending on finished goods and services in a country. a. True b. False ANSWER: a 347. GDP measures the total income in a country. a. True b. False ANSWER: a 348. Large amounts of nonmarket production and illegal activities mean that a lot of Latin American countries are actually richer than their GDP suggests. a. True b. False ANSWER: a 349. GDP is an accurate measure of both the standard of living and the distribution of income within a country. a. True b. False ANSWER: b 350. GDP accounts for the health and longevity of the population. a. True b. False ANSWER: b 351. A beautiful sunrise is NOT counted in GDP. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 6 b. False ANSWER: a 352. GDP does not count production in the underground economy. a. True b. False ANSWER: a 353. Nonpriced production is NOT included in GDP because these activities do not contribute to economic activity. a. True b. False ANSWER: b 354. Prostitution is legal in some parts of Nevada and illegal everywhere else in the United States. Therefore, prostitution is counted as part of GDP if it occurs in those parts of Nevada, but not elsewhere. a. True b. False ANSWER: a 355. Growing tomatoes in your back yard and making salsa for a Super Bowl party you are hosting will NOT be reflected in GDP. a. True b. False ANSWER: a 356. Environmental damage caused by pollution leaked into a river by a local factory will negatively impact GDP. a. True b. False ANSWER: b 357. The cost of hiring an outside company to clean up a chemical spill at a local factory will not be reflected in GDP. a. True b. False ANSWER: b 358. Anuradha is a recent immigrant from India to the United States who has become a U.S. citizen. Anuradha currently works as a software programmer in California's Silicon Valley. Are Anuradha's earnings counted in India's GDP or the United States' GDP? What about GNP? ANSWER: Anuradha's earnings are counted in the United States' GDP as the production from Anuradha is happening within the United States. If Anuradha had been working in India, the earnings would be counted in India's GDP. Since Anuradha Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 6 is a citizen of the United States, the earnings are also counted in the United States' GNP. If Anuradha remained a citizen of India while working in the United States, the earnings would be counted in India's GNP.
359. Jeff buys a used truck from a rental agency to make deliveries from a new furniture store. Would this purchase be included in GDP? If so, would it be consumption or investment spending? ANSWER: The truck would not be included in GDP as it is a used truck and was already previously included the year it was produced.
360. On your first day of a summer internship with a pharmaceutical sales company, your boss explains how the company is in the midst of examining its sales data over the past 25 years to identify trends of growth and decline. They ask for your opinion on whether the company should use real or nominal sales data. What would you say? ANSWER: Real sales data would be a better indicator of growth over time than nominal sales data since it accounts for changes in prices over the 25 years.
361. Explain the difference between real GDP and nominal GDP. ANSWER: Real GDP is adjusted for changes in the price level; nominal GDP is not. Real GDP evaluates the market value of goods and services produced at prices from a base year (i.e., uses the same prices in all years), while nominal GDP evaluates the market value of goods produced at prices for each year's data.
362. Suppose nominal GDP was $12,623.0 billion in 2005 and was $13,377.2 billion in 2006. If the GDP deflator for 2006 (with a base year of 2005) was 103.237, what was the growth rate of real output between 2005 and 2006? Show your calculations. ANSWER: Since we know the nominal GDP in 2005 and 2006, we can use that to find the growth rate of nominal GDP between 2005 and 2006:
The GDP deflator can be used to find the increase in prices from 2005 to 2006: Which means that prices in 2006 were 3.237% higher than they were in 2005. Thus, since the nominal GDP growth from 2005 to 2006 is 5.975% and the increase in prices is 3.237%: The growth of real output from 2005 to 2006 is 2.738%.
363. Table: Gross Domestic Product 2000 GDP in 2000 dollars $15.0 trillion 1995 GDP in 2000 dollars $13.8 trillion 1995 GDP in 1995 dollars $12.4 trillion Use the information in this table to answer the following questions: a. What was nominal GDP for the year 2000? b. How much did nominal GDP grow between the year 1995 and the year 2000? c. How much did real GDP grow between the year 1995 and the year 2000, in 2000 dollars? ANSWER: a. Nominal GDP for 2000 was $15 trillion. b. Nominal GDP grew by 20.968% between 1995 and 2000: $15.0 trillion-$12.4 trillion$12.4 trillion×100=20.968 c. Real GDP grew by 8.696% between 1995 and 2000: $15.0 trillion-$13.8 trillion$13.8 trillion×100=8.696
Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 6 364. Imagine an economy that produces only pizza and pretzels. In 2010, the price of pizza was $20 and the price of pretzels was $1. In 2011, the price of pizza was $22 and the price of pretzels was $1.10. If 100,000 pizzas and 1,000,000 pretzels were produced in 2010, and 110,000 pizzas and 1,100,000 pretzels were produced in 2011, what were the nominal GDP and real GDP (using 2010 prices) for this economy in 2010 and 2011? Calculate the growth rate of real GDP for this economy during this period. Why was the growth rate of real GDP different from the growth rate of nominal GDP over this period? Can you use the GDP data to calculate the inflation rate from 2010 to 2011? ANSWER: To calculate nominal GDP for 2010, use 2010 quantities and 2010 prices for pizzas and pretzels: (100,000 × $20) + (1,000,000 × $1) = $3,000,000. To calculate nominal GDP for 2011, use 2011 quantities and 2011 prices: (110,000 × $22) + (1,100,000 × $1.10) = $3,630,000. To calculate real GDP using 2010 prices, 2010 prices will be used in the calculation of GDP for all years. For 2010, this would provide the same calculation as for 2010 nominal GDP shown above. Thus, real GDP for 2010 (using 2010 prices) was $3,000,000. To calculate real GDP for 2011 (using 2010 prices), use 2011 quantities and 2010 prices: (110,000 × $20) + (1,100,000 × $1) = $3,300,000. The growth rate of real GDP is calculated as follows: [(3,300,000 – 3,000,000) ÷ 3,000,000] × 100 = 10%. The growth rate of real GDP is less than the growth rate of nominal GDP (which is 21%; check for yourself) because the growth rate of nominal GDP includes the increase in prices that occurred from 2010 to 2011 in addition to the increase in production (which is 10%, as measured by real GDP growth). Inflation from 2010 to 2011 can be calculated using the GDP deflator for 2011: GDP deflator2011 = (nominal GDP2011 ÷ real GDP2011) × 100 = (3,630,000 ÷ 3,300,000) × 100 = 110. The GDP deflator of 110 implies an inflation rate of 110 – 100 = 10% between 2010 and 2011.
365. What is a recession, and how would a recession affect the level of real GDP and the growth rate of real GDP in a nation? ANSWER: A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and whole-sale retail.
366. Would a significant decline in the economic activity of construction workers qualify as a recession? ANSWER: A significant decline in the economic activity of construction workers would only qualify as a recession if it coincided with declines across the entire economy as well. For a recession to occur, a significant decline in economic activity has to be widespread and last for more than a couple of months. So even if the decline in the economic activity of construction workers lasted for more than a couple of months, it would not qualify as a recession if only the economic activity of construction workers is affected.
367. What is the formula for calculating GDP using the national spending approach? ANSWER: The formula for the national spending approach is: Where: Y = Nominal GDP (the market value of all finished goods and services) C = The market value of consumption goods and services I = The market value of investment goods, also called capital goods G = The market value of government purchases NX = Net exports, defined as the market value of exports minus the market value of imports.
368. Calculate GDP for an economy that has consumer purchases of $6,000, investment purchases of $1,000, government purchases of $2,500, total exports of $1,000, and total imports of $500. ANSWER: Using the national spending approach for calculating GDP (Y = C + I + G + NX): The GDP for this economy is $10,000. Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 6 369. What is the formula for calculating GDP using the factor income approach? ANSWER: The formula for calculating GDP using the factor income approach is: Where: Y = Nominal GDP (the market value of all finished goods and services) Employee compensation = The income received by workers through wages and benefits Rent = The income received by landlords Interest = The income received by owners of capital Profit = The income received by businesses
370. List and briefly discuss the various components of the national spending approach to calculating GDP. ANSWER: Consumption = The market value of consumption goods and services. This refers to the private spending on finished goods and services. Consumption makes up the largest part of U.S. GDP. Investment = The market value of investment goods, also called capital goods. This refers to private spending on tools, plants, and equipment used to produce future output. Most investment spending is done by businesses, but not all. For example, buying a newly built home is counted as an investment expenditure. Government purchases = The market value of government purchases. This refers to the spending by all levels of government on finished goods and services. Transfer payments are not included in government purchases. Net exports = The market value of exports minus the market value of imports. The goods produced domestically and sold abroad are considered exports, while the goods produced abroad and sold domestically are considered imports.
371. List and briefly discuss the various components of the factor income approach to calculating GDP. ANSWER: Employee compensation = The income received by workers through wages and benefits. Rent = The income received by landlords. Interest = The income received by owners of capital. Profit = The income received by businesses.
372. Table: Select Components of GDP Component of GDP Amount Consumption $375.56 Investment $115.68 Wages and salaries $394.80 Rent $100.20 Government purchases $180.00 Interest $66.00 Exports $100.00 Imports $120.00 Use the information in this table to answer the following questions: a. What is GDP according to the national spending approach? b. What is the dollar amount of profit earned in this economy? ANSWER: a. The national spending approach will use the formula Y = C + I + G + NX: Y=$375.56+$115.68+$180.00+$100.00-$120.00=$651.24 Thus, using the national spending approach, the GDP for this economy is $651.24. b. The GDP should be the same for either approach used, whether it is the national spending approach or the factor income approach. Therefore, we can use the GDP found using the national spending approach, $651.24, to calculate any missing variable, given that the other variables are given: Y=Employee compensation+Rent+Interest+Profit $651.24=$394.80+$100.20+$66.00+Profit $651.24=$561.00+Profit Profit=$651.24-$561.00=$90.24 Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 6 Thus, the profit earned in this economy is $90.24.
373. List the different components of spending used to calculate GDP using the national spending approach, and give an example of each type of spending. ANSWER: Consumption: A person buys a smartphone for their own personal use. Investment: A farmer buys a tractor to help with production of crops. Government purchase: The government spending money to build new roads. Net exports (exports – imports): Exports: Denim jeans produced in a plant in Kentucky, United States and sold in Berlin Germany. Imports: Olive oil produced in Sicily, Italy and bought by United States citizens in Tennessee.
374. How are GDP, total output, total spending, and total income related in an economy? Briefly explain. ANSWER: GDP is the market value of all finished goods and services produced in an economy. This is used to find how much total output an economy has produced. If the GDP increases from one year to the next, then either prices have increased, or total output has increased, or both have increased. For this reason, economists differentiate between nominal GDP and real GDP. Nominal GDP is not adjusted for changes in prices, while real GDP is adjusted for changes in prices. This results in real GDP being a better indicator of how much total output has changed from one year to the next. Total income and total spending are another way of looking at GDP in that every dollar spent is a dollar received, ignoring sales taxes just to simplify. Thus, GDP can be measured by summing up all the spending on finished goods and services (the national spending approach) or by summing up everyone's income (the factor income approach).
375. Both intermediate goods and services and investment are used to produce finished goods and services. Describe how they differ. ANSWER: Intermediate goods are those that are used in the process of production. These are sold to firms and bundled with other goods and services for sale at a later stage. An example of this is a computer microchip. The microchip is an intermediate good sold to a computer manufacturing company that will be added to the computer and then sold with the computer. Only the sale of the computer will be included in GDP to avoid double counting. Investment is private spending on tools, plants, and equipment used to produce future output. An example of this is a farmer buying a tractor to help with crop yields.
376. According to the national spending approach, why are imports subtracted when GDP is split up? ANSWER: It's important to remember the "Domestic" in Gross Domestic Production. When we add C + I + G, we are adding up all national spending. However, some of that spending was on imports, goods that were not produced domestically. Thus, we subtract imports from national spending to get national spending on domestically produced goods, C + I + G – Imports. Some of the goods that we produce domestically, however, are not included in national spending on domestically produced goods because they were not bought by nationals but rather by people in other countries, that is, some of the goods we produced were exported. Thus, to find domestically produced goods, we add exports to national spending on domestically produced goods to arrive at C + I + G + Exports – Imports, or C + I + G + NX.
377. Explain why GDP does not include the underground economy. ANSWER: Illegal or underground-market transactions are omitted from GDP because the sales of these products are not reported and therefore do not show up in government statistics.
378. Discuss four reasons that explain why GDP is not a perfect measure of economic activity in a country. ANSWER: 1. GDP does not count the underground economy: Some products are sold illegally and thus not reported. These products do not appear in government statistics and cannot be counted in the country's GDP. This can skew how accurate the GDP reading is, given how prevalent the underground economy is. The more prevalent, the more it skews the number, and the less prevalent, the less it skews the number. 2. GDP does not count nonpriced production: Nonpriced production occurs when valuable goods and services are produced but no explicit monetary payment is made. For example, if a child mows their parents' lawn, the service will not be included in the GDP. However, if a Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 6 lawncare company did the same thing and the parents paid the company, this would be counted. There is a great deal of value in services done at home that are completely excluded from GDP. 3. GDP does not count bads (environmental costs): GDP adds up the market value of finished goods and services, but it does not subtract the value of bads. Pollution, for example, is a bad that is produced every year, but this mad is not counted in the GDP statistics. The statistics also do not count the destruction of water aquifers, the accumulation of carbon dioxide in the atmosphere, or the changing supplies of natural resources. These are all costs that we would ideally want include. Similarly, GDP statistics do not count the loss of animal or plant species as economic costs, unless those animals and plants had a direct commercial role in the economy. 4. GDP does not measure the distribution of income: GDP per capita is a rough measure of the standard of living in a country, but if GDP per capita grows by 10%, this does not necessarily mean that everyone's income grows by 10% or even that the average person's income grows by 10%.
379. What does GDP per capita tell us about a nation's economy? What issues does conventional GDP methodology exclude? ANSWER: GDP per capita gives us a rough estimate of a country's standard of living. The higher the GDP per capita, the higher the country's standard of living. However, this is a little bit more complicated since there are some problems with conventional GDP methodology because it excludes some important aspects of an economy. Conventional GDP methodology excludes products sold in the underground market, nonpriced production, bads (environmental costs), the health of nations, and the distribution of income.
380. Discuss how well GDP measures well-being. In your discussion, specifically define GDP and specifically state what it measures and what it does not measure. ANSWER: GDP, defined as gross domestic production, or the market value of all finished goods and services sold in a country. This statistic gives us a rough estimate of the total output a country is producing. The more output, the higher the standard of living for the citizens of that country. However, GDP is not a perfect measurement. GDP excludes some very important aspects of the economy, all of which could have serious impact on the final calculations of GDP. GDP excludes products sold in the underground market or illegally, nonpriced production, bads (environmental costs), the health of nations, and the distribution of income.
381. Explain how the presence of pollution skews GDP measurements. ANSWER: GDP adds up the market value of finished goods and services, but it does not subtract the value of bads. Pollution, for example, is a bad that is produced every year, but this mad is not counted in the GDP statistics. The statistics also do not count the destruction of water aquifers, the accumulation of carbon dioxide in the atmosphere, or the changing supplies of natural resources. These are all costs that we would ideally want to include. Similarly, GDP statistics do not count the loss of animal or plant species as economic costs, unless those animals and plants had a direct commercial role in the economy.
382. Which of these provides the greatest insight into the prosperity of the average person in a country: GDP, real GDP, GDP per capita, or real GDP per capita? Why? ANSWER: The greatest insight into the prosperity of the average person in a country is real GDP per capita. This variable has been adjusted for changes in price and tells us how much output a country produces divided by the population of that country. The higher a country's real GDP per capita, the higher that country's standard of living tends to be. A country can have a massive real GDP, but also a massive population, bringing down that country's real GDP per capita, thus the real GDP by itself would not be a good indicator of the average person. Nominal GDP and nominal GDP per capita are not the best either as they do not account for changed in prices, so there is ambiguity as to what is driving the GDP, actual output or just changes in prices.
Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 7 1. Data from countries around the world suggest that "health and wealth" (measured by infant survival rates and real GDP per capita) are: a. positively related. b. negatively related. c. unrelated. d. constant. ANSWER: a 2. Wealthier countries have: a. more conflicts, such as riots and civil wars. b. higher infant mortality rates. c. fewer educational opportunities. d. more material goods. ANSWER: d 3. Which statement BEST describes the cross-country evidence on the relationship between a nation's GDP per capita and standard measures of societal well-being? a. GDP per capita is negatively related to measures of societal well-being. b. GDP per capita is positively related to measures of societal well-being. c. There is no relationship between GDP per capita and measures of societal well-being. d. The relationship between GDP per capita and societal well-being is positive at times and negative at times. ANSWER: b 4. There is: a. a strong positive correlation between per capita GDP and infant survival. b. a weak positive correlation between per capita GDP and infant survival. c. no correlation between per capita GDP and infant survival. d. a weak negative correlation between per capita GDP and infant survival. ANSWER: a 5. In general, increases in a country's wealth will cause infant survival rates to: a. increase. b. decrease. c. remain unchanged. d. become unpredictable. ANSWER: a 6. Every year, 1.8 million children in poor countries die of diarrhea. What is most effective in preventing these deaths? a. government subsidies b. political reform Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 7 c. economic growth d. humanitarian aid ANSWER: c 7. A country's GDP per capita and infant survival rates usually are: a. not correlated. b. somewhat correlated. c. strongly correlated. d. correlated only in poor countries. ANSWER: c 8. Piped water and flush toilets together can reduce infant mortality from diarrhea by approximately: a. 10%. b. 30%. c. 50%. d. 70% or more. ANSWER: d 9. The correlation between infant mortality and real GDP per capita is: a. zero. b. positive. c. negative. d. unpredictable. ANSWER: c 10. What is MOST needed to reduce infant deaths from diarrhea? a. new drugs b. economic growth c. scientific discoveries d. better medical devices ANSWER: b 11. When economists speak of long-run economic growth, they mean increasing the: a. real GDP of a country. b. per capita real GDP of a country. c. geographic size of a country. d. population of a country. ANSWER: b 12. For most of recorded human history, real GDP per capita has: a. increased at a rapid rate. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 7 b. increased at a modest rate. c. remained about the same. d. decreased at a modest rate. ANSWER: c 13. Beginning in the _____ century, economic growth became a clear trend in parts of the world. a. sixteenth b. seventeenth c. eighteenth d. nineteenth ANSWER: d 14. If real GDP per capita in a country was $14,000 in year 1 and $14,280 in year 2, then the economic growth rate for this country from year 1 to year 2 was: a. 1%. b. 2%. c. 3%. d. 4%. ANSWER: b 15. If real GDP per capita in a country was $14,000 in year 1 and $14,560 in year 2, then the economic growth rate for this country from year 1 to year 2 was: a. 1%. b. 2%. c. 3%. d. 4%. ANSWER: d 16. If real GDP per capita in a country was $14,000 in year 1 and $14,140 in year 2, then the economic growth rate for this country from year 1 to year 2 was: a. 1%. b. 2%. c. 3%. d. 4%. ANSWER: a 17. If real GDP per capita in a country was $14,000 in year 1 and $14,420 in year 2, then the economic growth rate for this country from year 1 to year 2 was: a. 1%. b. 2%. c. 3%. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 7 d. 4%. ANSWER: c 18. Most of the world's population: a. is poor relative to the United States. b. is about as well off as the average person in the United States. c. is wealthy relative to the United States. d. cannot be compared to the United States. ANSWER: a 19. Around the world, about one _____ people have incomes of less than $3 per day. a. thousand b. million c. billion d. trillion ANSWER: c 20. Two thousand years ago, per capita GDP (in 2010 dollars) was: a. less than $1,000. b. about $10,000. c. more than $50,000. d. about the same as today. ANSWER: a 21. Today, real GDP per capita is about _____ as large in the richest countries as in the poorest countries. a. twice b. 10 times c. 20 times d. 50 times ANSWER: d 22. The world's poorest country is: a. Nigeria. b. Argentina. c. India. d. the Democratic Republic of the Congo. ANSWER: d 23. For most of recorded history, economic growth has been: a. about the same as today. b. virtually nonexistent. Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 7 c. a source of continuously rising living standards. d. a way to equalize the distribution of wealth around the world. ANSWER: b 24. At an average growth rate of 4%, approximately how long would it take for an economy to double its GDP? a. 17.5 years b. 25 years c. 50 years d. 70 years ANSWER: a 25. If the average annual growth rate of a country increases from 2% to 3%, how much faster will its GDP double? a. 10 years b. 11 2/3 years c. 17 years d. 25 years ANSWER: b 26. At an annual growth rate of 2%, approximately how long does it take for real GDP per capita to increase from $30,000 to $60,000 in a country? a. 15 years b. 25 years c. 35 years d. 45 years ANSWER: c 27. At an annual growth rate of 0.7%, approximately how long does it take for real GDP per capita to increase from $30,000 to $60,000 in a country? a. 50 years b. 100 years c. 200 years d. 400 years ANSWER: b 28. At an annual growth rate of 1.4%, approximately how long does it take for real GDP per capita to increase from $30,000 to $60,000 in a country? a. 50 years b. 100 years c. 200 years d. 400 years Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 7 ANSWER: a 29. At an annual growth rate of 3.5%, approximately how long does it take for real GDP per capita to increase from $30,000 to $60,000 in a country? a. 5 years b. 10 years c. 15 years d. 20 years ANSWER: d 30. If U.S. per capita GDP is $50,000 and grows at 2% per year, what will U.S. per capita GDP be in 70 years? a. $100,000 b. $200,000 c. $400,000 d. $800,000 ANSWER: b 31. If U.S. per capita GDP is $50,000 and grows at 3% per year, what will U.S. per capita GDP be in 70 years? a. $100,000 b. $200,000 c. $400,000 d. $800,000 ANSWER: c 32. If U.S. per capita GDP is $50,000 and grows at 5% per year, what will U.S. per capita GDP be in 70 years? a. $400,000 b. $800,000 c. $1.2 million d. $1.6 million ANSWER: d 33. One key fact about economic growth around the world is that: a. most poor countries lack natural resources. b. all countries used to be poor. c. growth has occurred throughout human history. d. the dispersion of GDP per capita has become more equal across countries over time. ANSWER: b 34. For most of recorded human history, long-run economic growth was: a. much higher than it has been in recent decades. b. the same as it is today. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 7 c. the highest during the Dark Ages. d. almost nonexistent. ANSWER: d 35. According to the rule of 70, a country with an annual growth rate of 10% will double its GDP per capita in: a. 70 years. b. 10 years. c. 7 years. d. less than 1 year. ANSWER: c 36. According to the rule of 70, a country with an annual growth rate of 7% will double its GDP per capita in: a. 70 years. b. 10 years. c. 7 years. d. less than 1 year. ANSWER: b 37. If the GDP of country X is 4 times the GDP of country Y and if the GDP of country X remains constant while the GDP of country Y grows at a rate of 7% per year, which of these statements is true? a. Country Y's GDP will be equal to country X's GDP in 10 years. b. Country Y's GDP will be equal to country X's GDP in 20 years. c. Country Y's GDP will be equal to country X's GDP in 40 years. d. Country Y's GDP will never catch up with country X's GDP. ANSWER: b 38. Economic growth refers to the growth rate of: a. real GNP per capita. b. GNP. c. GDP. d. real GDP per capita. ANSWER: d 39. Low rates of economic growth sustained over long periods produce: a. small changes in per capita GDP. b. large changes in per capita GDP. c. no changes in per capita GDP. d. unpredictable changes in GDP. ANSWER: b 40. The rule of 70 states that if the annual growth rate of a variable is x%, the necessary time for doubling is: Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 7 a. 70 plus x. b. 70 minus x. c. 70 times x. d. 70 divided by x. ANSWER: d 41. The rule of 70 indicates that an increase in the growth rate of a variable will _____ the time needed to double the value of the variable itself. a. decrease b. increase c. have no effect on d. have an unpredictable effect on ANSWER: a 42. Economic growth is measured by the growth rate of: a. nominal GDP. b. real GDP. c. nominal GDP per capita. d. real GDP per capita. ANSWER: d 43. If a country's real GDP per capita in 1950 was $10,000, and it grew to $20,000 by year 2000, then the country's annual growth rate during this period would have been approximately: a. 1.4%. b. 1.8%. c. 2.0%. d. 2.2%. ANSWER: a 44. Suppose a country's real GDP per capita was $9,000 in 1990, and it grew to $18,000 by 2000. What was the annual growth rate of the country's real GDP per capita during this period? a. 7% b. 10% c. 20% d. 25% ANSWER: a 45. Suppose a country's annual growth rate of real GDP per capita is approximately 2%. By which year would the country double its real GDP per capita from $10,000 in 1950 to $20,000? a. 1970 b. 1985 Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 7 c. 2000 d. 2005 ANSWER: b 46. Over the past 200 years, economic growth in the United States has been: a. among the slowest in the world. b. the fastest in the world. c. slow and consistent. d. volatile. ANSWER: c 47. Two countries that may be considered examples of growth miracles are: a. Mexico and China. b. the United States and Argentina. c. Denmark and Luxembourg. d. South Korea and Japan. ANSWER: d 48. Relative to Japan, Argentina was _____ in 1950 and _____ in 2000. a. poor; poor b. rich; rich c. poor; rich d. rich; poor ANSWER: d 49. Relative to South Korea, Argentina was _____ in 1950 and _____ in 2000. a. poor; poor b. rich; rich c. poor; rich d. rich; poor ANSWER: d 50. Relative to the United States, Argentina was _____ in 1950 and _____ in 2000. a. poor; poor b. rich; rich c. poor; rich d. rich; poor ANSWER: a 51. Relative to China, Argentina was _____ in 1950 and _____ in 2011. a. poor; poor Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 7 b. rich; rich c. poor; rich d. rich; poor ANSWER: b 52. Which statement BEST describes the economic growth patterns in the world since World War II? a. Japan and South Korea experienced rapid growth, while Argentina and Nigeria experienced slow growth. b. Japan and South Korea experienced slow growth, while Argentina and Nigeria experienced rapid growth. c. Most countries in the world experienced rapid growth. d. Most countries in the world except the United States experienced no growth at all. ANSWER: a 53. Which country had a growth miracle beginning in the late 1970s? a. the United States b. Japan c. South Korea d. Nigeria ANSWER: c 54. From 1950 to 1970, Japan's growth rate was: a. high and positive. b. low and positive. c. approximately zero. d. negative. ANSWER: a 55. Between 1974 and 2005, Nigeria's growth rate was: a. high and positive. b. low and positive. c. approximately zero. d. negative. ANSWER: d 56. Figure: The Distribution of World Income
Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 7
Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 7 57. Figure: The Distribution of World Income
Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 7
Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 7 58. In the year 2019, the world's average per capita GDP was $18,381. What percentage of the world's population lived in a country with per capita GDP that was below $18,381? a. 21 b. 43 c. 56 d. 76 ANSWER: d 59. What percentage of the world's population lives in a country that has a GDP per capita above the world average? a. 12 b. 24 c. 51 d. 76 ANSWER: b 60. The world's average level of GDP per capita was $18,381 as of 2019. This was a little less than the living standard in: a. China. b. Mexico. c. Nigeria. d. India. ANSWER: b 61. Figure: Economic Growth in Major World Regions
Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 7
The figure shows real GDP per capita over time in different regions of the world. The figure shows that all regions of the world: a. were poor at one time. b. have been relatively rich throughout most of human history. c. have experienced moderate growth throughout most of human history. d. remain poor today. ANSWER: a 62. Figure: Economic Growth in Major World Regions
Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 7
The figure shows real GDP per capita over time in different regions of the world. The figure shows that: a. all regions of the world eventually achieved significant growth. b. some regions of the world have always experienced growth. c. the fastest growth in some regions started around 1950. d. all regions of the world remain poor today. ANSWER: c 63. Figure: Economic Growth in Major World Regions
Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 7
The figure shows real GDP per capita over time in different regions of the world. The figure shows that living standards in different regions began to _____ at the beginning of the nineteenth century. a. diverge b. converge c. equalize d. fall ANSWER: a 64. The United States and Western European countries began to experience accelerated economic growth during which century? a. twelfth Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 7 b. sixteenth c. fifteenth d. nineteenth ANSWER: d 65. If real GDP in an economy increased from $20,000 billion to $20,200 billion from 2010 to 2011, what was the annual growth rate in this economy? a. 10.00% b. 5.00% c. 2.01% d. 1.00% ANSWER: d 66. If a country's initial real GDP is $60,000, and its annual growth rate is 5%, use the rule of 70 to determine approximately how many years it would take for this economy to double its GDP. a. 70 years b. 20 years c. 14 years d. 12 years ANSWER: c 67. Imagine an economy that has a growth rate of 2% per year. Use the rule of 70 to estimate how long it would take for this economy to quadruple its GDP per capita. a. 14 years b. 35 years c. 70 years d. 140 years ANSWER: c 68. Suppose economies A and B have the same initial level of GDP per capita at $15,000, and each economy begins with a constant growth rate of 1% per year. Neither country has good institutions for economic growth at first. Then country A enters an era of political stability, establishes property rights, and installs incentives for entrepreneurship. Country A's economic growth rate consequently improves to 5%. Assuming that population growth rates remain unaffected, how much longer will it take country B to double its per capita GDP level compared to country A? a. 70 years b. 14 years c. 56 years d. 28 years ANSWER: c 69. If a nation doubles its GDP per capita in 20 years, what is its annual growth rate? Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 7 a. 3.5% b. 4.2% c. 6.5% d. 7.0% ANSWER: a 70. If you receive a constant annual rate of return of 7% on an investment of $10,000, how many years will it take before you have $20,000? a. 10 years b. 7 years c. 35 years d. 2.86 years ANSWER: a 71. If real GDP per capita in the United States is currently $50,000 and grows at 2.5% per year, it will take approximately how many years to reach $200,000? a. 28 years b. 56 years c. 84 years d. 112 years ANSWER: b 72. What is the most immediate (or direct) cause of growth in real GDP per capita? a. factors of production b. institutions c. the political system in the economy d. incentives ANSWER: a 73. Factors of production that contribute to growth in per capita GDP include: a. proximal and ultimate factors of production. b. physical capital, human capital, and technological knowledge. c. organization of resources. d. institutions. ANSWER: b 74. A rural village in a developing country has an economy based on agriculture. Then the government of the country provides the village with newly developed hybrid seeds that more than double the agricultural yield per acre. This story illustrates the growth of per capita GDP in the village through which factor(s) of production? a. physical capital b. human capital Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 7 c. technological knowledge d. both human capital and technological knowledge ANSWER: c 75. One measure of student output is the number of completed math problems produced. Using pen and paper only, a student can complete 50 math problems in 2 hours. Using pen, paper, and a calculator, the same student can complete 100 math problems in 2 hours. (The student is already familiar with and knows how to use the calculator.) This scenario illustrates the use of which factor of production? a. physical capital b. human capital c. technological knowledge d. both human capital and technological knowledge ANSWER: a 76. Countries that have high per capita GDP tend to have high levels of: a. physical capital per worker. b. human capital per worker. c. technology per worker. d. all the three factors of production. ANSWER: d 77. Physical capital is the: a. stock of tools, including machines, structures, and equipment, used to produce output. b. productive knowledge and skills that workers acquire through education, training, and experience. c. knowledge about how the world works that is used to produce goods and services. d. financial resources available to business owners. ANSWER: a 78. Human capital is the: a. stock of tools, including machines, structures, and equipment, used by workers to produce output. b. productive knowledge and skills that workers acquire through education, training, and experience. c. knowledge about how the world works that is used to produce goods and services. d. same thing as the overall population. ANSWER: b 79. Technological knowledge is the: a. stock of tools, including machines, structures, and equipment, used to produce output. b. productive knowledge and skills that workers acquire through education, training, and experience. c. knowledge about how the world works that is used to produce goods and services. d. organizational skills of business owners. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 7 80. Which are immediate causes of the wealth of nations? a. institutions and incentives b. technical knowledge and human capital c. customs, practices, and social norms d. property rights and honest government ANSWER: b 81. What are the four factors of production that combine to contribute to the wealth of nations? a. incentives, institutions, organization, technical knowledge b. international trading partners, natural resources, efficient government, low taxes c. human capital, physical capital, technical knowledge, organization d. property rights, honest government, political stability, a dependable legal system ANSWER: c 82. Farmers who use tractors instead of horse-drawn plows have greater yields. Which factor of production explains this result? a. organizational skills b. natural resources c. technical knowledge d. physical capital ANSWER: d 83. A business that pays for its workers to attend a technical college is increasing its: a. physical capital. b. human capital. c. organizational skills. d. technical knowledge. ANSWER: b 84. Which is NOT an example of physical capital? a. tractor b. cell phone c. computer d. a share of Caterpillar, Inc. stock ANSWER: d 85. Increasing the amount of physical capital tends to _____ output per hour of workers and _____ the value of workers. a. increase; increase b. increase; decrease c. decrease; decrease Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 7 d. decrease; increase ANSWER: a 86. Workers' ability to use various tools is known as: a. technological knowledge. b. human capital. c. knowledge. d. experience. ANSWER: b 87. Which of these is NOT directly related to human capital? a. a calculator b. work experience c. schooling d. an understanding of chemistry ANSWER: a 88. A developing country could buy (or be given) _____ and _____ more easily than _____. a. technological knowledge; physical capital; human capital b. physical capital; human capital; technological knowledge c. human capital; technological knowledge; physical capital d. human capital; work experience; technological knowledge ANSWER: a 89. A country increases its technological knowledge by engaging in: a. research and development. b. education. c. programs that improve workers' health. d. investment in physical capital. ANSWER: a 90. A country increases its human capital by engaging in: a. research and development. b. education and training. c. programs that improve workers' health. d. investment in physical capital. ANSWER: b 91. A country increases its physical capital by engaging in: a. research and development. b. education and training. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 7 c. programs that improve workers' health. d. investment. ANSWER: d 92. High-income economies generally have _____ that incentivize individuals' self-interest by using _____. a. institutions; profit-seeking motives b. government mandates; legal penalties c. central planners; profit-seeking motives d. institutions; legal penalties ANSWER: a 93. Countries with high GDP per capita tend to have a lot of: a. physical capital per worker but not high human capital per worker or technical knowledge per worker. b. human capital per worker but not high physical capital per worker or technical knowledge per worker. c. technological knowledge per worker but not high physical capital per worker or human capital per worker. d. physical capital per worker, human capital per worker, and technological knowledge per worker. ANSWER: d 94. Which is NOT an example of physical capital? a. cell phones b. tractors c. computers d. money ANSWER: d 95. Human capital is: a. something we are born with. b. the money spent on education and training. c. acquired only through investment of time and other resources. d. the same as technological knowledge. ANSWER: c 96. Technological knowledge: a. may continue to increase even if human capital remains relatively constant. b. is bounded by the limits of human capital. c. is the productive knowledge and skills that workers acquire through education and training. d. has remained relatively constant over time. ANSWER: a 97. Which is NOT an example of human capital? a. an understanding of mathematics Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 7 b. a calculator c. computer programming skills d. experience using computers ANSWER: b 98. A tractor is an example of: a. human capital. b. physical capital. c. production technology. d. technical knowledge. ANSWER: b 99. A FedEx truck is an example of: a. human capital. b. physical capital. c. production technology. d. technical knowledge. ANSWER: b 100. A typical worker in India works with _____ a typical worker in the United States. a. many times more physical capital than b. about the same amount of physical capital as c. much less physical capital than d. slightly more physical capital than ANSWER: c 101. Knowledge of the computer software used by a business is an example of: a. human capital. b. physical capital. c. production technology. d. technical knowledge. ANSWER: a 102. Development of new computer software that increases productivity is an example of: a. human capital. b. physical capital. c. production technology. d. technical knowledge. ANSWER: d 103. U.S. farms today produce _____ output using _____ land as they did in 1950. Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 7 a. more; less b. about the same; less c. more; about the same amount of d. about the same; about the same amount of ANSWER: a 104. Which is NOT a factor of production? a. incentives b. human capital c. physical capital d. technological knowledge ANSWER: a 105. Which is an immediate cause of economic growth? a. good incentives b. the extent of government support in free markets c. physical capital d. good luck ANSWER: c 106. Which is an ultimate cause of economic growth? a. technological knowledge b. physical capital c. human capital d. institutions ANSWER: d 107. The stock of tools, including machines, structures, and equipment, used to produce output is called: a. physical capital. b. human capital. c. technological knowledge. d. real capital. ANSWER: a 108. The productive knowledge and skills that workers acquire through education, training, and experience is called: a. physical capital. b. human capital. c. technological knowledge. d. real capital. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 7 109. The knowledge about how the world works is called: a. physical capital. b. human capital. c. technological knowledge. d. real capital. ANSWER: c 110. Compared to workers in most of the world, U.S. workers have: a. a relatively large amount of physical capital. b. a relatively small amount of physical capital. c. roughly the same amount of physical capital. d. an unlimited supply of physical capital. ANSWER: a 111. _____ is the knowledge and skills that a worker needs to make productive use of technology, whereas _____ is knowledge about how the world works that is used to produce goods and services. a. Technological knowledge; human capital b. Human capital; technological knowledge c. Technological knowledge; organizational skills d. Organizational skills; technological knowledge ANSWER: b 112. Which is an example of an increase in physical capital? a. Scientists develop a more effective, environmentally safe refrigerant for air conditioners. b. A new computer chip processes information more quickly than that of the previous generation. c. The average educational level in a country's labor force rises from 8 years to 9 years. d. Five new schools are built. ANSWER: d 113. Which would be most effective in ensuring sustained long-term economic growth? a. increasing technological knowledge b. increasing human capital c. increasing government control of land use d. increasing physical capital ANSWER: a 114. Institutions and incentives are _____ causes, and factors of productions are _____ causes of the wealth of nations. a. ultimate; immediate b. immediate; ultimate Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 7 c. ultimate; indirect d. immediate; direct ANSWER: a 115. Why does South Korea have a higher level of real GDP per capita than North Korea? a. South Korea started with more human capital than North Korea. b. South Korea started with more physical capital than North Korea. c. South Korea has a better system of incentives than North Korea. d. South Korea has more natural resources than North Korea. ANSWER: c 116. Which is NOT an institution that leads to sustained long-term economic growth? a. a dependable legal system b. a stable political system c. an honest government d. a more equal income distribution ANSWER: d 117. Countries with high per capita GDP have institutions that make it in people's self-interest to invest in: a. physical capital. b. human capital. c. technology. d. all the factors of production. ANSWER: d 118. Institutions: a. are not important in market economies. b. structure economic incentives. c. matter only when backed by law. d. are important only in market economies. ANSWER: b 119. Which of these define(s) the "rules of the game" that structure economic incentives? a. institutions b. economic laws c. factors of production d. technical knowledge ANSWER: a 120. Which of these is(are) NOT an institution of economic growth? a. property rights Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 7 b. a dependable legal system c. competitive and open markets d. free-riding behavior ANSWER: d 121. Which of these is(are) NOT an institution of economic growth? a. property rights b. honest government c. labor unions d. competitive and open markets ANSWER: c 122. Which of these has the greatest potential for solving free-rider problems? a. property rights b. a stable political system c. an honest government d. the rule of law ANSWER: a 123. Which of these would be most effective in reducing "free riding" in a communal farming system? a. assigning property rights b. increasing supervision of workers c. increasing penalties for low production d. increasing physical capital ANSWER: a 124. Which scenario has the greatest potential for free riding? a. an unstable political system b. a system in which work effort and pay are not connected c. a dishonest government that promotes corruption d. secure property rights ANSWER: b 125. A country that has enforceable property rights, a noncorrupt political system, abundant factors of production, and an orderly change in leadership every few years should suspect that economic growth will be _____ because _____. a. slow; of a lack of a dependable legal system b. slow; of uncertainty due to an unstable political system c. high; most of the institutions needed for growth are in place d. high; once a group comes to power all the institutions needed for growth exist ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 7 126. When the Communist Party took over China, "The Great Leap Forward" was instituted as a system to encourage the growth of agricultural production in China. Yet, during this time, millions of people starved to death. Why did this occur? a. Farmers' self-interest was not aligned with social interest. b. The land and its output were controlled by a few wealthy individuals. c. The farmers violated government policy. d. The farmers were being jailed. ANSWER: a 127. Between 1978 and 1983, food production in China rose by 50% and 170 million people rose above the international poverty line. This occurred because of the: a. rising popularity of free-riding behavior in China. b. return to private property rights in farming. c. fall of communism in China. d. teachings of Mao Zedong. ANSWER: b 128. Agricultural productivity in China declined sharply during the country's experiment with communal farming. This was primarily a result of: a. a decade-long drought in China. b. the transition to open markets in China. c. a lack of property rights for farmland. d. political instability. ANSWER: c 129. Someone who consumes a resource without working or contributing to the resource's upkeep is called a(n): a. easy rider. b. free rider. c. double rider. d. outlaw. ANSWER: b 130. The most important factor contributing to China's rapid growth at the end of the 1970s and early 1980s was: a. improvements in physical capital. b. increases in human capital. c. advances in technology. d. institutional reforms. ANSWER: d 131. Why did so many Chinese farmers and workers starve under "The Great Leap Forward"? Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 7 a. The number of workers on communes was reduced. b. The Chinese people did not know how to farm in certain geographic areas. c. The incentive to work hard was low since the rewards were so minimal. d. A long, severe drought drastically decreased agricultural production. ANSWER: c 132. Why do more corrupt countries have lower levels of GDP per capita? a. Corrupt countries have no rule of law. b. Corrupt countries have higher-than-average taxes. c. Corrupt countries provide less incentive to produce and create wealth. d. Corrupt countries follow the doctrine of communism. ANSWER: c 133. What is a result of a high level of government corruption? a. There are few entrepreneurs. b. Government officials have a low standard of living. c. Politicians hold little power over the market. d. The form of government promotes entrepreneurship over political loyalty. ANSWER: a 134. Corruption is like a tax on firms because: a. firms can file for a refund for the money paid as bribes. b. bribes add to a firm's production costs. c. firms usually pay bribes to avoid paying corporate taxes. d. firms must pay a certain percentage of their profits at the end of the fiscal year as bribes. ANSWER: b 135. Increases in the level of political stability in a country tend to: a. increase per capita GDP. b. decrease per capita GDP. c. have no impact on per capita GDP. d. increase per capita GDP at lower levels of stability, but decrease per capita GDP at higher levels of stability. ANSWER: a 136. Decreases in the level of political stability in a country tend to: a. increase per capita GDP. b. decrease per capita GDP. c. have no impact on per capita GDP. d. increase per capita GDP at lower levels of stability, but decrease per capita GDP at higher levels of stability. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 7 137. The ability to collect on a debt in a timely manner is due to: a. economies of scale. b. a good legal system. c. a highly educated workforce. d. investment in physical capital. ANSWER: b 138. Due to economies of scale, average costs decline as: a. production levels increase. b. physical capital increases. c. human capital increases. d. technology increases. ANSWER: a 139. When industries are limited by the size of the domestic market, opening trade to the world markets will likely lead to _____ and _____ real GDP per capita in the domestic country. a. economies of scale; increase b. economies of scale; decrease c. diseconomies of scale; increase d. diseconomies of scale; decrease ANSWER: a 140. One of the best explanations for why some countries are rich and others are poor is that: a. technological knowledge is more advanced in rich countries than in poor countries. b. rich countries organize their factors of production more efficiently than poor countries do. c. rich countries may have simply gotten lucky and poor countries remain unlucky. d. rich countries have far greater natural resources than poor countries do. ANSWER: b 141. Good institutions: a. reward those who create value and increase efficiency with higher profits. b. distribute wealth evenly across the economy. c. result in growth rates approximately equal to those in countries with poor institutions. d. matter only if the country has a large amount of both physical and human capital. ANSWER: a 142. In North Korea, workers are rewarded for: a. providing goods and services of value to consumers. b. inventing new ideas for more efficient production. c. investing in human and physical capital. d. being loyal to the ruling Communist Party. Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 7 ANSWER: d 143. The ultimate cause for the differences in economic performance in North Korea and South Korea is: a. more corruption in South Korea than in North Korea. b. better economic institutions in South Korea than in North Korea. c. more foreign aid from the United States in South Korea than in North Korea. d. more abundant natural resources in South Korea than in North Korea. ANSWER: b 144. The difference between per capita GDP in North Korea and South Korea is due to: a. human capital. b. culture. c. geography. d. institutions. ANSWER: d 145. South Korea has a per capita GDP _____ as high as that of North Korea. a. twice b. 5 times c. 8 times d. nearly 20 times ANSWER: d 146. South Korea and North Korea differ mainly in: a. culture. b. physical capital. c. technological knowledge. d. economic institutions. ANSWER: d 147. The main reason for the influence of institutions on the wealth of nations is that good institutions: a. raise people's incentives to build wealth. b. keep the economy in tight control of the government. c. help distribute wealth more evenly among the people. d. allow government to convert private property more easily into collective property. ANSWER: a 148. According to the text, we can understand the "wealth of nations" BEST by examining: a. how natural resources are distributed around the world. b. the extent to which governments support the domestic markets. c. the laws and regulations that affect people's incentives to work and invest. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 7 d. the amount of technological knowledge obtained from other countries. ANSWER: c 149. Which is NOT an example of an institution that creates incentives aligning self-interest with the interest of society? a. well-defined property rights b. political stability c. low inflation d. competitive markets ANSWER: c 150. Institutions: a. are the advantages of large-scale production that reduce average cost as quantity increases. b. are the rules of the game that structure economic incentives. c. are the framework that allows the government to control the economy. d. do not vary much from country to country. ANSWER: b 151. What is NOT an important institution for growth? a. low level of corruption b. dependable legal system c. free markets d. strong regulation of religious belief ANSWER: d 152. Which of these is NOT a kind of institution that encourages investment and the efficient organization of resources? a. private property rights b. political stability c. a dependable legal system d. closed markets ANSWER: d 153. Property rights that are not well defined encourage: a. high rates of economic growth. b. free riders. c. an unequal distribution of wealth. d. protection of natural resources. ANSWER: b 154. Property rights are important institutions for encouraging investment because: Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 7 a. they eliminate corruption. b. they increase the total funds available to invest. c. people won't invest if they feel their property is at risk and they may not realize a return on their investment. d. they tend to support industrial sectors more than agricultural sectors. ANSWER: c 155. Which statement concerning "The Great Leap Forward" period in China is TRUE? a. Technological advancement was strong because of the hard work of farmers. b. A lack of private property rights provided no incentive for farmers to be productive. c. Communal property in agricultural land helped align farmers' self-interest with the social interest. d. Collective property rights failed to improve farming productivity because of the existence of private property rights.
ANSWER: b 156. The key reason for China's growth miracle beginning in the late 1970s was: a. the enforcement of communal property. b. the assignment of private property rights. c. increases in foreign investment from developed countries. d. pure luck. ANSWER: b 157. A legal system that helps raise a nation's productivity is one that: a. makes it easy for people to engage in contracts and to establish property rights. b. has a lot of regulations and procedures for people and businesses to follow. c. allows people and businesses to act freely and to do just about everything they want. d. protects domestic producers from foreign competition. ANSWER: a 158. Communal property creates a: a. corruption problem. b. stability problem. c. free-rider problem. d. self-selection problem. ANSWER: c 159. History has shown that when societies convert collective property rights to private property rights: a. investment in physical capital increases. b. work effort increases. c. productivity increases. d. work effort, investment, and productivity all increase. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 7 160. Property rights encourage: a. saving. b. investment in physical capital. c. investment in human capital. d. saving and investment in both physical and human capital. ANSWER: d 161. Under communal property, effort is: a. divorced from payment, so there is great incentive to work. b. divorced from payment, so there is little incentive to work. c. rewarded with payment, so there is great incentive to work. d. rewarded with payment, so there is little incentive to work. ANSWER: b 162. When an economic system changes from using a collective property rights system to something closer to private property rights, the immediate effect is: a. less efficient organization of resources. b. to increase regulation, resulting in fewer market activities. c. to decrease investment, work effort, and productivity. d. to increase investment, work effort, and productivity. ANSWER: d 163. Which of these countries has the lowest rate of economic growth? a. Switzerland b. North Korea c. Norway d. the United Kingdom ANSWER: b 164. What is the best way for a government to encourage economic growth? a. mandate university education for all its citizens b. make natural resources public property so that people feel a stronger sense of ownership c. increase its provision of public goods d. reduce corruption ANSWER: d 165. Honest government _____ economic growth. a. impedes b. has no effect upon c. fuels d. has an indeterminate effect upon Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 7 ANSWER: c 166. Corruption makes it profitable to be a(n): a. engineer. b. entrepreneur. c. philosopher. d. politician or bureaucrat. ANSWER: d 167. Which statement is TRUE regarding the effects of corruption? a. Corruption helps promote economic growth. b. Corruption reduces the incentive to build wealth by imposing a tax on entrepreneurs. c. Corruption raises investment by making it easier to run a business. d. Corruption is the best way for the government to obtain revenues needed to run growth-promoting policies. ANSWER: b 168. Corruption causes investment in physical capital to: a. increase. b. decrease. c. remain unchanged. d. become impossible. ANSWER: b 169. Increases in corruption cause economic growth to: a. increase. b. decrease. c. remain unchanged. d. become impossible. ANSWER: b 170. Which country was among the top 10 LEAST corrupt countries in the year 2016? a. Angola b. Myanmar c. Singapore d. Taiwan ANSWER: c 171. Which country was among the top 10 most corrupt countries in the year 2000? a. North Korea b. Bermuda c. Kenya Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 7 d. Saudi Arabia ANSWER: a 172. There is _____ relationship between levels of corruption and living standards in countries around the world. a. a strong positive b. a strong negative c. a weak d. no ANSWER: b 173. Political stability _____ economic growth. a. impedes b. has no effect upon c. fuels d. has an indeterminate effect upon ANSWER: c 174. Which of these does NOT lead to economic growth? a. property rights b. a dependable legal system c. political instability d. competitive and open markets ANSWER: c 175. India could be four times richer than it is today if it were to: a. avoid civil war. b. confiscate all private property. c. accept more foreign aid. d. make its markets open and competitive. ANSWER: d 176. Economies more open to foreign trade are more efficient in production partly because: a. more open economies tend to receive more foreign aid. b. foreign producers are more productive than domestic producers. c. economies of scale occur in larger markets. d. property rights are less important in a more open economy. ANSWER: c 177. Economies more open to foreign trade are more efficient in production partly because: a. more open economies tend to receive more foreign aid. Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 7 b. foreign producers are more productive than domestic producers. c. free trade opens a country up to new ideas and innovation. d. property rights are less important in a more open economy. ANSWER: c 178. The Industrial Revolution was in large part due to: a. good institutions for business, science, and governance. b. increased education. c. the discovery of large supplies of natural resources. d. the cooperation of governments across the world. ANSWER: a 179. An ultimate cause for the rapid economic growth during the Industrial Revolution was: a. the development of good institutions that provided people with incentives to engage in business and invention. b. the strengthening of government control in markets and its role in income redistribution. c. the discovery of wind power to generate electricity. d. Great Britain's colonization activity around the world. ANSWER: a 180. Which is NOT likely an ultimate cause of economic growth around the world? a. historical differences b. geographical locations c. communal resources d. luck ANSWER: c 181. Which statement explains why China experienced a dramatic increase in agricultural productivity after the 1970s? a. China started exporting its agricultural products to other countries. b. China lifted the import restrictions on agricultural products. c. China changed its institutions from collective farming to individual farming. d. China changed its institutions from individual farming to collective farming. ANSWER: c 182. The BEST way for an economy to grow is to: a. seek more foreign aid for the economy. b. increase the government's intervention in the economy. c. improve the country's institutions. d. establish policies promoting communal property. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 7 183. Countries that are NOT landlocked tend to grow _____ because _____. a. faster; easy access to water naturally opens a country to trade b. slower; easy access to water naturally opens a country to trade c. faster; fewer resources are required to build a strong military d. slower; fewer resources are required to build a strong military ANSWER: a 184. Landlocked countries tend to grow _____ because _____. a. faster; lack of water access makes trade more difficult and costly b. slower; lack of water access makes trade more difficult and costly c. faster; fewer resources are required to build a strong military d. slower; fewer resources are required to build a strong military ANSWER: b 185. Which of these is an ultimate cause of economic growth among countries around the world? a. history b. culture c. geography d. History, culture, and geography are all ultimate causes of growth. ANSWER: d 186. What is an ultimate cause of economic growth among countries around the world? a. luck b. culture c. geography d. Luck, culture, and geography are all ultimate causes of growth. ANSWER: d 187. Institutions ultimately come from: a. history. b. culture. c. geography. d. history, culture, and geography. ANSWER: d 188. Institutions ultimately come from: a. luck. b. culture. c. geography. d. luck, culture, and geography. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 7 189. The Industrial Revolution was able to facilitate economic growth in Great Britain due to conditions that did NOT include: a. secure property rights. b. relatively free labor markets. c. the use of the scientific method to develop production methods. d. policies that limited the distribution of wealth. ANSWER: d 190. Higher GDP per capita is correlated with higher life expectancy, lower infant mortality, and better nutrition. a. True b. False ANSWER: a 191. Virtually every indicator of societal well-being tends to increase with wealth. a. True b. False ANSWER: a 192. Countries with low levels of GDP per capita tend to have lower rates of death caused by contagious disease. a. True b. False ANSWER: b 193. Wealthier nations have more conflicts than do poorer nations. a. True b. False ANSWER: b 194. Individuals in wealthy nations tend to enjoy less leisure. a. True b. False ANSWER: b 195. GDP per capita varies enormously among nations. a. True b. False ANSWER: a 196. GDP per capita does not vary much among nations. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 7 a. True b. False ANSWER: b 197. Half of the world's population earns the average world GDP per capita of roughly $20,000. a. True b. False ANSWER: b 198. For most of recorded human history, people were poor and there was no economic growth. a. True b. False ANSWER: a 199. Economic growth has occurred during most of recorded human history. a. True b. False ANSWER: b 200. A country that grows at an average rate of 5% will double its living standard every 10 years. a. True b. False ANSWER: b 201. A country that grows at an average rate of 7% will double its living standard every 10 years. a. True b. False ANSWER: a 202. For most of human history, essentially everyone was poor by today's standards. a. True b. False ANSWER: a 203. There have always been some very wealthy countries, even by today's standards. a. True b. False ANSWER: b 204. Living standards across countries are more equal today than at any time in history. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 7 ANSWER: b 205. The rule of 70 implies that poor countries tend to catch up with rich countries over time. a. True b. False ANSWER: b 206. In the context of world history, economic growth is unusual. a. True b. False ANSWER: a 207. In the context of world history, economic growth is the normal state of affairs, and growth disasters rarely occur. a. True b. False ANSWER: b 208. For most of recorded human history, there was no long-run growth in real per capita GDP. a. True b. False ANSWER: a 209. Following World War II, Japan was one of the richest countries in the world. a. True b. False ANSWER: b 210. Today, most of the world's people have a relatively high standard of living. a. True b. False ANSWER: b 211. For most of recorded history, there was long-run growth in real per capita GDP. a. True b. False ANSWER: b 212. For most of recorded human history, there has been a steady, sustained growth in real GDP per capita. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 7 213. The United States has had sustained long-run economic growth for over 200 years. It would be impossible for a poor country today to catch up to the United States' level of per capita real GDP. a. True b. False ANSWER: b 214. If a country's GDP in 1950 was $25,000, and it had a continual rate of economic growth of 2%, its GDP would reach $50,000 in the year 2000. a. True b. False ANSWER: b 215. The difference between human capital and technological knowledge is that human capital relates to skills and education that reside within an individual, whereas technological knowledge is ideas and discoveries about how the world works. a. True b. False ANSWER: a 216. The difference between human capital and physical capital is that human capital measures the intelligence we are born with and physical capital refers to the machines that we create with our intelligence. a. True b. False ANSWER: b 217. Technical knowledge is considered an immediate cause of national wealth. a. True b. False ANSWER: a 218. Examples of human capital are tractors, factories, and shovels. a. True b. False ANSWER: b 219. Examples of physical capital are tractors, factories, and shovels. a. True b. False ANSWER: a 220. One difference between technological knowledge and human capital is that technological knowledge is discovering new ideas about how the world works, whereas human capital is knowing how to use the tools that come from those discoveries. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 7 a. True b. False ANSWER: a 221. Money is not what economists typically consider capital. a. True b. False ANSWER: a 222. Money is an example of physical capital. a. True b. False ANSWER: b 223. Technological knowledge is the stock of tools, including machines, structures, and equipment, used to produce goods and services. a. True b. False ANSWER: b 224. The organization and efficiency with which a country's factors of production are used are an immediate cause of economic growth. a. True b. False ANSWER: a 225. The factors of production are ultimate causes of economic growth. a. True b. False ANSWER: b 226. Geography, history, and luck are ultimate causes of economic growth. a. True b. False ANSWER: a 227. Pure good luck can be an ultimate cause of economic growth. a. True b. False ANSWER: a 228. Countries that use markets to organize production tend to have higher growth rates. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 7 a. True b. False ANSWER: a 229. "The Great Leap Forward" in China was an economic miracle, doubling agricultural production in the nation. a. True b. False ANSWER: b 230. China's "Great Leap Forward" caused agricultural production to plummet, and millions starved to death as a result. a. True b. False ANSWER: a 231. China's experiment with communal farming caused agricultural production to plummet, and millions starved to death as a result. a. True b. False ANSWER: a 232. China's experiment with communal farming failed because of free riding. a. True b. False ANSWER: a 233. China's experiment with communal farming failed because work effort was divorced from payment, and there was little incentive to work. a. True b. False ANSWER: a 234. China's impressive growth in recent decades is a result of policies that began during its "Great Leap Forward" program. a. True b. False ANSWER: b 235. China's impressive growth in recent decades is a result of institutional changes that provided secure property rights and the ownership of private land. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 7 ANSWER: a 236. Openness to foreign investment and freer trade are part of the explanation for China's recent growth miracle. a. True b. False ANSWER: a 237. China's recent growth miracle is a result of institutional changes that began in the late 1970s. a. True b. False ANSWER: a 238. The United States is among the world's 10 LEAST corrupt countries. a. True b. False ANSWER: b 239. Countries that have corrupt governments tend to have lower real GDP per capita. a. True b. False ANSWER: a 240. The origins of institutions that lead to economic growth are well known. a. True b. False ANSWER: b 241. Differences in growth rates across countries are attributed mostly to differences in technological knowledge. a. True b. False ANSWER: b 242. The key to producing and organizing factors of production to increase economic growth is having institutions that create the proper incentives. a. True b. False ANSWER: a 243. A country with a high GDP per capita is likely to have a lot of physical and human capital organized using the best technological knowledge available. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 7 b. False ANSWER: a 244. Institutions that promote economic growth include the enforcement of property rights. a. True b. False ANSWER: a 245. Corruption increases the returns to entrepreneurship by giving new businesses easy access to government officials. a. True b. False ANSWER: b 246. Competitive markets are not important for economic growth if the government enforces private property rights. a. True b. False ANSWER: b 247. Incentives are important in determining people's willingness to invest in physical capital, human capital, and technical knowledge. a. True b. False ANSWER: a 248. Incentives are important in structuring the institutions in a country. a. True b. False ANSWER: b 249. Landlocked countries tend to grow faster than countries that have access to water. a. True b. False ANSWER: b 250. Landlocked countries tend to grow slower than countries that have access to water. a. True b. False ANSWER: a 251. Openness to international trade tends to promote growth because it also opens a country to new ideas and innovation. Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 7 a. True b. False ANSWER: a 252. Openness to international trade tends to hinder growth because it allows a country's technical knowledge to be exploited by other countries. a. True b. False ANSWER: b 253. A country's institutions can ultimately be shaped by its history, culture, geography, and even luck. a. True b. False ANSWER: a 254. Data in the textbook show that life expectancy rises and infant mortality falls with higher real GDP per capita. Explain why this is the case. ANSWER: Virtually every standard indicator of well-being, including life expectancy and infant health, is positively correlated with real GDP per capita. Access to health care is easier in wealthy nations, saving many lives. Clean water is more plentifully available, reducing the chance of contracting water-borne diseases, which can cause diarrhea. Educational opportunities and leisure time are higher in wealthier countries, so parents have access to better information about caring for a child, and the time to devote to caring for the child. Wealthier nations also tend to have more stable societies with less violence.
255. How has the recent growth experience in China benefited the ordinary citizen in China? ANSWER: Although falling in recent years, for several years China's growth rate in real per capita GDP averaged above 7% a year. Using the Rule of 70, this translates in real per capita GDP doubling every 10 years. Privatization in agriculture increased food production by nearly 50%, eliminating the mass starvation seen during "The Great Leap Forward." Millions of people were lifted out of abject poverty. The rise in agricultural productivity freed workers to serve the manufacturing sector, which engaged with the global economy to generate even more efficiency and income gains.
256. Explain why real GDP per capita is a better measure of economic growth than real GDP. ANSWER: feedback: By most measures, China has the second-largest economy in the world. It is much, much larger than Luxembourg's, but it is also shared among almost a billion and a half people compared to several hundred thousand in Luxembourg. As a result, Luxembourg's per capita GDP is about 10 times higher than China's. Consequently, living standards in Luxembourg are much higher than in China. Per capita measurements even the playing field among large and small countries. Another reason per capita measures are more illuminating is that increases in real GDP may occur even when living standards are falling if the population is growing faster than real GDP.
257. Why is it important to remember that all countries used to be poor, that some countries remain poor today while others are rich, and that the differences between the rich and poor today are vast? ANSWER: Given the huge differences in income levels country to country, it might be difficult to realize that for most of human history those differences did not exist. Higher income levels have made life better in richer countries in many ways, and with economic growth those same benefits could accrue to countries that are now poor. Higher infant survival rates, more educational opportunities, better health, more leisure, and generally more comfortable lives could be available to poverty-stricken populations if we could better understand how the disparities arose and, more importantly, how to bring the poor countries to faster economic growth.
258. Figure: Growth Miracles and Growth Disasters Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 7
According to the information in the figure, Argentina had a higher real GDP per capita in 2000 than it did in 1900. Explain how it can still be considered a growth disaster. Also, discuss what other aspects of Argentina you would study to gain a complete understanding of its economic growth. ANSWER: In 1900, Argentina was one of the richest countries in the world with a per capita GDP almost as large (75%) as that of the United States. By 1950, Argentina's per capita GDP had fallen to half that in the United States. In 1950, however, Argentina was still a relatively wealthy country with a per capita GDP more than twice as high as that of Japan and more than five times as high as that of South Korea. Argentina failed to grow much, however, and by 2000 Argentina's per capita GDP was less than one-third of that of the United States. Moreover, Japan and South Korea are now much wealthier than Argentina. To understand why Argentina fell off the growth path, one should examine the institutions prevalent in the country. Political stability, honest government, clearly established property rights, the rule of law, and competitive and open markets set the stage for sustained growth. The absence of these institutions, many of which were absent in Argentina, preventing the country from growing as rapidly as it could have.
259. With China growing at rates in excess of 7% per year in recent decades, what has happened to the standard of living in China? Explain using the rule of 70. ANSWER: The rule of 70 states that if the real per capita GDP growth rate is 7%, real per capita GDP will double every 10 years or so. That means real per capita GDP in China has doubled each decade it has seen such growth rates. This consistent doubling has brought China almost to the world average, far above the low standard of living the Chinese population experienced before their rapid growth began.
260. Figure: The Distribution of World Income
Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 7
Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 7 261. Figure: Understanding the Wealth of Nations
Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 7
Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 7 Explain the role that "organization" plays in determining the wealth of nations. ANSWER: A society must organize its human capital, physical capital, and technological knowledge to produce valuable goods and services. This organization depends on incentives that align individual interests with social interests, and institutions that promote the efficient use of resources. These institutions include well-defined and defended property rights, honest government, political stability with free and fair elections, a reliable legal system, and competitive and open markets. When these incentives and institutions are in place, the nation's wealth rises.
262. Some of the poorest countries in the world are rich with natural resources. Explain why these resource-rich nations still struggle with low economic growth. ANSWER: A society must organize its human capital, physical capital, and technological knowledge to produce valuable goods and services. This organization depends on incentives that align individual interests with social interests, and institutions that promote the efficient use of resources. These institutions include well-defined and defended property rights, honest government, political stability with free and fair elections, a reliable legal system, and competitive and open markets. When these incentives and institutions are not in place, the nation risks wasting its endowment of resources.
263. List the causes of growth from the "ultimate" to the "immediate" causes. ANSWER: The ultimate causes include incentives that align individual interests with the social interest, institutions, and other factors like geography, history, ideas, culture, and even luck. The institutions include property rights, honest government, political stability, a reliable legal system, and competitive and open markets. Immediate causes include physical capital, human capital, technological knowledge, and organization.
264. Figure: Understanding the Wealth of Nations
Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 7
Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 7 Investment, education, and development of new technology are usually mentioned as important factors in the growth process. Why are they important, and where do they fit in the growth process? ANSWER: Investment creates physical capital, and education creates human capital. These expand an economy's productive capacity, but at a declining rate. New technology makes the physical and human capital we generate more productive, and since technological knowledge is potentially unlimited, our capacity to increase output may be unlimited.
265. Explain how human capital, physical capital, and technological knowledge differ from each other. ANSWER: All the three expand our ability to produce, but in different ways. Physical capital is the stock of tools including machines, structures, and equipment—all the things we've produced to produce other things. Human capital is the productive knowledge and skills that workers acquire through education, training, and experience—how to use the physical capital. Technological knowledge is knowledge about how the world works that is used to produce goods and services by enabling the physical and human capital to become more productive.
266. Korea was divided into North Korea and South Korea at the end of World War II. What similarities did the two nations have at that time? What differences contributed to the fact that South Korea now has a per capita GDP that is nearly 20 times higher than that of North Korea? ANSWER: Before the division, there were very few important differences between north and south in terms of human or physical capital. After the split, the two followed very different economic paths: South Korea relied on markets to organize production whereas North Korea relied on a command-economy system. The different results after 70 years are dramatic. South Korea, considered a growth miracle, is a thriving economy with real per capita GDP matching some European countries. North Korea deprives its citizens the incentives that drive entrepreneurs in other countries and remains a very poor country.
267. What are "incentives," and why are they important in the growth process? ANSWER: Incentives motivate people to do certain things. In the growth process, those things would include producing more physical capital, developing more human capital, and discovering more about the world works to produce technological knowledge. In a market economy, the incentives for entrepreneurs to increase these factors of production are profits or higher wages.
268. List the institutions that are important for economic growth as discussed in this chapter. ANSWER: There are five distinct institutions identified that affect economic growth. Property rights are important to give people confidence that they, not someone else, will benefit from their efforts. Honest government eliminates the "tax" of corruption on businesses. Political stability leads to a more stable business climate and reduces uncertainty for entrepreneurs. A dependable legal system convinces people that contracts will be enforced and malfeasance will be punished. Competitive and open markets mean resources will be allocated to their best uses.
269. Based on your understanding of the causes of the wealth of nations, discuss three reasons that you think countries fail to grow. ANSWER: Answers will vary but will probably include three of these. There are no clearly defined property rights, so people fear that the benefits of improvements they make in productive resources will be appropriated by others. Corruption puts an undue burden on businesses, causing them to use resources on unproductive activities. Civil strife or dictatorships destroy institutions needed for growth, so entrepreneurs fear their efforts will be destroyed by violence. The legal system is ineffective and unable or unwilling to enforce contracts, which makes it harder for parties to agree on the terms of any contract. Markets are non-competitive, over-regulated, and closed to international trade, which reduces the pressure to produce efficiently or prevents businesses from exploiting potential economies of scale, or both.
270. Explain how "good institutions" enhance the incentives for entrepreneurship. ANSWER: Well-established property rights encourage investment in physical and human capital, along with incentives to discover technological knowledge, because investors will feel confident that they will be the beneficiaries of their efforts. An Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 7 honest government means that entrepreneurs will devote their resources to profit-making activities instead of paying bribes to corrupt bureaucrats. Political instability creates incentives for talented entrepreneurs to emigrate. A stable and peaceful political system, however, creates an atmosphere attractive to entrepreneurs. A dependable legal system ensures that contracts will be enforced and debt collection will be relatively streamlined. Competition promotes efficient production and opening the economy to international trade creates economies of scale as the market grows from just the domestic population to the global population.
271. Discuss China's agricultural productivity from 1949 to 1983. In your discussion, state the main factor(s) that altered its productivity during the 1949–1978 and 1978–1983 time periods. ANSWER: feedback: In 1949, after the revolution, private agricultural assets were nationalized and communal farms were established, removing much of the incentive to work hard since work and rewards were now separated. The result was much lower productivity because individual self-interest was not aligned with social interest. In 1978, however, farmers in the village of Xiaogang held a secret meeting. The farmers agreed to divide the communal land and assign it to individuals. Each farmer would keep any output produced in excess of the quota for the government. The change from collective property rights to something closer to private property rights had an immediate effect: Investment, work effort, and productivity increased. Other collectives followed suit, and eventually Beijing decided to let the experiment continue in 1983. In five years, between 1978 and 1983, food production increased by nearly 50% and 170 million people were lifted above the World Bank's lowest poverty line. The change in incentives turned out to be tremendously powerful.
272. What factors BEST explain China's increased rate of growth after 1978? ANSWER: The end of the communal farming system was followed by a tremendous increase in productivity. China's leaders recognized the impact such reforms could have in other sectors and allowed reform to spread. Changing incentives to align individual interests more closely with the social interest, along with opening the economy to trade and foreign investment, combined to enable China to grow more rapidly.
273. Why are property rights important for economic development? ANSWER: Property rights are essential for encouraging investment in physical and human capital. Developing high levels of human capital takes years, and the payoff for investments in physical capital may take decades. People will hesitate to make the necessary investments if they are uncertain as to whether they will be the beneficiaries of their efforts.
274. Why do economists look at a government's honesty when they study national wealth? ANSWER: There is a strong negative correlation between corruption and GDP per capita. The less corrupt and more honest the government is, the more likely the nation will have a high GDP per capita. Corruption acts as a tax on productive activities and reduces the incentive to invest in physical capital, human capital, and technical knowledge. Resources diverted from productive use are instead used for bribes and gaining favor with the dishonest government. The lack of proper incentives, wasted resources, and inefficiency all reduce productivity and growth in the economy, thus leading to lower living standards.
275. Explain the impact that strong private property rights have on investments in physical capital and human capital. ANSWER: Secure property rights provide an incentive for investment in physical capital and human capital and thus facilitate economic growth. Savers won't save and investors won't invest if they don't expect that their property will be secure and that they will receive a return for their savings and investment.
276. Explain how both too little government and too much government can threaten property rights in a country. ANSWER: Too little or too much government can reduce incentives to invest in capital. If there is too much government, individual private property rights might be weakened in favor of the government taking control of property. Investors fear that they will not be able to control their own property and use it in a way that maximizes returns to the property owner; in extreme cases, property owners might fear expropriation by the government. At the other extreme, if there is too little government, there may not be a stable legal system to enforce property rights, leaving property owners in legal limbo. Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 7 An inability to enforce property rights in a timely and reasonably low-cost manner serves as a deterrent to investing in capital.
277. Provide an overview of the incentives and institutions that facilitate economic growth. ANSWER: The key to producing and organizing the factors of production is institutions that create appropriate incentives to work and not free-ride, and to produce factors of production. These require a connection between effort and reward, both for workers and for entrepreneurs. The institutions needed to provide those incentives include property rights, honest government, political stability, a dependable legal system, and competitive and open markets. If these institutions are in place, they provide a secure environment for entrepreneurs to take risks.
278. Suppose that the annual real GDP per capita in India is currently $2,000 and in the United States it is $50,000. If the United States is growing at 3% per year, at what rate will India need to grow to have the same annual real GDP per capita as the United States 50 years from today? Show all of your work. ANSWER: In 50 years, U.S. real GDP per capita (GDP) will be 50,000(1.03)50 = 219,195. For India to catch the United States in 50 years, we need to solve for g in the future value equation: 219,195 = 2,000(1 + g)50. 219,195 ÷ 2,000 = (1 + g)50 109.5975 = (1 + g)50 109.59751/50 = (1 + g)(50)(1/50) 1.0985 = 1 + g 0.0985 = g India would have to grow at 9.85% per year.
279. Which statement is TRUE about economic growth? a. All countries eventually grow rich. b. Once a country starts to grow, it will continue to grow. c. A country can grow and become wealthy, never grow, or grow and then begin to stagnate. d. Growth is a random process; in some years a country grows and in other years it doesn't. ANSWER: c 280. Which statement is FALSE? a. Historically, all people used to be poor. b. History shows that over time, prosperity occurs in all countries. c. GDP per capita varies significantly across countries. d. Economic growth rates vary across countries and over time. ANSWER: b 281. Which is a TRUE statement about real GDP per capita across countries? a. Half of the world's population has income below the world average real GDP per capita, and half of the world's population has income above it. b. The majority of people in the world have income equal to the world average real GDP per capita.
c. Most people live in countries where real GDP per capita is above the world average real GDP per capita. d. Most people live in countries where real GDP per capita is below the world average real GDP per capita. ANSWER: d 282. Individual incomes around the world vary _____ than the distribution of real GDP per capita across countries because _____. Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 7 a. more; incomes vary significantly within each country b. more; tax policies in some countries reduce income variation c. less; incomes vary little within each country d. less; focusing on averages skews the perception ANSWER: a 283. Between 1 and 1000 CE, the trend line of real GDP per capita in the world was: a. rising. b. falling. c. flat. d. varying. ANSWER: c 284. The economic growth rate is the growth rate of: a. GDP. b. GDP per capita. c. real GDP. d. real GDP per capita. ANSWER: d 285. Table: GDP 2015–2018 2015 2016 2017 2018 Real GDP in 2015 dollars $4,000,000 $4,200,000 $4,300,000 $4,400,000 GDP per capita 40,000 42,400 43,860 44,614 Real GDP per capita in 2015 dollars 40,000 41,584 41,748 42,453 What was the economic growth rate in 2018? a. 1.66% b. 1.69% c. 1.72% d. 2.33% ANSWER: b 286. Table: GDP 2015–2018 2015 2016 2017 2018 Real GDP in 2015 dollars $4,000,000 $4,200,000 $4,300,000 $4,400,000 GDP per capita 40,000 42,400 43,860 44,614 Real GDP per capita in 2015 dollars 40,000 41,584 41,748 42,453 What was the economic growth rate in 2016? a. 0.41% b. 2.26% c. 3.96% d. 5.00% Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 7 ANSWER: c 287. Growth becomes exponential due to: a. inflation. b. the business cycle. c. per capita computation. d. compounding. ANSWER: d 288. If a certain economy is growing at a rate of 1.75% annually, how many years will it take for the country's real GDP per capita to double? a. 40.0 years b. 61.3 years c. 52.5 years d. 75.0 years ANSWER: a 289. If a country has an economic growth rate of 5.5%, its real GDP per capita will double in _____ years. a. 3.85 b. 12.73 c. 55.70 d. 78.55 ANSWER: b 290. Table: Growth Rates and Real GDP per Capita Country A Country B Country C Country D Real GDP per capita $5,000 $10,000 $15,000 $20,000 Economic growth rate 7% 6% 3% 2% Which country will reach a real GDP per capita of $80,000 the MOST quickly if the growth rates in the table are maintained? a. country A b. country B c. country C d. country D ANSWER: b 291. Table: Growth Rates and Real GDP per Capita Country A Country B Country C Country D Real GDP per capita $5,000 $10,000 $15,000 $20,000 Economic growth rate 7% 6% 3% 2% Which country will reach a real GDP per capita of $80,000 the MOST slowly if the growth rates in the table are maintained? a. country A Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 7 b. country B c. country C d. country D ANSWER: d 292. Which two countries transitioned from widespread poverty to comfortable prosperity for the average person within a time span of approximately 20 years? a. England and Japan b. the United States and England c. South Korea and Argentina d. Japan and South Korea ANSWER: d 293. Two countries that have experienced relatively stagnant real GDP per capita for the past century are: a. China and Indonesia. b. Indonesia and Nigeria. c. Nigeria and Argentina. d. Argentina and China. ANSWER: c 294. Which is NOT consistent with historical records on economic growth? a. Essentially all people were poor for most of human history. b. Growth tends to occur evenly across the world. c. Some economies have seen basically no growth through recorded history. d. An economy can transition from poverty to prosperity within a few decades. ANSWER: b 295. The most promising idea for creating a growth miracle in a country is: a. building more schools in the country. b. opening the country to more foreign investment. c. improving the institutions in the country. d. allowing more foreign aid in the country. ANSWER: c 296. The ways in which the factors of production are organized into production are the result of _____ and _____. a. human capital; technological knowledge b. institutions; technological knowledge c. incentives; technological knowledge d. incentives; institutions ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 7 297. Which is NOT an institution as the term is used in economics? a. social mores b. technological knowledge c. laws and regulations d. organizations ANSWER: b 298. Key institutions in a society that affect its economy do NOT include: a. labor unions. b. political stability. c. an honest government. d. property rights. ANSWER: a 299. When a worker's income is not tied to the worker's effort, the incentive to: a. work hard is reduced. b. work hard is increased. c. enhance society's welfare is reduced. d. enhance society's welfare is increased. ANSWER: a 300. The incentive to be a free rider increases when: a. private property rights are unclear. b. markets are open. c. the legal system is dependable. d. the government is honest. ANSWER: a 301. What change among rural farmers in China took place beginning in 1978 that increased food output by nearly 50% in 5 years? a. expanded availability of farm equipment b. free public schooling c. a more stable government d. individual, rather than collective, farming ANSWER: d 302. If people have low expectations that their property will be secure and that they will be able to gain a return from its use, then people will: a. hoard their property. b. see their property become increasingly expensive. Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 7 c. not save and invest. d. invest in physical, rather than human, capital. ANSWER: c 303. What is the relationship between corruption and real GDP per capita across countries? a. There is a positive relationship. b. There is a negative relationship. c. Corruption has no identifiable relationship with real GDP per capita. d. There is a cyclical relationship. ANSWER: b 304. Which would encourage, rather than discourage, investment in capital within a country? a. fear of expropriation b. limited property rights c. a limited legal system d. open markets ANSWER: d 305. An undependable legal system would hinder economic growth due to the ease of: a. enforcing contracts. b. protecting property rights. c. expropriation of property. d. debt collection. ANSWER: c 306. Research shows that approximately half of the difference in per capita income across countries is due to differences in _____ and half is due to differences in _____. a. technology; population b. the honesty of government; political stability c. the openness of markets; the expropriation of property d. the quantity of physical and human capital; using capital efficiently ANSWER: d 307. Excessive regulation of businesses does NOT: a. help businesses operate more efficiently. b. reduce the openness of markets. c. make it harder to produce with economies of scale. d. increase red tape. ANSWER: a 308. When a firm can produce a large output with large facilities at a lower average total cost than it can Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 7 produce a small output with smaller facilities, there are: a. growth economies. b. free riders. c. economies of scale. d. increased savings. ANSWER: c 309. The Industrial Revolution was able to facilitate economic growth in Great Britain due to conditions that did NOT include: a. secure property rights. b. relatively free labor markets. c. the use of the scientific method to develop production methods. d. policies that limited the distribution of wealth. ANSWER: d 310. Which statement is TRUE? a. For living standards to rise, real GDP per capita must rise. b. If GDP rises, living standards will rise. c. If real GDP per capita rises, the standard of living for every citizen will rise. d. Living standards for everyone in a country can rise even if population growth rises faster than real GDP. ANSWER: a 311. For most of human history, living standards did not rise because: a. real GDP per capita did not rise. b. physical capital did not increase fast enough to match technological advances. c. real GDP did not rise. d. the population rose more slowly than real GDP. ANSWER: a 312. Country A and country B start with the same real GDP per capita. Country A grows at a constant rate of 1% each year, whereas country B has a single year in which it grows 9% but does not grow in other years. After nine years, which country's real GDP per capita has grown more? a. country A b. country B c. They have both grown the same amount. d. There is not enough information to answer the question. ANSWER: a 313. Country A's real GDP per capita grows each year, but only at 0.5%. Which statement about country A is TRUE? a. Real GDP per capita will eventually double, but it will take a long time. b. Living standards will never improve. Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 7 c. Living standards will improve only if population grows at less than 0.5% per year. d. Output must be growing at a slower rate than population. ANSWER: a 314. Which is NOT a source of human capital acquisition? a. infrastructure b. education c. training d. experience ANSWER: a 315. Which is a source of human capital acquisition? a. experience b. infrastructure c. computers d. occupational licensing ANSWER: a 316. An economy in which individuals make most of the decisions to further their own self-interest is a(n): a. market economy. b. command economy. c. selfish economy. d. egalitarian economy. ANSWER: a 317. An economy in which bureaucrats make most of the decisions about how to allocate resources is a(n): a. command economy. b. market economy. c. libertarian economy. d. altruistic economy. ANSWER: a 318. Which variable do economists prefer to use when measuring living standards? a. real GDP per capita b. real GDP c. nominal GDP per capita d. nominal GDP ANSWER: a 319. One reason real GDP per capita failed to grow over much of human history is that: a. virtually all resources had to be used to produce consumption goods, leaving little left over for saving and investment.
Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 7 b. since every society was at about the same level of real GDP per capita, no society felt the need to grow. c. human capital did not yet exist. d. technological knowledge did not develop until the Industrial Revolution. ANSWER: a 320. Figure: Economic Growth in Major World Regions
Based on the information in the graph, which statement is TRUE? a. All regions recently experienced growth, but the gap between rich and poor countries is growing. b. The regions that took the longest to increase their growth rates are growing the fastest more recently. c. Around the globe, there was a significant increase in growth rates around 1500. d. There have always been large regional differences in real GDP per capita. Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 7 ANSWER: a 321. Which BEST explains the inferior performance of command economies compared to market economies? a. misaligned incentives b. lack of human capital c. too little investment d. deficient technological knowledge ANSWER: a 322. The productive abilities that workers acquire through education, training, and experience is: a. human capital. b. technological knowledge. c. not critical for economic growth. d. more or less equal across economies. ANSWER: a 323. Increases in technological knowledge depend on: a. saving to fund investment in research and development. b. the government. c. international collaboration. d. high levels of human and physical capital. ANSWER: a 324. Clearly defined property rights reduce which problem? a. free riding b. political instability c. corruption d. noncompetitive markets ANSWER: a 325. Which strategy would be MOST likely to enable a poor country to increase its growth rate? a. revising institutions to align individual interests with the social interest b. collecting private farms into communal farms to exploit economies of scale c. nationalizing factors of production to make sure everyone is moving in the same direction d. closing the economy to international trade to promote domestic production ANSWER: a 326. Why might poor countries grow more rapidly than rich countries? a. Rich countries would have to produce more factors of production to grow, whereas poor countries could make already existing factors more productive by adjusting institutions. b. Poor countries have many unused resources which could be converted into physical capital.
c. Poor countries have lower birth rates, so GDP per capita rises faster. Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 7 d. Technological knowledge in rich countries has been completely developed, but poor countries can rely on physical and human capital to grow.
ANSWER: a
Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 8 1. In recent years, real GDP in China has grown: a. at about the same rate as real GDP in the United States. b. much faster than real GDP in the United States. c. much slower than real GDP in the United States. d. faster than real GDP in the United States in some years, slower than real GDP in the United States in other years.
ANSWER: b 2. In 2010, China's GDP per capita grew by approximately: a. 7%. b. 8%. c. 9%. d. 10%. ANSWER: d 3. In 2010, U.S. GDP per capita grew by approximately: a. 1.2%. b. 2.2%. c. 3.2%. d. 4.2%. ANSWER: b 4. In 2010, GDP per capita in the United States grew by 2.2%. In the same year, GDP per capita in China grew by almost: a. 2%. b. 5%. c. 7%. d. 10%. ANSWER: d 5. Which is NOT a key institution for economic growth? a. property rights b. honest government c. political stability d. income equality ANSWER: d 6. Countries on the cutting edge grow primarily by: a. adopting ideas already used by other countries. b. accumulating capital. c. developing new ideas. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 8 d. eliminating waste and inefficiency. ANSWER: c 7. Countries on a catching-up growth path are growing primarily through: a. capital accumulation. b. new technological knowledge. c. new ideas. d. foreign aid. ANSWER: a 8. The two types of economic growth are: a. ultimate and immediate. b. progressive and regressive. c. fast and slow. d. cutting-edge and catching-up. ANSWER: d 9. Catching-up growth is growth due to: a. capital accumulation. b. new ideas. c. increased government institutions and regulations. d. improved organization of existing resources. ANSWER: a 10. Cutting-edge growth is growth due to: a. capital accumulation. b. new ideas. c. new human capital. d. improved organization of existing resources. ANSWER: b 11. The production function is a mathematical function that shows: a. the most cost-efficient means of producing output. b. the relationship between output and the factors of production. c. how various inputs are produced. d. the most efficient level of output produced in an economy. ANSWER: b 12. The A term in the production function Y = F(A, K, eL) represents which factor of production in the Solow growth model? a. physical capital Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 8 b. human capital c. technological knowledge d. organization of resources ANSWER: c 13. The Solow growth model features _____ returns to physical capital. a. diminishing b. constant c. increasing d. no ANSWER: a 14. In the Solow model production function, Y = F(A, K, eL), K stands for: a. kurtosis. b. consumption. c. physical capital. d. human capital. ANSWER: c 15. In the Solow model production function, Y = F(A, K, eL), L stands for: a. labor. b. leisure. c. liquidity. d. long run. ANSWER: a 16. In the Solow model production function, Y = F(A, K, eL), A stands for: a. aggregate demand. b. assets. c. attitude. d. ideas. ANSWER: d 17. In the Solow model production function, Y = F(A, K, eL), eL stands for: a. efficiency. b. liquidity. c. elasticity. d. human capital. ANSWER: d
Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 8 18. An economy with production function Y = F(K) =
that has 400 units of capital will produce _____ units
of output. a. 1,600 b. 400 c. 40 d. 20 ANSWER: d 19. Imagine an economy with production function Y = F(K) =
and 400 units of capital. If the fraction of
output invested in new capital is γ = 0.2, how much new capital will the economy create in the next period? a. 2 units b. 4 units c. 6 units d. 8 units ANSWER: b 20. Imagine an economy with production function Y = F(K) =
and 400 units of capital. If the depreciation
rate is δ = 0.05, how much capital will deteriorate in the next period? a. 4 units b. 8 units c. 16 units d. 20 units ANSWER: d 21. Imagine an economy with production function Y = F(K) =
and 400 units of capital. If the fraction of
output invested in new capital is γ = 0.2 and the depreciation rate is δ = 0.05, how much total capital will be available in the next period? a. 380 units b. 384 units c. 400 units d. 404 units ANSWER: b 22. Imagine an economy with production function Y = F(K) =
and 400 units of capital. If the fraction of
output invested in new capital is γ = 0.2 and the depreciation rate is δ = 0.05, what is the steady-state amount of capital? a. 16 units b. 64 units c. 100 units Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 8 d. 225 units ANSWER: a 23. Imagine an economy with production function Y = F(K) =
and 400 units of capital. If the fraction of
output invested in new capital is γ = 0.2, the depreciation rate is δ = 0.05, and the economy starts with output of 20, what does the Solow model predict will happen to output in the long run? a. It will remain at 20. b. It will decline. c. It will increase. d. It will increase for a time and then return to 20. ANSWER: b 24. Imagine an economy with production function Y = F(K) =
and 400 units of capital. If the fraction of
output invested in new capital increases from γ = 0.2 to γ = 0.5 and the depreciation rate is δ = 0.05, what is the new steady-state amount of capital? a. 16 units b. 64 units c. 100 units d. 256 units ANSWER: c 25. _____ first developed the model that explains economic growth using a production function. a. Milton Friedman b. Robert Solow c. John Maynard Keynes d. Ben Bernanke ANSWER: b 26. The Solow model is based on: a. a production function. b. supply and demand curves. c. the GDP accounts. d. consumer preferences. ANSWER: a 27. If we hold ideas, education, and labor constant in the Solow model, then output (GDP) is a function of: a. human capital only. b. physical capital only. c. labor only. d. technological knowledge only. Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 8 ANSWER: b 28. Economists use a production function to express the relationship between _____ and GDP. a. GDP per capita b. productivity c. the factors of production d. an economy's growth rate ANSWER: c 29. Consider the production function Y = F(K) =
. When the capital stock is 144, output is:
a. 12. b. 24. c. 72. d. 144. ANSWER: a 30. Which would decrease national output? a. a new idea to improve the production process b. a natural disaster that destroys some capital c. an increase in human capital d. an increase in labor ANSWER: b 31. In the Solow model, if the first unit of capital increases output by one unit, then the second unit of capital will cause total output to: a. increase, but by less than one unit. b. increase by more than one unit. c. remain the same. d. decrease. ANSWER: a 32. In the Solow model, an increase in the capital stock with all other variables held constant will _____ the country's real GDP but at a(n) _____ rate. a. increase; decreasing b. decrease; decreasing c. increase; increasing d. decrease; increasing ANSWER: a 33. In the Solow model, if a country's saving rate (γ) increased from 10% to 12% and it was operating at its steady state before the change, we would expect to see a(n): Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 8 a. decrease in both the capital stock and output. b. increase in the capital stock only. c. increase in output only. d. increase in both the capital stock and output. ANSWER: d 34. In the Solow model, if a country's depreciation rate (δ) increased from 1% to 2% and it was operating at its steady state before the change, we would expect to see a(n): a. decrease in both the capital stock and output. b. decrease in the capital stock only. c. decrease in output only. d. increase in both the capital stock and output. ANSWER: a 35. Diminishing returns to capital implies that _____ diminishes as more capital is added. a. output b. the marginal product of capital c. the cost of producing goods and services d. technological knowledge ANSWER: b 36. The increase in output caused by the addition of one more unit of capital is called: a. the average product. b. total product. c. the production function. d. the marginal product of capital. ANSWER: d 37. As more units of capital become available in the Solow model, output: a. increases at an increasing rate. b. increases at a constant rate. c. increases at a decreasing rate. d. remains constant. ANSWER: c 38. As more units of capital become available in the Solow model, the marginal product of capital: a. increases. b. decreases at first, then increases. c. decreases. d. remains constant. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 8 39. The marginal product of capital is the increase in: a. employment when one more unit of capital is added. b. unemployment when one more unit of capital is added. c. output when one more unit of capital is added. d. the number of machines when one more unit of capital is added. ANSWER: c 40. According to the Solow model, output is a function of the quantity of: a. labor. b. capital. c. ideas. d. labor, capital, and ideas. ANSWER: d 41. Diminishing returns to tractors indicates that: a. having more tractors always leads to more output. b. having more tractors leads to increases in output only if there are corresponding increases in technology. c. additional output may be produced with fewer tractors. d. having more tractors leads to more output, but at a decreasing rate. ANSWER: d 42. Diminishing returns to capital implies that: a. the marginal product of capital is decreasing. b. more capital produces less output. c. the production function is downward sloping. d. capital is not the most efficient input. ANSWER: a 43. The principle of diminishing returns to capital implies that a country that loses much of its capital during a war will: a. experience a slower growth rate than before the war. b. never catch up to its level of output before the war. c. never be able to replace the capital lost during the war. d. experience a faster growth rate than before the war. ANSWER: d 44. Which statement BEST explains why growth in China has been so rapid recently? a. China began with very little capital, so its marginal product of capital was very high. b. China began with very little capital, so its marginal product of capital was very low. c. China began with very high capital, so its marginal product of capital was very high. Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 8 d. China began with very high capital, so its marginal product of capital was very low. ANSWER: a 45. Which statement is NOT an explanation for why Germany and Japan both grew faster than the United States following World War II? a. Both countries had very little capital stock remaining after the war. b. Both countries had a high marginal product of capital after the war. c. Both countries had a strong incentive to put new capital stock into place. d. Both countries were experiencing cutting-edge growth at the time. ANSWER: d 46. Germany and Japan's rapid growth following the end of World War II is an example of: a. indirect growth. b. cutting-edge growth. c. growth due to increases in natural resources. d. high returns to capital. ANSWER: d 47. Figure: Four Production Functions
Which of these production functions exhibits diminishing returns? a. A b. B c. C d. D Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 8 ANSWER: d 48. Recent growth in China has been driven primarily by: a. capital accumulation. b. development of new technology. c. foreign aid. d. improved organization of existing resources. ANSWER: a 49. Based on the nature of China's growth in recent years, it is likely that its growth rate will _____ in coming years. a. increase b. slow c. remain about the same d. turn negative ANSWER: b 50. Which statement is NOT a reason for high economic growth rates in Germany and Japan following World War II? a. Good institutions were in place soon after the war. b. Both countries had higher growth rates than the United States before World War II. c. New capital was highly productive during the rebuilding process. d. The incentive to invest in capital was very high after the war. ANSWER: b 51. The 2003 Iraq War destroyed large amounts of capital. Later, insurgent activity continued to destroy capital and created instability in the government. Today, hostilities have waned, and the government has become more stable. According to the Solow growth model, over the next few years we would expect to see growth rates in Iraq _____ those of high-income countries with similar institutions, followed by growth rates that are _____ the growth rates in those countries. a. higher than; much higher than b. lower than; similar to c. higher than; similar to d. similar to; lower than ANSWER: c 52. Recent rapid growth in China is primarily due to: a. a high marginal product of capital that will eventually decrease as the country grows. b. a high marginal product of capital that will continue to grow as the country grows. c. the development of new technology that has increased productivity. d. increases in human capital that have significantly increased the marginal product of labor. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 8 53. Economists speculate that China's rapid growth will eventually slow as: a. its excess labor supply becomes exhausted. b. its capital stock rises. c. other countries catch up to China. d. economies of scale diminish. ANSWER: b 54. The marginal product of capital in China is _____ relative to the marginal product of capital in developed economies. a. high b. moderate c. low d. zero ANSWER: a 55. Since the death of Chairman Mao in 1976, China has moved toward: a. a more Communist society. b. more communal manufacturing. c. more market-based production. d. a more closed economy. ANSWER: c 56. As a city rebuilds after a hurricane destroys most of its physical capital, we would expect growth in this locale to be: a. higher than average in both the short run and long run. b. lower than average in both the short run and long run. c. higher than average in the short run but return to normal levels in the long run. d. lower than average in the short run but eventually rise above average in the long run. ANSWER: c 57. Countries that have been bombed extensively in a war often experience a(n) _____ growth rate in the aftermath of the conflict. a. lower b. higher c. unchanged d. zero ANSWER: b 58. Countries that have been bombed extensively in a war typically have a(n) _____ marginal product of capital in the aftermath of conflict. a. lower Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 8 b. higher c. unchanged d. zero ANSWER: b 59. Following World War II, Japan and Germany grew rapidly because: a. each country had a lot of capital that survived the war. b. each country's new capital was highly productive after the war. c. postwar institutions were not effective. d. little rebuilding was required at the end of the war. ANSWER: b 60. Capital growth is equal to investment _____ depreciation. a. minus b. plus c. times d. divided by ANSWER: a 61. Capital growth is the difference between: a. investment and economic growth. b. investment and depreciation. c. depreciation and economic growth. d. investment and saving. ANSWER: b 62. The level of capital stock increases when investment in physical capital is: a. greater than depreciation. b. less than depreciation. c. greater than personal consumption. d. greater than investment in human capital. ANSWER: a 63. Figure: Production Function
Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 8
In this diagram of the Solow model, if output is 600, consumption equals: a. 50. b. 200. c. 400. d. 600. ANSWER: b 64. Depreciation refers to the: a. loss of capital because of technological change. b. underuse of capital because of a reduced workforce. c. wear and tear on capital through normal use. d. underuse of capital because of inefficiency. ANSWER: c 65. In a steady state, the level of investment: a. exceeds depreciation. b. is equal to depreciation. c. is less than depreciation. d. could be equal to, greater than, or less than depreciation. ANSWER: b 66. When investment exceeds depreciation, the capital stock: a. falls and output falls. b. falls and output rises. c. rises and output falls. d. rises and output rises. ANSWER: d 67. In a steady state, the capital stock: a. increases. b. decreases. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 8 c. neither increases nor decreases. d. equals zero. ANSWER: c 68. In a steady state, output is: a. growing. b. declining. c. constant. d. zero. ANSWER: c 69. In the Solow model with constant technological knowledge (A), when the economy reaches a steady state: a. catching-up growth occurs. b. cutting-edge growth occurs. c. growth stops. d. both catching-up and cutting-edge growth occur. ANSWER: c 70. In the Solow model with constant technological knowledge (A), if the economy is initially below its steadystate capital stock: a. catching-up growth will occur. b. cutting-edge growth will occur. c. there will be no growth. d. both catching-up and cutting-edge growth will occur. ANSWER: a 71. In the Solow model with constant technological knowledge (A), if the economy is initially below its steadystate capital stock: a. economic growth will occur. b. economic decline will occur. c. the economy will remain at its current output level. d. depreciation will cause the capital stock to decline. ANSWER: a 72. In the Solow model with constant technological knowledge (A), if the economy is initially above its steadystate capital stock: a. economic growth will occur. b. economic decline will occur. c. the economy will remain at its current output level. d. investment will cause the capital stock to increase. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 8 73. In the Solow model with constant technological knowledge (A), if investment exceeds depreciation: a. economic growth will occur. b. economic decline will occur. c. the economy will remain at its current output level. d. depreciation will cause the capital stock to decline. ANSWER: a 74. In the Solow model with constant technological knowledge (A), if depreciation exceeds investment: a. economic growth will occur. b. economic decline will occur. c. the economy will remain at its current output level. d. depreciation will cause the capital stock to rise. ANSWER: b 75. In the Solow model with constant technological knowledge (A), if investment equals depreciation: a. economic growth will occur. b. economic decline will occur. c. the economy will remain at its current output level. d. depreciation will cause the capital stock to rise. ANSWER: c 76. The steady-state capital stock is the capital stock at which: a. investment exceeds depreciation. b. investment equals depreciation. c. investment is less than depreciation. d. depreciation equals zero. ANSWER: b 77. If output in an economy is 20 and the investment function is 0.25Y, then: a. 16 units of output are being consumed. b. 25 units of output are being invested. c. 15 units of output are being consumed. d. 20 units of output are being invested. ANSWER: c 78. If output in an economy is 500 and the investment function is 0.25Y, then: a. 125 units of output are being consumed. b. 375 units of output are being consumed. c. 100 units of output are being consumed. d. 400 units of output are being invested. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 8 79. If the depreciation rate is 0.03 and the capital stock is 200, how many units of capital will depreciate this period? a. 2 units b. 3 units c. 6 units d. 12 units ANSWER: c 80. Consider a small country with a capital stock equal to 900 units. This year it produced 20 units of new capital goods, with a depreciation rate of 20% and a production function of Y = K1/2. What will its capital stock be next year? a. 920 units b. 720 units c. 740 units d. 900 units ANSWER: c 81. Consider a small country with a capital stock equal to 900 units. This year it produced 20 units of new capital goods, with a depreciation rate of 10% and a production function of Y = K1/2. If there is no technological advancement, what will the growth rate in this country be over the next year? a. −4.13% b. −3.97% c. 2.40% d. 10.00% ANSWER: b 82. All else equal, an increase in savings will cause investment to: a. increase. b. decrease. c. remain unchanged. d. first increase and then decrease. ANSWER: a 83. All else equal, an increase in savings will cause capital stock to: a. increase. b. decrease. c. remain unchanged. d. increase and then decrease. ANSWER: a 84. Capital is output that is: Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 8 a. invested in the stock market. b. used to produce other goods. c. invested in the bond market. d. consumed. ANSWER: b 85. Over time, capital wears out. The official term for this is: a. wear and tear. b. depreciation. c. capital dissolution. d. capital deepening. ANSWER: b 86. New capital is created in the economy by: a. consumption. b. investment. c. depreciation. d. government. ANSWER: b 87. Figure: Depreciation in Economy A
The figure shows the depreciation function for an economy. The depreciation rate is: a. 25%. b. 2.5%. c. 0.25%. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 8 d. 0.025%. ANSWER: b 88. Figure: Depreciation in Economy B
The figure shows the depreciation function for an economy. The depreciation rate is: a. 1. b. 0.10. c. 0.010. d. 0.0010. ANSWER: b 89. What is meant by the steady-state level of capital? a. All of a nation's capital is being reinvested back into the economy. b. Positive net capital investment continues to drive growth at a steady rate. c. There is no new net investment or any growth. d. Investment exceeds depreciation. ANSWER: c 90. Human capital is similar to physical capital in that it: a. is dependent on government investment. b. decreases the economy's growth rate. c. does not depreciate. d. has diminishing returns. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 8 91. When investment is equal to depreciation, the capital stock: a. increases. b. decreases. c. remains constant. d. becomes zero. ANSWER: c 92. In a steady state, the capital stock: a. increases. b. decreases. c. remains constant. d. becomes zero. ANSWER: c 93. Other things held constant, an increase in depreciation will cause the capital stock to: a. decrease. b. increase. c. remain unchanged. d. become unprofitable. ANSWER: a 94. Countries with more human capital tend to have a: a. higher GDP per capita. b. lower GDP per capita. c. higher population. d. lower population. ANSWER: a 95. With additional education, the marginal product of human capital: a. increases at an increasing rate. b. increases at a decreasing rate. c. remains constant. d. decreases. ANSWER: d 96. Consider an economy with production function Y = K1/2, an investment rate equal to 0.25, and a depreciation rate of 0.05. If K = 1,000 this period, the capital stock next period will be: a. equal to 1,000. b. greater than 1,000. c. less than 1,000. d. greater than 1,200. Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 8 ANSWER: c 97. If the production function in a country is Y = K1/2, the investment rate equals 0.25, and the depreciation rate is 0.05, then the steady-state level of the capital stock is equal to: a. 5 units. b. 10 units. c. 15 units. d. 25 units. ANSWER: d 98. If the production function in a country is Y = K1/2, the investment rate equals 0.25, and the depreciation rate is 0.05, then the steady-state level of output is equal to: a. 5 units. b. 10 units. c. 15 units. d. 25 units. ANSWER: a 99. Countries A and B have similar levels of technology and physical capital, but country B has twice as much human capital as country A. If diminishing returns apply to all inputs, country B should grow at _____ country A. a. the same rate as b. more than twice the rate of c. a lower rate than d. twice the rate of ANSWER: c 100. At the steady-state level of capital, capital investment: a. equals depreciation. b. is greater than depreciation. c. is less than depreciation. d. and depreciation are both zero. ANSWER: a 101. Figure: Depreciation and Investment
Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 8
According to this diagram of the Solow model, if the current capital stock is 70, then economic growth will be: a. positive. b. zero. c. negative. d. in a steady state. ANSWER: c 102. Figure: Depreciation and Investment
According to this diagram of the Solow model, the steady-state level of the capital stock is: a. 40 units. b. 50 units. c. 60 units. d. 70 units. ANSWER: c 103. In the Solow model, an earthquake that destroys half of a nation's capital stock will cause a(n): a. increase in the country's growth rate in the years following the earthquake. b. decrease in the country's growth rate in the years following the earthquake. c. decrease in the country's steady-state capital stock. d. increase in the country's steady-state output level. Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 8 ANSWER: a 104. In the Solow model, if a country increases its savings rate: a. growth increases as the economy moves toward a new, higher steady-state capital stock. b. growth decreases as the economy moves toward a new, lower steady-state capital stock. c. growth increases as a result of a new, higher production function. d. no growth occurs, since the steady state is unchanged. ANSWER: a 105. If an economy described by the production function Y = K1/2 has 30% of output invested in new capital and 6% of the capital stock depreciated each year, what is the steady-state level of capital? a. 3.24 units b. 9 units c. 25 units d. 36 units ANSWER: c 106. Consider an economy described by the production function Y = K1/2 with 30% of output invested in new capital and 6% of the capital stock depreciating each year. If the current capital stock is 30, then the economy's capital stock would: a. grow, and the output next period would increase. b. grow, but the output next period would decrease. c. shrink, but the output next period would increase. d. shrink, and the output next period would decrease. ANSWER: d 107. The iron logic of diminishing returns in the Solow model means that: a. eventually output will cease growing even though capital is still growing. b. eventually capital will cease growing even though output is still growing. c. capital and output will continue to grow indefinitely, but at a diminishing rate. d. eventually capital and output both will cease growing. ANSWER: d 108. A country is experiencing _____ growth when its GDP is growing due to increases in its capital stock and putting into use ideas developed earlier. a. catching-up b. cutting-edge c. constant d. infinite ANSWER: a 109. A country is experiencing _____ growth when its GDP is growing due to the development and adoption of Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 8 new ideas that increase productivity. a. catching-up b. cutting-edge c. constant d. infinite ANSWER: b 110. Suppose an economy has a production function of Y = K1/2 with the investment rate = 0.2 and the depreciation of capital rate = 0.02. If K = 625, the capital stock will _____over the next year. a. increase b. decrease c. remain the same d. be zero ANSWER: b 111. Suppose a country's output level is 800. It invests in an additional unit of capital, which increases output by 2 units. If the country then increases investment in capital by 1 more unit, the expected additional increase in output will be _____ due to _____. a. greater than 2 units; increasing marginal returns b. greater than 2 units; decreasing marginal returns c. less than 2 units; increasing marginal returns d. less than 2 units; decreasing marginal returns ANSWER: d 112. Suppose a country invests 30% of output in new capital each year. The depreciation rate of capital is 0.02. The country's output level is 30 units and its capital stock = 900. What is the annual change in the country's capital stock? a. 9 b. 18 c. −9 d. −18 ANSWER: c 113. When a country has a large amount of capital stock, its annual investment in new capital needs to be _____ if it wants to maintain the same level of capital stock because of _____. a. small; depreciation b. large; depreciation c. zero; increasing returns to scale d. large; increasing returns to scale ANSWER: b 114. Economic growth _____ be maintained solely by continually increasing investment in capital because of Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 8 _____. a. can; increasing marginal returns b. cannot; decreasing marginal returns c. can; constant marginal returns d. cannot; increasing marginal returns ANSWER: b 115. Capital stock and national output will be larger in the next time period when: a. depreciation is greater than capital stock. b. depreciation is smaller than capital stock. c. investment is greater than depreciation. d. investment is smaller than depreciation. ANSWER: c 116. Capital stock and national output will be smaller in the next time period when: a. depreciation is greater than capital stock. b. depreciation is smaller than capital stock. c. investment is greater than depreciation. d. investment is smaller than depreciation. ANSWER: d 117. There are _____ returns to physical capital and _____ returns to human capital. a. decreasing; decreasing b. decreasing; increasing c. increasing; decreasing d. increasing; increasing ANSWER: a 118. Over time, human capital will: a. be subject to diminishing marginal returns. b. fall to zero. c. be the driving force for sustained long-run economic growth. d. be the only factor determining a country's productivity. ANSWER: a 119. Which statement is correct regarding the relationships of physical capital and human capital to diminishing returns? a. They both exhibit diminishing marginal returns. b. They both exhibit increasing marginal returns. c. Physical capital exhibits diminishing marginal returns and human capital exhibits increasing marginal returns. d. Physical capital exhibits increasing marginal returns and human capital exhibits diminishing marginal returns. Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 8 ANSWER: a 120. When an economy is in a steady state, what is true regarding investment and output from year to year? a. Investment and output are decreasing from year to year. b. Investment and output are increasing from year to year. c. Investment and output are constant from year to year. d. Investment is increasing, and output is constant from year to year. ANSWER: c 121. Suppose a country's production function is Y = K1/2 with a savings rate of 0.3 and a capital depreciation rate of 0.01. Current output equals 30 units and the capital stock is 900. According to the Solow model, the country's capital stock will_____ in the following year. a. increase b. decrease c. remain constant d. fall to zero ANSWER: c 122. According to the Solow model, what will happen when a country produces at an output level below its steady-state output level? a. The capital stock will shrink. b. The capital stock will grow. c. The capital stock will remain constant. d. The capital stock will fall to zero. ANSWER: b 123. Which statement is correct? a. If investment > depreciation, the nation's capital stock will grow. b. If investment < depreciation, the nation's capital stock will grow. c. If investment = depreciation, the nation's capital stock will grow. d. If investment and depreciation both equal zero, the nation's capital stock will grow. ANSWER: a 124. A small country has 400 units of capital. This year it will produce 20 units of new capital goods and depreciate 5% of its capital stock. Based on this information, it should expect to have _____ growth over the next year if technological knowledge remains constant. a. catching-up b. positive c. no d. negative ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 8 125. If a country is initially at its steady-state level of capital stock, which will NOT result in economic growth in future years, ceteris paribus? a. a technological advancement b. an increase in the savings rate c. continuing investment at its current rate d. a decrease in the depreciation rate ANSWER: c 126. A small country's aggregate production function is Y = K1/2. Its depreciation rate is 5% and its investment rate is 25%. What is its steady-state level of real GDP? a. 25 b. 5 c. 1.25 d. 0.25 ANSWER: b 127. A small country's aggregate production function per hour of labor is Y = K1/2. Its depreciation rate is 1%, and its investment rate is 10%. What is its steady-state level of capital? a. 1 b. 10 c. 100 d. 1,000 ANSWER: c 128. A small country's aggregate production function is Y = K1/2. Its depreciation rate is 5%, and its investment rate is 25%. What is its steady-state level of capital? a. 25 b. 5 c. 1.25 d. 0.25 ANSWER: a 129. A small country's aggregate production function per hour of labor is Y = K1/2. Its depreciation rate is 1%, and its investment rate is 10%. What is its steady-state level of output? a. 1 b. 10 c. 100 d. 1,000 ANSWER: b 130. A country in a steady state invests 50% of its output in new capital (γ = 0.5) and depreciates 5% of its capital stock (δ = 0.05). With a capital stock of 100 units, labor remains constant. Because of technological Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 8 innovation, production improves from Y = K1/2 to Y = 2K1/2. What is the new steady-state level of K? a. 100 b. 256 c. 400 d. 1,600 ANSWER: c 131. A country in a steady state invests 50% of its output in new capital (γ = 0.5) and depreciates 5% of its capital stock (δ = 0.05). With a capital stock of 100 units, labor remains constant. Because of technological innovation, production improves from Y = K1/2 to Y = 2K1/2. What is the new steady-state level of output? a. 10 b. 20 c. 40 d. 80 ANSWER: c 132. In the Solow model, an increase in investment leads to: a. an increase in growth rates in the short run but a return to zero growth in the long run as the economy
converges to a new, higher steady state. b. an increase in growth rates in both the short run and the long run, as new investment will lead to permanently higher levels of the capital stock. c. a decrease in growth rates in both the short run and the long run, as fewer resources are available for production following the increase in investment. d. no change in growth rates.
ANSWER: a 133. If investment is greater than depreciation, then the capital stock: a. decreases. b. remains constant. c. increases. d. becomes negative. ANSWER: c 134. If investment is less than depreciation, then the capital stock: a. decreases. b. remains constant. c. increases. d. becomes negative. ANSWER: a 135. If investment equals depreciation, then the capital stock: a. decreases. b. remains constant. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 8 c. increases. d. equals zero. ANSWER: b 136. If the investment rate (γ) increases in the Solow model, other things held constant, then capital growth: a. decreases. b. remains constant. c. increases. d. becomes negative. ANSWER: c 137. If the investment rate (γ) decreases in the Solow model, other things held constant, then capital growth: a. decreases. b. remains constant. c. increases. d. changes indeterminately. ANSWER: a 138. Good institutions tend to: a. decrease the rate of investment. b. leave the rate of investment unchanged. c. increase the rate of investment. d. have an ambiguous effect on investment. ANSWER: c 139. An increase in the investment rate results in a: a. lower steady-state capital stock and a lower steady-state output. b. lower steady-state capital stock but a higher steady-state output. c. higher steady-state capital stock and a higher steady-state output. d. higher steady-state capital stock but a lower steady-state output. ANSWER: c 140. According to the Solow model, a higher investment rate leads to: a. more capital and more output. b. more capital and less output. c. less capital and more output. d. less capital and less output. ANSWER: a 141. According to the Solow model, a higher investment rate leads to: a. an increase in steady-state output. Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 8 b. a decrease in steady-state output. c. no change in steady-state output. d. volatility in steady-state output. ANSWER: a 142. Consider an economy that is operating at its steady state. An increase in the investment rate in this economy will lead to: a. an increase in the growth rate of output in both the short run and long run. b. no change in the growth rates of either capital or output in either the short run or the long run, since the
economy is already in the steady state. c. an increase in the growth rate of output in the short run but lower overall growth in the long run as a result of increased depreciation. d. an increase in the growth rate of output in the short run but zero growth in output in the long run.
ANSWER: d 143. In the Solow model, an increase in the investment rate will _____ the amount of capital needed to achieve a steady state. a. increase b. decrease c. not affect d. have an unpredictable effect on ANSWER: a 144. According to the Solow model, an increase in the fraction of output that is saved will increase _____ in the long run. a. investment b. output c. both investment and output d. neither investment nor output ANSWER: c 145. According to the Solow model, countries with higher savings rates have higher levels of: a. investment. b. output. c. both investment and output. d. neither investment nor output. ANSWER: c 146. Conditional convergence refers to the tendency for: a. poorer countries to grow faster than richer countries, but only if they receive sufficient foreign investment. b. richer countries to grow faster than poorer countries given similar steady-state capital stocks, so the poor
countries never catch up with the rich countries. c. poorer countries to grow faster than richer countries given similar steady-state capital stocks, but the poor
Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 8 countries will never catch up with the rich countries. d. countries with similar steady-state levels of output to grow faster when they are poor than when they are rich until their per capita GDP levels converge.
ANSWER: d 147. What is the name for the tendency—among countries with similar steady-state levels of output—for poorer countries to grow faster than richer countries until they reach the same income levels? a. the diminishing rate of return b. the marginal law of supply c. conditional convergence d. growth capitalization ANSWER: c 148. If two countries have the same steady-state levels of output, the country that is _____ today will _____ in per capita output. a. poorer; always lag behind b. poorer; catch up c. richer; eventually fall behind d. richer; become even further ahead ANSWER: b 149. Member nations of the Organisation for Economic Co-operation and Development (OECD) with a lower GDP per capita in 1960 experienced what sort of growth during the subsequent 40 years? a. relatively lower growth than higher GDP per capita countries b. relatively faster growth than higher GDP per capita countries c. no growth at all d. growth similar to countries with a high 1960 GDP per capita ANSWER: b 150. Conditional convergence implies that there is _____ relationship between real GDP per capita and subsequent growth rates. a. a positive b. a negative c. no d. a vertical ANSWER: b 151. Among countries with similar Solow steady states, poorer countries tend to grow _____ rich countries. a. more slowly than b. at the same rate as c. faster than d. sometimes faster and sometimes more slowly than Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 8 ANSWER: c 152. Conditional convergence refers to the condition that among countries with similar steady states: a. a country with a higher output level tends to grow more rapidly. b. a country with a higher output level tends to grow more slowly. c. all countries grow at the same rate regardless of their initial output levels. d. whether one country's output converges to that of another country depends on their geographical proximity. ANSWER: b 153. Conditional convergence predicts that if two countries have the same steady-state level of output, the poorer country will: a. grow but never be able to catch up with the richer country. b. catch up with the richer country because the richer country will not be able to maintain its steady-state output level. c. catch up with the richer country because it will grow faster than the rich country.
d. not grow at all and will fall further behind the rich country. ANSWER: c 154. Economists call the tendency for poorer countries to grow faster than richer countries with similar steadystate levels of output: a. Solow growth. b. steady-state growth. c. dynamic growth. d. conditional convergence. ANSWER: d 155. The Solow model predicts that a country will grow more rapidly the: a. further its capital stock is above its steady-state value. b. further its capital stock is below its steady-state value. c. closer its capital stock is to its depreciation rate. d. closer its capital stock is to its population growth rate. ANSWER: b 156. Economists call the tendency for poorer countries to grow faster than richer countries, provided they have the same steady state, and thus to converge in income _____ convergence. a. standard b. dynamic c. income d. conditional ANSWER: d 157. According to the Solow model, a country will grow fastest when its capital stock is: Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 8 a. at the steady-state value. b. above the steady-state value. c. just below the steady-state value. d. far below the steady-state value. ANSWER: d 158. A higher savings rate will _____ a country's steady-state output level. a. increase b. decrease c. have no impact on d. first decrease, then increase ANSWER: a 159. If two countries have identical production functions, which will have a higher steady-state output? a. The country with the lower investment rate will have a higher steady-state output. b. The country with the higher investment rate will have a higher steady-state output. c. Neither. Both countries will have the same steady-state output. d. The country with an investment rate of zero will have a higher steady-state output. ANSWER: b 160. What changes in the Solow model when a country's savings rate increases? a. The country's steady-state level of output increases. b. The country's steady-state level of output decreases. c. The country's depreciation rate increases. d. The country's depreciation rate decreases. ANSWER: a 161. According to the concept of conditional convergence, high-output countries will experience _____ growth than low-output countries as the countries all move toward _____. a. faster; steady-state output b. faster; full output c. slower; steady-state output d. equally fast; steady-state output ANSWER: c 162. Catching-up growth fundamentally involves the concepts of _____ and _____. a. increasing returns to capital; depreciation b. diminishing marginal product of capital; conditional convergence c. conditional convergence; elasticity d. diminishing marginal product of capital; cutting-edge growth ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 8 163. Conditional convergence across countries applies only when they have the same: a. population size. b. initial levels of capital. c. initial levels of output. d. steady-state levels of output. ANSWER: d 164. Which statement correctly differentiates catching-up growth from cutting-edge growth? a. Cutting-edge growth leads to convergence, whereas catching-up growth does not. b. Catching-up growth comes primarily from capital accumulation, whereas cutting-edge growth comes from
technological development. c. Poorer countries with low levels of capital stock will always display catching-up growth, whereas rich countries will not. d. Catching-up growth can go on indefinitely, whereas cutting-edge growth cannot.
ANSWER: b 165. Which statement correctly differentiates catching-up growth from cutting-edge growth? a. Cutting-edge growth leads to convergence, whereas catching-up growth does not. b. Cutting-edge growth comes primarily from capital accumulation, whereas catching-up growth comes from
technological development. c. Poorer countries with low levels of capital stock will always display catching-up growth, whereas rich countries will not. d. Cutting-edge growth can go on indefinitely, whereas catching-up growth cannot.
ANSWER: d 166. Which statement is consistent with the predictions of the simple Solow model with no technological advancement? a. In the long run, economic growth is zero. b. In the long run, a higher capital stock raises economic growth. c. In the long run, rich countries grow faster than poor countries. d. In the long run, a higher saving rate reduces economic growth. ANSWER: a 167. In the long run, catching-up growth: a. can continue indefinitely. b. eventually stops when the economy reaches its steady state. c. can explain an economy's growth in the very long run. d. keeps the capital stock growing indefinitely, but not output. ANSWER: b 168. Solow estimated that better ideas are responsible for about _____ of the U.S. standard of living. a. one-fourth Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 8 b. one-half c. three-fourths d. all ANSWER: c 169. The key to escaping the iron logic of diminishing returns in the Solow model is: a. investment in physical capital. b. education and training to build human capital. c. new ideas. d. foreign investment. ANSWER: c 170. The key to keeping the economy growing in the long run is: a. investment in physical capital. b. education and training to build human capital. c. new ideas. d. foreign investment. ANSWER: c 171. The key to keeping the economy growing in the long run is: a. investment in physical capital. b. education and training to build human capital. c. advances in technological knowledge. d. foreign investment. ANSWER: c 172. The source of cutting-edge growth is: a. investment in physical capital. b. education and training to build human capital. c. advances in technological knowledge. d. foreign investment. ANSWER: c 173. The growth that results from better ideas or technological knowledge is: a. catching-up growth. b. cutting-edge growth. c. capital growth. d. short-run growth. ANSWER: b 174. Better ideas or technological knowledge cause the: Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 8 a. production function to shift upward. b. production function to shift downward. c. investment function to shift downward. d. depreciation function to shift downward. ANSWER: a 175. Better ideas or technological knowledge cause: a. the production function to shift upward. b. the investment function to shift upward. c. both the production function and the investment function to shift upward. d. neither the production function nor the investment function to shift upward. ANSWER: c 176. The production function can shift upward because of: a. higher depreciation. b. an increase in investment. c. better ideas. d. an increase in capital stock. ANSWER: c 177. In the Solow production function, an increase in the term 'A' refers to an increase in: a. productivity. b. the capital stock. c. the rate of depreciation. d. investment. ANSWER: a 178. Increases in productivity cause the: a. depreciation function to shift downward. b. production function to shift downward. c. production function to shift upward. d. investment curve to shift downward. ANSWER: c 179. Better ideas cause the: a. depreciation function to shift downward. b. production function to shift downward. c. production function to shift upward. d. investment curve to shift downward. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 8 180. Research by Solow indicated that about _____% of the increases in U.S. GDP per capita are due to better ideas. a. 25 b. 50 c. 75 d. 100 ANSWER: c 181. Which can drive long-run economic growth in the Solow model? a. human capital b. physical capital c. real capital d. technological knowledge ANSWER: d 182. Figure: The Solow Model
Which event would NOT shift the production function from Y1 to Y2 in the accompanying diagram of the Solow model? a. increases in productivity b. better ideas c. physical capital accumulation d. advances in technological knowledge ANSWER: c 183. Figure: The Solow Model
Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 8
In the accompanying graph of the Solow model, if the production function shifts from Y1 to Y2 while capital remains at K1, then the capital stock will: a. decrease until it reaches the new steady-state level. b. increase until it reaches the new steady-state level. c. increase for a time and then return to K1. d. remain unchanged. ANSWER: b 184. Figure: The Solow Model
If the production function shifts from Y1 to Y2 in the accompanying graph of the Solow model, then: a. the steady state will remain at K1. b. a new steady state will occur at K2. c. the steady state will move to K2 and then return to K1 in the long run. d. the steady state will end up between K1 and K2. ANSWER: b 185. Figure: The Solow Model
Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 8
If the production function shifts from Y1 to Y2 in the accompanying graph of the Solow model, then: a. no growth occurs. b. growth occurs from capital accumulation only. c. growth occurs from better ideas only. d. growth occurs from both capital accumulation and better ideas. ANSWER: d 186. Figure: The Solow Model
If the production function shifts from Y1 to Y2 in the accompanying graph of the Solow model, then: a. no growth occurs. b. catching-up growth occurs. c. cutting-edge growth occurs. d. both catching-up and cutting-edge growth occur. ANSWER: d 187. Figure: Increased Production
Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 8
In the graph, which event could cause the upward shift of the production function? a. foreign direct investment b. technological advancement c. an increase in the capital stock d. an aging labor force ANSWER: b 188. Consider the production function Y = 2K1/2. The value _____ represents the level of technology in this economy. a. 1 b. 4 c. 2 d. 0.5 ANSWER: c 189. A small country has an aggregate production function given by Y = AK1/2. What would need to happen to the aggregate production function to represent an advance in technology? a. K would need to increase. b. A would need to increase. c. K would need to decrease. d. A would need to decrease. ANSWER: b 190. In the Solow model, better ideas will lead to: a. more capital. Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 8 b. less government regulation. c. less investment. d. less capital. ANSWER: a 191. In the Solow model, better ideas will lead to: a. increases in productivity. b. capital accumulation. c. both an increase in productivity and an increase in capital accumulation. d. neither an increase in productivity nor an increase in capital accumulation. ANSWER: c 192. In the Solow model, better ideas will lead to: a. catching-up growth. b. cutting-edge growth. c. both catching-up growth and cutting-edge growth. d. neither catching-up growth nor cutting-edge growth. ANSWER: c 193. The fact that the United States has grown steadily on average over the past two centuries is consistent with the: a. hypothesis that incomes of poor countries tend to converge to incomes of rich countries. b. law of diminishing returns to capital. c. concept that increases in investment cause higher living standards. d. concept that better ideas result in economic growth in the long run. ANSWER: d 194. A significant inconsistency between the steady-state prediction of the basic Solow model and the economic data in many countries is that output: a. continues to grow in the long run. b. begins to decrease in the long run. c. alternates between increasing and decreasing in the long run. d. grows infinitely large in the long run. ANSWER: a 195. When the production function includes a measure of technological innovation, an increase in technology is depicted as _____ on the graph of the production function. a. a downward shift b. an upward shift c. no change d. a shift to the left Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 8 ANSWER: b 196. In the long run, better technological ideas will NOT lead to: a. higher steady-state output. b. greater capital accumulation. c. a larger population. d. continued growth. ANSWER: c 197. Better ideas increase output directly because of _____ and indirectly due to _____. a. being able to produce more with a given level of capital; capital accumulation b. catching-up growth; cutting-edge growth c. capital accumulation; being able to produce more with a given amount of capital d. catching-up growth; capital accumulation ANSWER: a 198. When innovators develop better ideas: a. the savings rate falls and then rises. b. increasing returns to capital are achieved. c. depreciation no longer affects output. d. more output is produced from the same amount of inputs. ANSWER: d 199. How does including ideas in the Solow model change the graph of the model? a. An increase in the ideas parameter shifts the production function upward. b. A change in the ideas parameter does not affect the graph of the Solow model. c. An increase in the ideas parameter shifts the production function downward. d. An increase in the ideas parameter shifts the production function leftward. ANSWER: a 200. Suppose a country's production function is Y = A(K1/2), A = 3, the capital depreciation rate = 0.02, and the savings rate = 0.1. If A increases from 3 to 3.2, the steady-state stock of capital goes from _____ to _____. a. 15; 16 b. 22,500; 25,600 c. 25; 26 d. 225; 256 ANSWER: d 201. Suppose a country's Solow model production function is Y = A(K1/2), A = 3, the capital depreciation rate = 0.02, and the savings rate = 0.1. If A increases from 3 to 3.2, the production function _____, the investment curve _____, and the depreciation curve _____. a. increases; increases; increases Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 8 b. increases; increases; is unchanged c. is unchanged; increases; is unchanged d. increases; is unchanged; is unchanged ANSWER: b 202. Ideas are: a. rivalrous. b. nonrivalrous. c. partly rivalrous. d. sometimes rivalrous and sometimes nonrivalrous. ANSWER: b 203. Patents _____ spillovers from new ideas. a. increase b. maintain c. reduce d. eliminate ANSWER: c 204. Ideas are not rivalrous, meaning that: a. many people can benefit from an idea at the same time. b. only one person can benefit from an idea at a time. c. most ideas are generated by the government. d. no one can benefit from an idea. ANSWER: a 205. The existence of technological spillovers implies that: a. too many resources are invested in research and development. b. too few resources are invested in research and development. c. the right amount of resources is invested in research and development. d. investing in research and development is not a good idea. ANSWER: b 206. If the size of the market grows, then: a. fewer resources are spent in research and development. b. it does not make sense to increase investment in research and development, since ideas are not rivalrous. c. more resources are spent on research and development. d. people will be worse off. ANSWER: c 207. What might be one of the outcomes if more people in India and China start dying of cancer and heart Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 8 disease instead of malnutrition and preventable disease? a. Companies will invest more in curing cancer and heart disease. b. Companies will invest less in curing cancer and heart disease. c. Companies will invest more in solving malnutrition and preventable disease. d. More people in the United States will die of malnutrition and preventable disease. ANSWER: a 208. Cutting-edge economic growth is mainly the result of: a. capital accumulation. b. immigration of skilled labor. c. technological advances. d. conditional convergence. ANSWER: c 209. Which policy does NOT promote idea-based economic growth? a. granting patents to intellectual property b. government subsidies in research and development c. strengthening the spillover effects of innovations d. enforcing open and competitive markets ANSWER: c 210. Which statement is FALSE? a. Ideas for increasing output are primarily researched, developed, and implemented by profit-seeking firms. b. Ideas can be freely shared, but spillovers mean that ideas are underprovided. c. Government has a role in improving the production of ideas. d. The smaller the market, the greater the incentive to research and develop new ideas. ANSWER: d 211. If a developing country wanted to increase its level of investment, which action would directly lead to this goal? a. strengthen and enforce private property laws b. provide a minimum level of food to all people in the country c. increase taxes to prevent corporations from keeping excess profits d. nationalize all foreign manufacturing facilities in the country ANSWER: a 212. What is key to growth for countries such as the United States and Japan? a. more physical capital investments b. investments in human capital c. new ideas d. larger institutions Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 8 ANSWER: c 213. Which statement about the effects of patents is TRUE? a. Patents increase the incentive to research and develop new products and also increase competition in the
market. b. Patents increase the incentive to research and develop new products but also increase monopoly power for the product's creators. c. Patents reduce the incentive to research and develop new products but also reduce competition in the market.
d. Patents reduce the incentive to research and develop new products but increase monopoly power for the product's creators.
ANSWER: b 214. The reason that the United States has experienced sustained economic growth for over 200 years is mostly due to: a. timely replacement of physical capital. b. continued advances in technological knowledge. c. steady increases in population. d. strategic government planning. ANSWER: b 215. American culture contributes to economic growth and encourages new ideas by: a. supporting entrepreneurship. b. encouraging a high level of personal savings. c. supporting a retirement income for all citizens. d. expecting a high level of government ownership of manufacturing firms. ANSWER: a 216. Which is an example of an increase in human capital? a. an increase in the training of bone cancer researchers b. building new bone cancer research centers c. the discovery of a cure for bone cancer d. an increase in the number of scientists working on curing bone cancer ANSWER: a 217. Which is an example of an increase in technological knowledge? a. an increase in the training of bone cancer researchers b. building new bone cancer research centers c. bone cancer researchers discovering a cure for bone cancer d. an increase in the number of scientists working on curing bone cancer ANSWER: c 218. The most effective incentive for the creation of new ideas or technology is: a. profit seeking. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 8 b. government grants. c. educational grants. d. foreign aid. ANSWER: a 219. In the United States, most scientists who research and develop new products work for: a. private firms. b. the U.S. government. c. public universities. d. private universities. ANSWER: a 220. A patent: a. provides temporary monopoly power to the company that receives it. b. usually never expires. c. increases the spillover effect of a new idea. d. allows more people to benefit from a new idea. ANSWER: a 221. A(n) _____ grants temporary monopoly rights to an inventor, typically for 20 years from its filing date. a. patent b. development loan c. document of invention d. initial product offering ANSWER: a 222. Continued long-run economic growth requires that economies: a. continue to increase their investment rates. b. have high levels of capital stock. c. have institutions in place that encourage research and development of new ideas. d. reach their steady-state levels of capital and output. ANSWER: c 223. Patents allow a firm to enjoy a monopoly, thus increasing the incentive to: a. imitate their competitors. b. decrease capital investment. c. rely on government scientists and engineers. d. research and develop new products. ANSWER: d 224. Technological advances are generally expected to have _____ spillovers. Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 8 a. negative b. positive c. no d. both positive and negative ANSWER: b 225. Research and development spillovers: a. reward research and development. b. are nonrivalrous. c. only benefit the inventor. d. keep ideas from spreading to other countries. ANSWER: b 226. Research and development of new ideas that lead to spillover effects tend to be: a. overprovided in markets. b. underprovided in markets. c. rivalrous in the market. d. produced only with the help of patents or other government subsidies. ANSWER: b 227. A profit-maximizing firm will invest in research and development as long as: a. the social marginal benefit is greater than the marginal cost. b. it continues to increase revenues. c. it is subsidized by the government. d. the private marginal benefit is greater than the marginal cost. ANSWER: d 228. With possible spillover of ideas, there will be: a. too little investment in research and development. b. increasing investment in research and development. c. more ideas being created. d. no effect on the investment in research and development. ANSWER: a 229. A good is NOT rivalrous if: a. two people cannot consume it at the same time. b. two or more people can consume it at the same time. c. it is not substitutable. d. it is not a private good. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 8 230. As other countries grow wealthier, the incentive to undertake research and development projects: a. increases, since the potential for profits rises. b. decreases, since competition drives profits lower. c. decreases, since the marginal returns to research and development fall when more countries are wealthier. d. decreases, since there is less government subsidization when countries are wealthier. ANSWER: a 231. The optimal private investment in research and development will likely be _____ the optimal social investment. a. the same as b. less than c. greater than d. half of ANSWER: b 232. You create a video to audition for film school. It ends up being viewed by over 500,000 people. What are the additional people enjoying? a. a consumable leisure good b. the effect of maximizing trade c. the effect of conditional convergence d. the effect of a spillover good ANSWER: d 233. What is meant by a nonrivalrous good? a. Additional people can consume a good without diminishing another's consumption. b. There exists a perfectly competitive market for the good. c. There is only a single consumer of the good. d. There is only a single producer of the good. ANSWER: a 234. If two or more people can use a good at the same time, the good is a(n) _____ good. a. durable b. public c. investment d. nonrivalrous ANSWER: d 235. Because of spillovers, the social benefit of research and development: a. is greater than the private benefit. b. is less than the private benefit. c. is equal to the private benefit. Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 8 d. may be less than, greater than, or equal to the private benefit. ANSWER: a 236. Considering the incentives for the private market to conduct research and development, we expect that the amount of research and development conducted by the private sector would be _____ the efficient level because of the _____ property of new knowledge. a. equal to; rivalrous b. less than; nonrivalrous c. more than; rivalrous d. more than; nonrivalrous ANSWER: b 237. Government has a role in subsidizing research and development when: a. the beneficiaries are below the poverty line. b. it can increase tax revenue. c. it can more efficiently allocate resources. d. the spillovers are large. ANSWER: d 238. The larger the spillovers, the stronger the argument for: a. research and development. b. government subsidies. c. government taxation of excess profits. d. economic growth. ANSWER: b 239. Pharmaceutical companies tend to concentrate on drugs for common diseases because: a. more people can be helped. b. spillovers are smaller. c. they are more likely to be granted patents. d. potential profits are larger. ANSWER: d 240. Which is NOT associated with ideas as they relate to increasing productivity? a. Ideas for increasing output are primarily researched, developed, and implemented by profit-seeking firms. b. Spillovers mean that ideas are overprovided. c. Government has a role in improving the production of ideas. d. The larger the market, the greater the incentive to research and develop new ideas. ANSWER: b 241. A patent provides the developer of a new idea, product, or process with a: Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 8 a. grant of temporary monopoly rights, typically 20 years from the data of filing. b. grant of permanent monopoly rights. c. subsidy for production. d. share of the profits from any other company that uses their idea, product, or process. ANSWER: a 242. Patents provide the developer of a new idea, product, or process with: a. a grant of permanent monopoly rights. b. a share of the profits from any other company that uses their idea, product, or process. c. a grant of temporary monopoly rights. d. all of the profits from any other company that uses their idea, product, or process. ANSWER: c 243. Which is an example of a nonrival good? a. an apple b. the Pythagorean theorem c. a calculator d. an apple tree ANSWER: b 244. A private firm will invest in research and development when its private marginal benefit _____ of the investment. a. exceeds the private marginal cost b. exceeds the social marginal benefit c. equals the social marginal benefit d. is less than the private marginal cost ANSWER: a 245. The private marginal benefit of investing in a nonrival, productive idea is _____ the social marginal benefit. a. less than b. equal to c. greater than d. greater than or equal to ANSWER: a 246. Which is NOT a typical method that governments use to encourage private firms to invest in generating new, productive ideas? a. patents b. prizes c. subsidies Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 8 d. taxes ANSWER: d 247. A government's incentive to support private firms in the research and development needed to generate new ideas is to: a. increase private research and development. b. decrease private research and development. c. eliminate spillovers from private research and development. d. remain uninvolved. The government has no role in supporting private firms in research and development. ANSWER: a 248. Which approach would the government use to create a marginal cost reduction for private firms who engage in the research and development of new, productive ideas? a. patents b. taxes c. subsidies d. prizes ANSWER: c 249. Private firms have a greater incentive to conduct research and development for a market that is _____ rather than _____. a. small; large b. large; small c. small; monopolistic d. well established; new ANSWER: b 250. Why are firms more likely to spend on research to find a way to reduce tooth cavities than to find better ways to replace missing teeth? a. Tooth cavities are more common than missing teeth. b. Missing teeth are more common than tooth cavities. c. It is not possible to replace missing teeth. d. All of the best ways to replace missing teeth have already been discovered. ANSWER: a 251. Demand for which product is likely to increase MOST when prosperity rises in India? a. agricultural products b. new ideas c. capital goods d. textiles ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 8 252. Many economists are optimistic about the future of economic growth, mostly because: a. falling populations worldwide mean higher GDP per capita. b. growing populations mean a higher labor supply and thus higher levels of output. c. increasing populations worldwide mean added incentives for research and development. d. people are becoming wealthier worldwide. ANSWER: c 253. Over the past 10,000 years, growth in per capita GDP has been: a. decreasing. b. steady. c. increasing. d. changing indeterminately. ANSWER: c 254. In the past several hundred years, economic growth has been: a. decreasing. b. staying the same. c. increasing. d. nonexistent. ANSWER: c 255. The number of potential ideas in the world is: a. limited. b. about the same as the number of actual ideas. c. somewhat larger than the number of current ideas. d. unimaginably vast. ANSWER: d 256. The formula that represents the generation of ideas (A) is: a. population − incentives − ideas per hour. b. population × incentives × ideas per hour. c. capital × (population ÷ ideas per hour). d. capital ÷ population − ideas per hour. ANSWER: b 257. The number of new ideas does NOT depend on the: a. level of capital invested. b. number of people involved. c. incentive to innovate. d. number of ideas per hour each person has. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 8 258. Which should lead to an increased rate of economic growth due to increased development of new ideas? a. stable population, increased wealth, and larger markets b. increased population, increased consumer wealth, and smaller markets c. increased population, lower saving, and larger markets d. increased population, increased wealth, and larger markets ANSWER: d 259. Which is NOT a major factor in the number of new ideas generated each year? a. increased population b. increased wealth c. larger markets d. lower saving ANSWER: d 260. Which would NOT encourage the faster development of new ideas? a. lower saving b. increased population c. increased wealth d. larger markets ANSWER: a 261. Governments can play a role in supporting the production of new ideas by: a. taxing industries that become too competitive. b. enforcing antimonopoly laws. c. directing the immediate exchange of all scientific ideas. d. protecting intellectual property. ANSWER: d 262. What slows economic growth as prosperity increases? a. diminishing marginal product of human capital only b. diminishing marginal product of physical capital only c. diminishing marginal product of human and physical capital d. Nothing. Economic growth increases as prosperity increases. ANSWER: c 263. An economy's growth rate will be higher in which situation? a. when a country's capital stock is far away from its steady-state value b. when a country's capital stock is very close to its steady-state value c. when a country's capital stock is at its steady-state value d. during destructive events like war and natural disasters Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 8 ANSWER: a 264. The primary driver of long-run economic growth is: a. physical capital accumulation. b. human capital accumulation. c. new ideas. d. increasing population sizes. ANSWER: c 265. Catching-up growth occurs primarily through capital accumulation and the adoption of simple ideas that already exist. a. True b. False ANSWER: a 266. Cutting-edge growth occurs primarily through capital accumulation and the adoption of simple ideas that already exist. a. True b. False ANSWER: b 267. Growth on the cutting edge is primarily about developing new ideas. a. True b. False ANSWER: a 268. China is growing faster than the United States despite having inferior economic institutions. a. True b. False ANSWER: a 269. Growth consists of two types: catching-up growth and cutting-edge growth. a. True b. False ANSWER: a 270. The Solow model offers insight about the difference between catching-up growth and cutting-edge growth. a. True b. False ANSWER: a 271. If a country is currently to the left of its steady-state capital stock in the Solow model, growth in output Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 8 will follow as a result of capital accumulation. a. True b. False ANSWER: a 272. If a country is currently to the left of its steady-state capital stock in the Solow model, growth in output will follow only if new technology can be developed to shift the production function. a. True b. False ANSWER: b 273. Diminishing returns to capital prevent capital accumulation alone from explaining sustained economic growth over time. a. True b. False ANSWER: a 274. In the Solow model, output increases when investment is greater than depreciation. a. True b. False ANSWER: a 275. Capital accumulation alone can explain sustained economic growth over long periods of time in many countries. a. True b. False ANSWER: b 276. Diminishing returns to capital mean that twice the amount of capital will lead to twice the amount of output. a. True b. False ANSWER: b 277. The concept of diminishing returns explains why China is growing so much faster than the United States. a. True b. False ANSWER: a 278. The marginal product of capital diminishes with the addition of more and more capital. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 8 ANSWER: a 279. The Solow model implies that countries farther below their steady states will grow more slowly than countries closer to their steady states. a. True b. False ANSWER: b 280. The Solow model implies that countries farther below their steady states will grow more quickly than countries closer to their steady states. a. True b. False ANSWER: a 281. Following World War II, the United States grew faster than Germany. a. True b. False ANSWER: b 282. Holding technology constant, China's growth will eventually slow as the marginal product of capital falls. a. True b. False ANSWER: a 283. Based on the Solow model, an earthquake that destroys half the capital stock in a country will increase the growth rate in the years following the disaster. a. True b. False ANSWER: a 284. Based on the Solow model, an earthquake that destroys half the capital stock in a country will decrease the growth rate in the years following the disaster. a. True b. False ANSWER: b 285. China's high growth rate in recent years is due primarily to better institutions and increases in its capital stock. a. True b. False ANSWER: a 286. The Solow growth model predicts that China and other developing countries will eventually surpass the Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 8 leading economies of the world in terms of their level of real GDP per capita. a. True b. False ANSWER: b 287. Currently China is growing at a faster rate than the United States. Eventually, the rate of growth in China will slow down. a. True b. False ANSWER: a 288. The term depreciation refers to the wear and tear on capital goods. a. True b. False ANSWER: a 289. Investment is the process of adding new capital to an economy. a. True b. False ANSWER: a 290. Unlike physical capital, human capital exhibits increasing returns. a. True b. False ANSWER: b 291. In the Solow model, when investment equals depreciation, the capital stock and output are constant. a. True b. False ANSWER: a 292. Capital is output intended for consumption. a. True b. False ANSWER: b 293. In an economy with no technological advance, economic growth will continue if investment equals depreciation. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 8 294. Once an economy reaches its steady state, it will continue to grow indefinitely. a. True b. False ANSWER: b 295. The difference between investment and depreciation determines capital growth. a. True b. False ANSWER: a 296. If investment is greater than depreciation, an economy will be above its steady state. a. True b. False ANSWER: b 297. If investment is greater than depreciation, an economy will be below its steady state. a. True b. False ANSWER: a 298. In the simple Solow model, the level of the capital stock determines the level of output but not its growth rate, at least not in the very long run. a. True b. False ANSWER: a 299. An increase in the investment rate lowers the steady-state output. a. True b. False ANSWER: b 300. An increase in investment results in a higher level of steady-state output. a. True b. False ANSWER: a 301. Since 1960, the poorest among the OECD countries have grown the fastest. a. True b. False ANSWER: a 302. Among countries with similar steady-state output levels, there is a negative relationship between initial Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 8 income levels and subsequent growth rates. a. True b. False ANSWER: a 303. To become rich, a poor country must invent new ideas. a. True b. False ANSWER: b 304. To maintain growth over very long periods of time, a country must adopt new ideas. a. True b. False ANSWER: a 305. Cutting-edge economic growth comes primarily from new ideas, new technologies, or new methods of management. a. True b. False ANSWER: a 306. The simplest form of the Solow model with no advances in technology predicts that economic growth will continue indefinitely in the long run. a. True b. False ANSWER: b 307. Among poor countries, economic growth comes primarily from new ideas, new technologies, or new methods of management. a. True b. False ANSWER: b 308. The simple Solow model cannot fully explain the growth rate of developed countries in the past century without considering advances in technology. a. True b. False ANSWER: a 309. Better ideas increase output directly because of higher productivity and indirectly because of capital accumulation. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 8 ANSWER: a 310. In the context of the Solow model, new ideas shift the production function upward. a. True b. False ANSWER: a 311. In the context of the Solow model, new ideas shift both the production function and the investment function upward. a. True b. False ANSWER: a 312. In the context of the Solow model, new ideas cause both cutting-edge growth and catching-up growth to occur over time. a. True b. False ANSWER: a 313. The nonrivalry of ideas means that different people cannot use the same idea simultaneously. a. True b. False ANSWER: b 314. The social benefits of research and development are equal to the private benefits. a. True b. False ANSWER: b 315. The social benefits of research and development are greater than the private benefits. a. True b. False ANSWER: a 316. Spillovers cause the social benefits of research and development to be greater than the private benefits. a. True b. False ANSWER: a 317. The most important incentive for research and development of new ideas is government funding. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 8 ANSWER: b 318. The most important incentive for research and development of new ideas is the profit opportunity for private entrepreneurs. a. True b. False ANSWER: a 319. Most new idea creation today depends on government sponsorship. a. True b. False ANSWER: b 320. A good is nonrivalrous if more than one person can use it at the same time without impeding someone else's use of the good. a. True b. False ANSWER: a 321. As more countries gain wealth, private firms will increase R&D in anticipation of a larger market. a. True b. False ANSWER: a 322. A patient with a rare disease has the same chance of survival as one with a common disease, thanks to the spillover effect. a. True b. False ANSWER: b 323. Patents encourage new idea creation by temporarily granting monopoly status to inventors. a. True b. False ANSWER: a 324. The increase in world population will likely lead to an increase in ideas for production. a. True b. False ANSWER: a 325. Both institutions and property rights are becoming less favorable to entrepreneurship throughout the world. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 8 b. False ANSWER: b 326. Suppose the production function for an economy is
,
, and
. If the present
,
, and the present capital stock is
capital stock is equal to 25, then the economy is: a. shrinking. b. in a steady state. c. growing. d. experiencing zero depreciation. ANSWER: b 327. Suppose the production function for an economy is
equal to 25. If the economy is in a steady state, then what is the value of ? a. b. c. d. The value of cannot be determined with the given information. ANSWER: c 328. At the steady state, the capital stock is: a. increasing at a steady rate. b. decreasing at a steady rate. c. neither increasing nor decreasing. d. equal to zero. ANSWER: c 329. Suppose the production function for an economy in its steady state is
,
, and
. If
,
, and
. If
the present capital stock is equal to 25, then: a. investment = 1. b. investment = 2.5. c. investment = 5. d. investment = 0.5. ANSWER: a 330. Suppose the production function for an economy in its steady state is the present capital stock is equal to 25, then: a. depreciation = 1. b. depreciation = 2.5. c. depreciation = 5. Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 8 d. depreciation = 0.5. ANSWER: a 331. If the capital stock is neither increasing nor decreasing, then the economy is: a. growing. b. spiraling downward. c. in a steady state. d. producing nothing. ANSWER: c 332. In the Solow growth model, output is written as a function of: a. physical capital, human capital, and technological knowledge. b. physical capital, unemployment, and money growth. c. technological knowledge, human capital, and unemployment. d. physical capital, human capital, and unemployment. ANSWER: a 333. In the Solow growth model, an increase in investment will: a. decrease steady-state output. b. keep steady-state output unchanged. c. increase steady-state output. d. cause output to grow infinitely large. ANSWER: c 334. In the Solow growth model, an increase in the steady-state output level could be the result of a(n): a. increase in investment. b. decrease in investment. c. increase in the interest rate. d. decrease in the money supply. ANSWER: a 335. Suppose the production function for an economy is
,
, and
. If the present
,
, and
. If the present
capital stock is equal to 36, then: a. depreciation = 0.6. b. depreciation = 1.2. c. depreciation = 3.6. d. depreciation = 7.2. ANSWER: c 336. Suppose the production function for an economy is Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 8 capital stock is equal to 36, then: a. investment = 0.6. b. investment = 1.2. c. investment = 3.6. d. investment = 7.2. ANSWER: b 337. Explain what the production function represents in the Solow model. ANSWER: The production function expresses the relationship between output and the factors of production. There are typically three factors of production: physical capital (K), human capital (eL), and technological knowledge, A.
338. Explain why the marginal product of capital diminishes as more and more capital is used. ANSWER: The first unit of capital performs the task where it is most productive. The second unit performs a slightly less productive task, because the first unit is already performing the most productive tasks. The third unit performs an even less productive task, and so on.
339. If an economy with no growth in labor, education, or technology has a steady-state capital stock of 125,000 and a depreciation rate of 5%, what is the level of investment needed to maintain the steady state? ANSWER: To maintain a steady state in an economy with no growth in labor, education, or technology, the level of investment must match the depreciation rate. Given a depreciation rate of 5% and a steady-state capital stock of 125,000, we can calculate the level of investment needed to maintain the steady state: I = 0.05 × 125,000 I = 6,250
340. An economy has a steady-state output level of 9. The economy's labor, technology, and education levels are constant and the economy's production function is Y = K1/2. If the depreciation rate is 6%, what is the steady-state capital stock, and what is the investment rate needed to maintain it? ANSWER: Since and steady-state output is 9, steady-state capital stock is . With a depreciation rate of , depreciation = 0.06(81) = 4.86. The investment rate,
, must be such that
investment rate of 54% is needed to maintain a steady-state output level of 9, when
, or
. An
and the depreciation rate
is 6%.
341. Suppose an economy has the production function Y = K1/4. If the investment rate is equal to 0.25 and the depreciation rate is equal to 0.10, calculate the steady-state levels of capital and output. ANSWER: Depreciation and investment . In the steady state, depreciation = investment, so . Solving for K, we get steady-state capital K = 3.393. Then the steady-state level of output is .
342. Consider an economy with production function Y = 2K1/2, an investment rate of 10%, and a depreciation rate of 5%. Assume there are no increases in labor, education, or technology. If the capital stock in this economy is currently 9, is this economy above, below, or at its steady state? What does this imply about growth in this economy? Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 8 ANSWER: In steady state, investment = depreciation. So,
. Solving for K, we get K = 16. Currently, K =
9, so the economy is below its steady state. The economy will continue to grow.
343. In the context of the Solow model, with no growth in labor, education, or technology, explain how an increase in the investment rate will affect an economy's steady-state output level and its growth rate. ANSWER: An increase in the investment rate increases a country's steady-state level of output. When the investment rate increases, we have Investment > Deprecation, and so the capital stock increases and the economy grows. As more capital accumulates, diminishing marginal returns set in, and the economy eventually slows until, at the new steady state, it stops growing once again.
344. Suppose an economy is in a steady state and its investment rate increases. Use the Solow model to explain why the increase in the investment rate will raise the steady-state output level. ANSWER: When the investment rate increases, we have Investment > Depreciation, so the capital stock increases and the economy grows. With more capital stock, depreciation will rise until it once again equals investment and, at the higher steadystate output, growth ceases.
345. For over 25 years, China has experienced growth rates averaging 7% or more each year. According to research by economists, this "miracle" rapid growth occurred because of increases in capital and labor, not increases in technology. In the context of the Solow model, discuss what these findings imply about China's expected growth for the future. ANSWER: China's growth will slow. Chinese growth has been rapid because China began with very little capital, so their marginal product of capital was very high. As capital accumulates, however, their marginal product of capital will decline, and China's growth will slow.
346. a. Consider an economy operating with a capital stock K0, where K0 is below the economy's steady-state capital stock. According to the Solow model, will the capital stock in this economy grow, shrink, or stay constant in the next period? Explain and illustrate graphically. b. Now, imagine that the economy is at its steady-state capital stock, KSS1. Suppose there is an increase in technology. How will this change manifest itself in the graph? Show the economy after this increase in technology. Where is the new steady-state level of capital and output? ANSWER: a. See Figure 28.6 (8.6). If the current capital stock is below the economy's steady-state capital stock, then in the next period the capital stock and output will grow. In the graph, any output level below 225 will lead to growth in the capital stock. b. See Figure 28.11 (8.11). If the economy is at its steady-state capital stock, and then there is an increase in technology, the production function will shift upward. The increase in technology produces more output from the same capital stock, so output immediately increases. With greater output, investment also increases. But now investment is greater than depreciation and so capital begins to accumulate. Capital accumulates and the economy grows until they reach a new steady state, which will correspond to a higher output level.
347. Explain why patents are important for innovation. ANSWER: Without patents, it is often difficult for private firms to recoup their investments in new ideas because competitors could copy new products, processes, and methods. Imitators get the benefit of new ideas without having to pay the cost of development, and so they tend to drive innovators out of the market unless some barrier prevents quick imitation.
348. What are the positive and negative effects of patents on the creation of new ideas? ANSWER: Patents grant the creator of an idea exclusive rights to all proceeds from an idea for a period of time. Patents have positive and negative effects on the creation of ideas. On the positive side, since patents guarantee that any proceeds from an idea will go to the inventor, they increase the incentive to come up with new ideas. This higher incentive causes Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 8 more creative activity and more new ideas. On the negative side, since the patent essentially gives the inventor a monopoly on the use of the idea, it limits the widespread use of—or at least raises the price of using—the idea by the rest of society. This limited use, or higher price, of ideas limits the benefits—or spillovers—to society that result from the use of an idea. Limiting spillovers means that too few new ideas will be created.
349. Why do spillovers in the production of new ideas lead to an under-provision of new ideas? ANSWER: A profit-maximizing firm invests in R&D as long as the private marginal benefit is larger than the marginal cost. Spillovers mean that the social benefit of R&D exceeds the private benefit. The optimal social investment is found where marginal social benefit equals marginal cost. Since the private benefit to R&D is less than the social benefit, private investment in R&D is less than the socially optimal level.
350. Using a graph showing the private marginal cost, private marginal benefit, and social marginal benefit of the research and development of new ideas, show how government subsidies for research and development might mitigate the effect of spillovers. ANSWER: See Figure 28.12 (8.12). A government subsidy equal to the size of the spillover could mitigate the effects of the spillover.
Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 9 1. Which statement is TRUE? a. Bonds enable the government to lend. b. Bonds enable corporations to lend. c. A bond is like an IOU. d. Bonds enable both government and corporations to lend. ANSWER: c 2. Saving is: a. the purchase of new capital goods. b. income that is not spent on consumption goods. c. the desire to have goods and services sooner rather than later, all else being equal. d. a sophisticated IOU that documents who owes how much and when payment is due. ANSWER: b 3. Investment is: a. the purchase of new capital goods. b. income that is not spent on consumption goods. c. the desire to have goods and services sooner rather than later, all else being equal. d. a sophisticated IOU that documents who owes how much and when payment is due. ANSWER: a 4. Buying stock in a company is: a. investment. b. divestment. c. a transfer of ownership rights. d. leverage. ANSWER: c 5. In economics, investment refers to the: a. purchase of new capital goods. b. purchase of stocks and bonds. c. amount of personal savings in a bank. d. fund used to settle a debt. ANSWER: a 6. In financial markets, which group BEST represents the demand side of the market? a. stock markets b. banks c. borrowers d. savers ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 9 7. Which do economists consider an investment? a. the purchase of bonds b. the purchase of stocks c. the construction of a new factory d. the acquisition of gold ANSWER: c 8. Which do economists NOT considered saving? a. making a deposit in a savings account at the bank b. buying a share of stock in a computer company c. buying a corporate bond d. paying tuition for a college education ANSWER: d 9. What is the portion of income that people do NOT spend on consumption goods? a. investments b. profits c. asset retention d. savings ANSWER: d 10. Which do economists define as saving? a. General Motors issues corporate bonds. b. Microsoft sells stock at an initial public offering. c. Sandra purchases a certificate of deposit from a bank. d. Andrea finances her new car through an auto loan. ANSWER: c 11. Saving is: a. businesses purchasing new capital goods. b. people purchasing new consumption goods. c. income that businesses do not spend on capital goods. d. income that people do not spend on consumption goods. ANSWER: d 12. Investment is: a. businesses purchasing of new capital goods. b. people purchasing new consumption goods. c. people purchasing gold and silver during inflationary times. d. people purchasing shares of stock on the New York Stock Exchange. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 9 ANSWER: a 13. When a person's income is greater than their spending on consumption goods, then they are: a. dissaving. b. saving. c. investing. d. disinvesting. ANSWER: b 14. Economists define saving as: a. income not spent on investment goods. b. income not spent on consumption goods. c. income not taxed by the government. d. the purchase of new capital goods. ANSWER: b 15. Economists define investment as: a. income spent on corporate stocks. b. income not spent on consumption goods. c. income the government does not tax. d. the purchase of new capital goods. ANSWER: d 16. A financial intermediary: a. increases the costs of moving savings from savers to borrowers and investors. b. coordinates between buyers and sellers of inputs. c. works to turn savings into investments. d. applies new technological discoveries in production processes. ANSWER: c 17. A financial intermediary helps to convert _____ into _____. a. investments; savings b. buyers; sellers c. expenditures on physical capital; expenditures on human capital d. income people do not spend on consumption; new capital ANSWER: d 18. In the field of economics, an investment involves businesses making _____ purchases. a. capital b. saving c. a security Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 9 d. a share of stock ANSWER: a 19. The income people do not spend on consumption is: a. debt. b. saving. c. a bond. d. shadow income. ANSWER: b 20. Individual saving contributes to: a. the supply of loanable funds. b. the demand for loanable funds. c. both the supply of loanable funds and the demand for loanable funds. d. neither the supply of loanable funds nor the demand for loanable funds. ANSWER: a 21. Which is NOT a reason individuals typically choose to save? a. to smooth their consumption over the lifecycle b. to offset fluctuations in income c. as a way to transfer income from good times to bad times d. to increase investment ANSWER: d 22. On the basis of their role in the financial system, venture capitalists are BEST described as: a. borrowers. b. savers. c. financial intermediaries. d. investors. ANSWER: b 23. What is the future value of $3,000 invested at 4% for two years? a. $3,244.80 b. $3,420.00 c. $3,660.00 d. $3,270.80 ANSWER: a 24. What is the future value of $1,900 invested at 4% for two years? a. $1,976.00 b. $2,236.09 Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 9 c. $2,055.04 d. $3,070.80 ANSWER: c 25. When the interest rate is 16%, a bond promising to pay $2,500 in one year will sell for $: a. 15,625.00. b. 156.25. c. 2,155.17. d. 22,155.17. ANSWER: c 26. When the interest rate is 9%, a bond promising to pay $2,100 in one year will sell for $: a. 11,926.61. b. 1,926.61. c. 1,055.28. d. 566.67. ANSWER: b 27. The present value of the bond is $519.05, the future value is $545.00, so the return on this bond is: a. 0.10%. b. 10%. c. 0.05%. d. 5%. ANSWER: d 28. The present value of the bond is $2,300.00, the future value is $2,523.00, so the return on this bond is: a. 0.97%. b. 7.9%. c. 9.7%. d. 0.79%. ANSWER: c 29. The present value of the bond is $2,300.00, the future value is $2,523.00, so the return on this bond is: a. 0.97%. b. 7.9%. c. 9.7%. d. 0.79%. ANSWER: c 30. A zero-coupon bond with a face value of $2,000 and a current price of $1,700 has a rate of return of: a. 46.6%. Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 9 b. 33.3%. c. 15.7%. d. 17.6%. ANSWER: d 31. A zero-coupon bond with a face value of $2,200 and a current price of $1,900 has a rate of return of: a. 46.6%. b. 33.3%. c. 15.7%. d. 17.6%. ANSWER: c 32. A zero-coupon bond with a face value of $1,200 and a current price of $900 has a rate of return of: a. 46.6%. b. 33.3%. c. 15.7%. d. 17.6%. ANSWER: b 33. A zero-coupon bond with a face value of $2,200 and a current price of $1,500 has a rate of return of: a. 46.6%. b. 33.3%. c. 15.7%. d. 17.6%. ANSWER: a 34. All else equal, lower _____ rates usually result in _____ savings. a. interest; less b. interest; more c. exchange; more d. exchange; less ANSWER: a 35. All else equal, _____ interest rates usually result in more _____. a. lower; savings b. higher; savings c. higher; consumption d. lower; consumption ANSWER: b 36. The supply curve for savings is _____ because as the _____ rate rises, the quantity of savings will also rise. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 9 a. upward sloping; interest b. downward sloping; interest c. horizontal; inflation d. downward sloping; inflation ANSWER: b 37. Individuals typically enjoy _____ consumption. a. volatile b. periodic c. smooth d. layered ANSWER: c 38. The AIDS epidemic _____ the savings rate in Africa. a. has maintained b. has increased c. has decreased d. indeterminately changes ANSWER: c 39. If income and consumption are equal, saving must be: a. zero. b. positive and rising. c. positive and remaining relatively constant. d. negative. ANSWER: a 40. An increase in life expectancy should cause saving in the United States to: a. increase. b. decrease. c. remain unchanged. d. become more volatile. ANSWER: a 41. When a family's income becomes more uncertain, we expect its saving to: a. increase. b. decrease. c. remain unchanged. d. become more uncertain. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 9 42. Which is NOT a reason people save during their working lifetimes? a. to avoid drastically reducing their consumption once they retire b. to consume later in life c. to take precautionary measures in case of job loss d. to allow for a more volatile consumption path over time ANSWER: d 43. Fluctuations in income cause most people to: a. invest. b. save. c. spend all their income each year. d. retire at an early age. ANSWER: b 44. The main reason people save during their working years is a(n): a. preference toward a smooth consumption path over time. b. high time preference for the present. c. expectation that they will die early. d. preference toward matching income with spending over time. ANSWER: a 45. The consumption-smoothing theory implies that a country whose people have a very low life expectancy has: a. low consumption. b. high investment. c. a low savings rate. d. a high borrowing rate. ANSWER: c 46. According to the consumption-smoothing theory, people with a longer life expectancy: a. invest more in their lifetimes than those with shorter life expectancy. b. have the same saving rates in their lifetimes as those with shorter life expectancy. c. have higher savings rates in their lifetimes than those with shorter life expectancy. d. have lower saving rates in their lifetimes than those with shorter life expectancy. ANSWER: c 47. Which is NOT a reason people save during their working lifetimes? a. They save for retirement, especially if average life expectancy is higher. b. They save to prepare for periods of unemployment. c. They save to prepare for unexpected hospitalizations or illnesses. d. They save to match income and spending from year to year. Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 9 ANSWER: d 48. In reference to the consumption-smoothing theory, a person typically saves the MOST: a. during working years. b. during retirement years. c. as an infant. d. as a full-time student. ANSWER: a 49. Workers who put 10% of their income into a retirement account each year are: a. consuming all of their income. b. smoothing consumption. c. dissaving. d. trying to match income and spending. ANSWER: b 50. Why is saving so minimal in nations with a high population of AIDS victims? a. People with a short life expectancy tend to save less. b. Governments provide an extensive social safety net. c. Interest rates are not high enough. d. Unemployment rates are too high. ANSWER: a 51. A seasonal worker saves more when their income rises and saves less when their income falls. This behavior is referred to as: a. dissaving. b. consumption smoothing. c. impatience. d. time preference. ANSWER: b 52. All else being equal, time preference is the desire to: a. have goods and services sooner rather than later. b. delay the purchase of goods and services. c. have goods and services in retirement years. d. have goods and services that are made in the current year. ANSWER: a 53. Which BEST represents time preference? a. Sarah is spending $20,000 per year on tuition and other expenses to attend college with the hope of earning a higher income in the future. b. Max saves $300 per month from his paychecks for retirement.
Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 9 c. Alex smokes a pack of cigarettes per day even though he knows that he may face poor health down the road because of his smoking habit. d. Thomas invests money in Apple today, which Apple subsequently uses to fund additional investment purchases that will benefit future shareholders.
ANSWER: c 54. Time preference is: a. the purchase of new capital goods. b. income that is not spent on consumption goods. c. the desire to have goods and services sooner rather than later, all other things being equal. d. a sophisticated IOU that documents who owes how much and when payment is due. ANSWER: c 55. People with a high time preference are less likely to: a. engage in crime. b. use heroin. c. drop out of school. d. save. ANSWER: d 56. China has a higher saving rate than the United States. One economic explanation for this fact is that: a. Americans are more irrational than the Chinese. b. Americans are more rational than the Chinese. c. there is a lower rate of time preference among Americans than among Chinese. d. there is a higher rate of time preference among Americans than among Chinese. ANSWER: d 57. Economists call the desire to have goods and services sooner rather than later: a. investment. b. consumption smoothing. c. savings. d. time preference. ANSWER: d 58. All else being equal, a working-age person who has more patience tends to have: a. more savings. b. fewer savings. c. more collateral. d. less investment. ANSWER: a 59. Time preference is the desire to: Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 9 a. save for a time when income will be lower. b. have goods and services sooner rather than later. c. maximize return on investment in the shortest amount of time. d. increase longevity to have more income. ANSWER: b 60. What is an example of impatience in economic behavior? a. taking the first job you are offered b. insisting on getting a physical exam every year c. asking for your grade right after finishing a test d. eating a healthy diet every day ANSWER: a 61. The supply of savings function shows the relationship between saving and: a. consumption. b. income. c. age. d. the interest rate. ANSWER: d 62. The supply of savings function is: a. upward sloping. b. downward sloping. c. vertical. d. horizontal. ANSWER: a 63. The supply of savings is positively sloped because: a. firms borrow more when interest rates are low. b. people are enticed to forego consumption when interest rates are higher. c. when people have greater income they save more. d. higher interest rates cause people to save less. ANSWER: b 64. If the interest rate increases, then: a. the quantity saved will decrease, but the quantity supplied of loanable funds will increase. b. the quantity saved will increase, but the quantity supplied of loanable funds will decrease. c. both the quantity saved and the quantity supplied of loanable funds will decrease. d. both the quantity saved and the quantity supplied of loanable funds will increase. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 9 65. If $100 is saved at an annual interest rate of 10%, at the end of the one year, the saver will have $: a. 11. b. 110. c. 10. d. 111. ANSWER: b 66. The price of savings is the: a. interest rate. b. investment rate. c. savings rate. d. rate of time preference. ANSWER: a 67. Which explains why the supply of savings is upward sloping? a. An increase in the interest rate leads to an increase in the quantity of saving. b. An increase in the interest rate leads to an increase in the opportunity cost of saving. c. An increase in investment leads to an increase in the level of saving. d. An increase in time preference leads to an increase in the quantity of saving. ANSWER: a 68. Higher interest rates typically _____ saving, ceteris paribus. a. decrease b. maintain c. increase d. indeterminately change ANSWER: c 69. People will usually save more if the interest rate: a. is higher. b. is lower. c. moves erratically. d. is zero. ANSWER: a 70. The supply curve for savings indicates that the higher the interest rate, the: a. larger the quantity saved. b. smaller the quantity saved. c. larger the saver's income. d. smaller the saver's income. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 9 71. The supply of savings curve shows the relationship between savings and: a. income. b. investment. c. age. d. the interest rate. ANSWER: d 72. The savings supply curve is: a. upward sloping. b. downward sloping. c. horizontal. d. vertical. ANSWER: a 73. Which is NOT one of the four major factors that determine the supply of savings? a. government policy b. interest rates c. impatience d. smoothing consumption ANSWER: a 74. Household saving and dissaving to even out consumption spending are known as: a. flattening the consumption curve. b. shadowing consumption. c. dollar averaging. d. smoothing consumption. ANSWER: d 75. When a household spends more than its current income, it is: a. saving. b. shadowing. c. dissaving. d. investing. ANSWER: c 76. Individuals tend to prefer to: a. save for purchases rather than borrow. b. borrow when they are younger and repay in retirement. c. have things later rather than sooner. d. have things sooner rather than later. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 9 ANSWER: d 77. Consumers who consider purchasing a good or service, even though the costs and benefits of purchasing the good or service do not occur in the same time period, tend to give greater weight to: a. benefits rather than costs. b. costs rather than benefits. c. the future rather than the present. d. the present rather than the future. ANSWER: d 78. The more impatient someone is, the more they tend to prefer to: a. consume now rather than later. b. save now rather than later. c. incur costs now rather than later. d. aggressively work now to retire later. ANSWER: a 79. The field of study that combines economics, psychology, and neurology is: a. economic brain studies. b. psychonomics. c. neuro-economics. d. behavioral economics. ANSWER: d 80. Which is NOT a main field of study that is part of behavioral economics? a. sociology b. psychology c. economics d. neurology ANSWER: a 81. The lower the interest rate, the _____ the quantity of saving. a. more steady b. more unpredictable c. greater d. lower ANSWER: d 82. Consumption smoothing means: a. never borrowing. b. borrowing every year to consume more than one earns. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 9 c. borrowing to consume more than one's income in high-income years and consuming less than one's income in low-income years. d. borrowing to consume more than one's income in low-income years and consuming less than one's income in high-income years.
ANSWER: d 83. According to the lifecycle theory of savings, a typical person's: a. saving is smooth over their entire lifetime. b. consumption is smooth over their entire lifetime. c. consumption in a given year is related to their income in that year. d. saving is the highest when they die. ANSWER: b 84. People smooth their consumption over their lifetime by: a. saving. b. borrowing. c. both borrowing and saving. d. neither borrowing nor saving. ANSWER: c 85. Other things being equal, a person typically has the largest pool of savings: a. upon completing school. b. during the first year of working full time. c. immediately before retirement. d. at the time of death. ANSWER: c 86. Most individuals save during the: a. early years of life only. b. middle years of life only. c. later years of life just before retirement. d. middle and later years of life before retirement. ANSWER: d 87. Economist Franco Modigliani's lifecycle theory of savings proposes that to maximize lifetime satisfaction, consumers: a. practice consumption smoothing by borrowing and saving. b. borrow equal amounts throughout the lifecycle. c. save equal amounts throughout their lifecycle. d. consume what they earn each year. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 9 88. The lifecycle theory of savings predicts that individuals will save during: a. the early years of life. b. the working years of life. c. the retirement years of life. d. all phases of life. ANSWER: b 89. Which is TRUE about the lifecycle theory of savings? a. People tend to save during the early years of their lifetimes, dissave during their prime working years, and
borrow during their retirement years. b. People tend to borrow during the early years of their lifetimes, invest during their prime working years, and save during their retirement years. c. People tend to borrow during the early years of their lifetimes, save during their prime working years, and dissave during their retirement years. d. People tend to save during the early years of their lifetimes, borrow during their prime working years, and invest during their retirement years.
ANSWER: c 90. At which stage in life does someone generally dissave the MOST? a. shortly after taking the first job b. during middle age c. while raising a family d. during retirement ANSWER: d 91. What theory describes a pattern of early borrowing followed by a period of saving and then dissaving late in a worker's lifetime? a. the lifecycle theory of savings b. the career theory of dissaving c. the demand theory of borrowing d. the theory of cyclical smoothing ANSWER: a 92. Why is the demand to borrow positively related to the rate of economic growth? a. Lenders obtain additional wealth. b. It provides motivation to keep spending to a minimum. c. The incentive to invest is enhanced by economic growth. d. It increases the opportunity cost of borrowing. ANSWER: c 93. Which is NOT an example of the need to borrow to finance large investments? a. Megan takes out a mortgage to purchase her first home. b. The government issues additional bonds to build a new interstate highway system. Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 9 c. Jamie pays for college by working two jobs on the weekends. d. A real estate developer applies for a $1 million loan to build a new golf course. ANSWER: c 94. In the lifecycle theory of savings, the sequence of behavior is as follows: a. borrow, dissave, save. b. borrow, save, dissave. c. save, borrow, dissave. d. save, dissave, borrow. ANSWER: b 95. In the lifecycle theory of saving, one's consumption path is _____ one's income path. a. more volatile than b. less volatile than c. as volatile as d. equal to ANSWER: b 96. The supply of loanable funds comes from _____, and the demand for loanable funds comes from _____. a. saving; investment b. investment; saving c. saving; consumption d. investment; consumption ANSWER: a 97. The demand to borrow shows the relationship between borrowing and: a. income. b. investment. c. age. d. the interest rate. ANSWER: d 98. The demand to borrow function is: a. upward sloping. b. downward sloping. c. horizontal. d. vertical. ANSWER: b 99. Some businesses cannot start small, and therefore: a. they must borrow or attract venture capitalists to start at all. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 9 b. none of these businesses ever get off the ground. c. they are no different from any other business. d. these businesses are always owned by the government. ANSWER: a 100. In economics, investment refers to: a. saving. b. dissaving. c. people purchasing consumption goods. d. businesses purchasing capital goods. ANSWER: d 101. Which is NOT a reason people borrow? a. to engage in consumption smoothing b. to sustain themselves through periods of unemployment c. to fund unexpected expenditures d. to equalize income and spending period by period ANSWER: d 102. Which is NOT a reason firms and individuals borrow? a. They want to smooth consumption. b. Debt is often necessary for large purchases. c. They believe their return will be greater than the interest rate. d. They desire to equalize income and spending every period. ANSWER: d 103. Businesses will take out additional loans only if: a. they have no other way to obtain funds. b. the interest rate is less than the expected rate of return on their investment. c. the demand for investment equals the supply of savings. d. the interest rate is less than the cost of borrowing. ANSWER: b 104. Higher interest rates typically _____ borrowing, all else equal. a. decrease b. maintain c. increase d. indeterminately change ANSWER: a 105. People will usually borrow more if the interest rate is: Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 9 a. higher. b. lower. c. volatile. d. stable. ANSWER: b 106. When the interest rate increases, the: a. amount of savings in banks decreases. b. amount of borrowing to finance investments decreases. c. cost of borrowing decreases. d. return on investments increases. ANSWER: b 107. Why is the demand for loanable funds downward sloping? a. People save less when the interest rate is low. b. More people borrow money when interest rates are low than when they are high. c. Fewer investment projects have returns that can beat higher interest rates, so people are more willing to invest at higher interest rates. d. People save more when the interest rate is high.
ANSWER: b 108. The demand to borrow function shows the relationship between borrowing money and: a. consumption. b. income. c. age. d. the interest rate. ANSWER: d 109. At lower interest rates, the cost of investing _____ and the quantity of funds demanded for investment _____. a. decreases; increases b. increases; decreases c. increases; increases d. decreases; decreases ANSWER: a 110. At an interest rate of 8%, the quantity of funds that borrowers demand is $30 billion. At 4%, borrowers might want to borrow $: a. 20 billion. b. 25 billion. c. 30 billion. Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 9 d. 45 billion. ANSWER: d 111. If the interest rate rises from 5% to 9%, the number of new businesses will: a. increase. b. decrease. c. remain the same. d. sharply increase, then level off. ANSWER: b 112. People do NOT borrow funds to: a. smooth consumption over time. b. make large investments. c. accumulate savings. d. cover the cost of current consumption expenditures that exceed their income. ANSWER: c 113. The idea that people smooth out consumption through saving and borrowing was pioneered by _____ in the _____ theory of savings. a. Franco Modigliani; lifecycle b. Franco Modigliani; time smoothing c. Adam Smith; lifecycle d. Adam Smith; time smoothing ANSWER: a 114. Which is NOT an example of a major reason that funds are borrowed to make large investments in physical capital and human capital? a. A woman uses her entire savings for a down payment and borrows to cover the cost of equipment and a
factory building to produce a good she has recently developed. She did not have the funds to produce the good without the loan. b. Rather than raising taxes today to pay for a new bridge that will facilitate transportation and economic growth, the government borrows to cover the cost of the bridge with plans to repay the loan later with additional tax revenue. c. A student borrows to cover university tuition with the expectation that his loan payments can be made with future earnings that will be higher due to his investment in human capital. d. A woman chooses to borrow funds to buy a new car rather than choosing to withdraw funds from her savings to pay in cash.
ANSWER: d 115. A business loan is only profitable when the: a. cost of the loan is less than the additional revenue gained because of the investment. b. cost of the loan is less than total revenue earned in the future. c. additional revenue gained from the investment is less than the cost of the loan. Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 9 d. total revenue earned in the future is less than the cost of the loan. ANSWER: a 116. There is a(n) _____ relationship between the interest rate and the quantity of funds that borrowers demand. a. positive b. negative c. circular d. unpredictable ANSWER: b 117. If the interest rate decreases with other things unchanged, the quantity of funds investors want to borrow will: a. decrease. b. increase. c. remain the same. d. change unpredictably. ANSWER: b 118. If the interest rate increases with other things unchanged, the quantity of funds investors want to borrow will: a. decrease. b. increase. c. remain the same. d. change unpredictably. ANSWER: a 119. Borrowers _____ and savers _____. a. supply loans; demand loans b. demand loans; supply investments c. supply savings; demand to borrow d. demand loans; supply savings ANSWER: d 120. _____ demand(s) funds to borrow, whereas _____ supply(supplies) the funds. a. Private citizens; the government b. The government; private citizens c. Investors; savers d. Savers; investors ANSWER: c 121. Figure: Loanable Funds Market Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 9
At an interest rate of 3% in this market, there is a _____ of loanable funds of $_____. a. shortage; 320 b. surplus; 250 c. shortage; 250 d. surplus; 320 ANSWER: a 122. Figure: Loanable Funds Market
Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 9
At an interest rate of 6% in this market, there is a _____ of loanable funds of $_____. a. shortage; 320 b. surplus; 250 c. shortage; 250 d. surplus; 320 ANSWER: d 123. Figure: Loanable Funds Market
Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 9
This market will be in equilibrium when the interest rate is _____% and the quantity of loanable funds is $_____. a. 3.0; 180 b. 4.5; 180 c. 4.5; 250 d. 6.0; 500 ANSWER: c 124. Figure: Loanable Funds Market
Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 9
The equilibrium interest rate in this market is: a. 3.0%. b. 4.5%. c. 6.0%. d. above 6.0%. ANSWER: b 125. Figure: Loanable Funds Market
Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 9
The equilibrium quantity of loanable funds in this market is: a. $180. b. $250. c. $500. d. more than $500. ANSWER: b 126. The market for loanable funds determines: a. income. b. consumption. c. investment. d. the interest rate. ANSWER: d 127. Figure: Market for Loanable Funds
Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 9
If the interest rate is 3% in this market for loanable funds, then: a. investment exceeds savings by $200 million. b. investment exceeds savings by $100 million. c. borrowing demands exceed savings by $200 million. d. borrowing demands exceed savings by $100 million. ANSWER: d 128. Figure: Market for Loanable Funds
Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 9
If the interest rate is 5% in this market for loanable funds, then savings exceed: a. investment by $200 million. b. investment by $100 million. c. borrowing demands by $200 million. d. borrowing demands by $100 million. ANSWER: d 129. Figure: Market for Loanable Funds
Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 9
Equilibrium in this market for loanable funds occurs when the interest rate is: a. 3%. b. 4%. c. 5%. d. higher than 5%. ANSWER: b 130. Figure: Market for Loanable Funds
Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 9
Equilibrium in this market for loanable funds occurs when the quantity of loanable funds is: a. $100 million. b. $150 million. c. $200 million. d. more than $200 million. ANSWER: b 131. Trading in the market for loanable funds determines the equilibrium: a. level of savings. b. amount of borrowing. c. interest rate. d. level of savings, amount of borrowing, and interest rate. ANSWER: d 132. The loanable funds market is the market where: a. the government brings buyers and sellers together to finance capital expenditures. b. the actions of borrowers and lenders determine equilibrium interest rates. c. traders buy and sell stocks. d. firms determine overall investment rates in the economy. ANSWER: b 133. A shortage of savings in the loanable funds market will: Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 9 a. drive market interest rates down. b. drive market interest rates up. c. increase the supply of loanable funds. d. increase the demand for loanable funds. ANSWER: b 134. A surplus of savings in the loanable funds market will: a. drive market interest rates down. b. drive market interest rates up. c. increase the supply of loanable funds. d. increase the demand for loanable funds. ANSWER: a 135. If the demand for loanable funds increases, all else equal, interest rates will: a. increase. b. decrease. c. remain the same. d. change indeterminately. ANSWER: a 136. If the demand for loanable funds decreases, all else equal, interest rates will: a. increase. b. decrease. c. remain the same. d. change indeterminately. ANSWER: b 137. If the supply of loanable funds increases, all else equal, interest rates will: a. increase. b. decrease. c. remain the same. d. change indeterminately. ANSWER: b 138. If the supply of loanable funds decreases, all else equal, interest rates will: a. increase. b. decrease. c. remain the same. d. change indeterminately. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 9 139. If the interest rate in the market for loanable funds is below the market-clearing rate, then: a. individuals will become more impatient. b. individuals will become less impatient. c. there will be a shortage of savings, and demanders will bid the interest rate up as they compete to borrow. d. there will be a surplus of savings, and suppliers will bid the interest rate down as they compete to lend. ANSWER: c 140. If individuals become more impatient, what will happen in the market for loanable funds? a. The supply of loanable funds will decrease, interest rates will fall, and the quantity of savings and borrowing
will increase. b. The supply of loanable funds will increase, interest rates will rise, and the quantity of savings and borrowing will decrease. c. The supply of loanable funds will increase, interest rates will fall, and the quantity of savings and borrowing will increase. d. The supply of loanable funds will decrease, interest rates will rise, and the quantity of savings and borrowing will decrease.
ANSWER: d 141. In the market for loanable funds: a. banks supply loanable funds and the government demands loanable funds. b. both savers and borrowers supply and demand loanable funds. c. savers demand loanable funds and borrowers supply loanable funds. d. savers supply loanable funds and borrowers demand loanable funds. ANSWER: d 142. Figure: Loanable Funds Expansion
Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 9
For which reason would the demand curve for loanable funds shift to the right from DLF to D1LF in the figure? a. The economy is expected to boom, thereby increasing investment returns. b. Larger investment projects with potentially higher returns get funded. c. Falling interest rates make it less expensive for firms to borrow. d. Rising interest rates make it more attractive for savers to save. ANSWER: a 143. Figure: Loanable Funds Expansion
Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 9
In the figure, if the demand for loanable funds increases from DLF to D1LF and the supply of loanable funds remains at SLF, the equilibrium interest rate will: a. increase to i1. b. remain at i0. c. fall below i0. d. increase to i1 temporarily and then return to i0. ANSWER: a 144. Figure: Loanable Funds Contraction
Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 9
For which reason would the supply curve for loanable funds shift to the left from S1LF to SLF in the figure? a. The economy is expected to go into a recession. b. An existing investment tax credit is abolished. c. The government ceases taxing interest earnings. d. Consumers become less patient. ANSWER: d 145. Figure: Loanable Funds Contraction
Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 9
In the figure, if the supply of loanable funds decreases from S1LF to SLF and the demand for loanable funds remains at D1LF, the equilibrium interest rate will: a. increase to i1. b. remain at i0. c. fall to i2. d. increase or decrease temporarily and then return to i0. ANSWER: a 146. When individuals become more willing to save, the: a. demand to borrow shifts to the right. b. demand to borrow shifts to the left. c. supply of savings shifts to the right. d. supply of savings shifts to the left. ANSWER: c 147. When business firms become more pessimistic about the state of the economy, the: a. demand to borrow shifts to the right. b. demand to borrow shifts to the left. c. supply of savings shifts to the right. d. supply of savings shifts to the left. ANSWER: b 148. When individuals become more willing to save because their incomes have increased, the interest rate Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 9 _____ and the quantity of borrowing and lending _____. a. increases; increases b. increases; decreases c. decreases; decreases d. decreases; increases ANSWER: d 149. When business firms become more pessimistic about the state of the economy, the interest rate _____ and the quantity of borrowing and lending _____. a. increases; increases b. increases; decreases c. decreases; decreases d. decreases; increases ANSWER: c 150. An investment tax credit will cause the interest rate to _____ and borrowing to _____. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANSWER: a 151. If consumers expect to have a shorter life expectancy and desire to save less, then the: a. demand for loanable funds will increase, and the equilibrium interest rate will increase. b. demand for loanable funds will decrease, and the equilibrium interest rate will decrease. c. supply of loanable funds will decrease, and the equilibrium interest rate will increase. d. supply of loanable funds will increase, and the equilibrium interest rate will decrease. ANSWER: c 152. If the government raises taxes on investment returns, then the: a. demand for loanable funds will increase, and the equilibrium interest rate will increase. b. demand for loanable funds will decrease, and the equilibrium interest rate will decrease. c. supply of loanable funds will decrease, and the equilibrium interest rate will increase. d. supply of loanable funds will increase, and the equilibrium interest rate will decrease. ANSWER: b 153. Which is the MOST likely to cause an increase in the demand for loanable funds? a. a decrease in the interest rate b. an increase in savings c. a decrease in consumption d. an increase in government borrowing Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 9 ANSWER: d 154. An increase in the supply of savings will cause the interest rate to: a. remain unchanged. b. decrease. c. increase. d. increase or decrease depending on the elasticity of demand for loanable funds. ANSWER: b 155. What economic activity did many South Korean citizens engage in during the 1960s and 1970s that helped their country increase its growth rate? a. increased consumer spending b. increased their saving c. bought and sold stocks and bonds d. only bought goods made in South Korea ANSWER: b 156. What temporary policy does the government often use to combat the decreased investment demand during a recession? a. decreasing government spending b. reducing regulations affecting firms c. selling more bonds d. offering an investment tax credit ANSWER: d 157. A decrease in investment demand: a. results in the same equilibrium as an increase in savings. b. decreases both the amount saved and the interest rate. c. increases the amount saved but decreases the interest rate. d. increases the supply of savings. ANSWER: b 158. At an 8% interest rate, the quantity of savings is $250 billion. What might the quantity of savings be if the interest rate fell to 5%? a. $190 billion b. $250 billion c. $300 billion d. $500 billion ANSWER: a 159. What effect will an investment tax credit have on interest rates and the quantity of savings? a. There will be no effect, because investment tax credits only affect the amount of taxes paid by firms. Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 9 b. Both interest rates and the quantity of savings will increase. c. Interest rates will decrease and the quantity of savings will increase. d. Interest rates will not change, but the quantity of savings will decrease. ANSWER: b 160. If a financial crisis raises awareness about the dangers of not saving, leading to an increase in overall savings rates across the country, the loanable funds market will experience an increase in the _____ loanable funds and a(n) _____ in equilibrium interest rates. a. demand for; increase b. supply of; increase c. demand for; decrease d. supply of; decrease ANSWER: d 161. If an increase in the expected future returns on investment leads to an increase in the current level of investment projects undertaken, the loanable funds market will experience an increase in the _____ loanable funds and a(n) _____ in equilibrium interest rates. a. demand for; increase b. supply of; increase c. demand for; decrease d. supply of; decrease ANSWER: a 162. If the government decides to drastically increase spending, and by extension the budget deficit, during an economic recession, it will increase the _____ loanable funds and _____ equilibrium interest rates. a. demand for; increase b. demand for; decrease c. supply of; decrease d. supply of; increase ANSWER: a 163. If the supply of loanable funds increases and the demand for loanable funds increases at the same time, interest rates will: a. increase. b. decrease. c. remain the same. d. increase, decrease, or remain the same. ANSWER: d 164. If the supply of loanable funds increases and the demand for loanable funds decreases at the same time, interest rates will: a. increase. Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 9 b. decrease. c. remain the same. d. increase, decrease, or remain the same. ANSWER: b 165. If the supply of loanable funds decreases and the demand for loanable funds increases at the same time, interest rates will: a. increase. b. decrease. c. remain the same. d. increase, decrease, or remain the same. ANSWER: a 166. If the supply of loanable funds decreases and the demand for loanable funds decreases at the same time, interest rates will: a. increase. b. decrease. c. remain the same. d. increase, decrease, or remain the same. ANSWER: d 167. If the demand for loanable funds increases, all else equal, the quantity of loanable funds exchanged will: a. increase. b. decrease. c. remain the same. d. increase, decrease, or remain the same. ANSWER: a 168. If the demand for loanable funds decreases, all else equal, the quantity of loanable funds exchanged will: a. increase. b. decrease. c. remain the same. d. change indeterminately. ANSWER: b 169. If the supply of loanable funds increases, all else equal, the quantity of loanable funds exchanged will: a. increase. b. decrease. c. remain the same. d. change indeterminately. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 9 170. If the supply of loanable funds decreases, all else equal, the quantity of loanable funds exchanged will: a. increase. b. decrease. c. remain the same. d. change indeterminately. ANSWER: b 171. If investors become less optimistic about the economy, which BEST describes behavior in the loanable funds market? a. An increase in supply results in an increase in the interest rate. b. A decrease in supply results in a decrease in the interest rate. c. A decrease in demand results in a decrease in the interest rate. d. An increase in demand results in an increase in the interest rate. ANSWER: c 172. As a result of an increase in the supply of savings: a. both the interest rate and the demand for borrowing decrease. b. the interest rate increases, but the demand for borrowing decreases. c. both the interest rate and the demand for borrowing increase. d. the interest rate decreases, but the amount of borrowing increases. ANSWER: d 173. An investment tax credit results in a(n): a. increase in the demand for loanable funds and an increase in the interest rate. b. decrease in the demand for loanable funds and a decrease in the interest rate. c. increase in the supply of loanable funds and a decrease in the interest rate. d. decrease in the supply of loanable funds and an increase in the interest rate. ANSWER: a 174. An increase in the supply of savings curve will cause the equilibrium interest rate to: a. increase. b. decrease. c. remain unchanged. d. first increase and then decrease. ANSWER: b 175. An increase in the supply of savings curve will cause the equilibrium quantity of savings to: a. increase. b. decrease. c. remain unchanged. Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 9 d. first increase and then decrease. ANSWER: a 176. An increase in the supply of savings curve will cause the equilibrium quantity of borrowing to: a. increase. b. decrease. c. remain unchanged. d. first increase and then decrease. ANSWER: a 177. An increase in the demand for borrowing will cause the equilibrium interest rate to: a. increase. b. decrease. c. remain unchanged. d. first increase and then decrease. ANSWER: a 178. An increase in the demand for borrowing will cause the equilibrium quantity of savings to: a. increase. b. decrease. c. remain unchanged. d. first increase and then decrease. ANSWER: a 179. An increase in the demand for borrowing will cause the equilibrium quantity of borrowing to: a. increase. b. decrease. c. remain unchanged. d. first increase and then decrease. ANSWER: a 180. In the market for loanable funds, the interest rate functions as: a. the quantity. b. the price. c. demand. d. supply. ANSWER: b 181. If the demand for loanable funds decreases, the interest rate _____ and the amount of funds borrowed _____. a. falls; increases Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 9 b. rises; increases c. falls; decreases d. rises; decreases ANSWER: c 182. If the demand for loanable funds increases, the interest rate _____ and the amount of funds borrowed _____. a. falls; increases b. rises; increases c. falls; decreases d. rises; decreases ANSWER: b 183. If the supply of loanable funds decreases, the interest rate _____ and the amount of funds borrowed _____. a. falls; increases b. rises; increases c. falls; decreases d. rises; decreases ANSWER: d 184. If the supply of loanable funds increases, the interest rate _____ and the amount of funds borrowed _____. a. falls; increases b. rises; increases c. falls; decreases d. rises; decreases ANSWER: a 185. Firms raise money by using which two methods? a. selling stocks and issuing Treasury bills b. selling stocks and issuing corporate bonds c. borrowing from banks and borrowing from the government d. borrowing from international countries and from the government ANSWER: b 186. Which are examples of financial intermediaries? I. commercial banks II. the bond market III. the stock market a. I and II b. II only c. II and III Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 9 d. I, II, and III ANSWER: d 187. Stock shares represent corporate _____ and bonds represent corporate _____. a. debt; ownership b. debt; debt c. ownership; ownership d. ownership; debt ANSWER: d 188. Which channels loanable funds from savers to borrowers? a. the Treasury Department b. Congress c. the Internal Revenue Service d. financial intermediaries ANSWER: d 189. For savers, the role of financial intermediaries is to: a. earn more returns on their investments. b. ensure that all borrowers can fund their investments. c. reduce the default risk on money they save and lend. d. avoid taxes from income earned on investments. ANSWER: c 190. Which BEST describes the role of banks in the loanable funds market? a. Banks own the supply of loanable funds and distribute them to borrowers. b. Banks act as nonprofit middlemen whose primary goal is to facilitate trade in the loanable funds market. c. Banks act as profit-seeking institutions, taking the supply of loanable funds from households and distributing it to borrowers. d. Banks are the primary demanders of loanable funds and thus have an important role in setting interest rates.
ANSWER: c 191. Which is NOT a role that banks play in the loanable funds market? a. minimize information costs b. reduce opportunity costs c. spread risk d. provide middleman services ANSWER: b 192. Financial intermediaries: a. reduce the costs of moving savings from savers to borrowers and investors. b. have liabilities that exceed their assets. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 9 c. are inefficient middlemen, raising the cost of economic activity. d. profit by keeping resources in their least valuable uses. ANSWER: a 193. Which is NOT a role of commercial banks? a. evaluate business ideas b. issue government bonds c. spread risk d. facilitate the payment system ANSWER: b 194. What is a service that banks specialize in providing? a. providing the highest return available in the market b. seeking to pass all the returns on investment to the savers c. evaluating the quality of investment opportunities d. making sure all funds are distributed in the most equitable fashion ANSWER: c 195. Which function do commercial banks NOT perform? a. They provide a safe opportunity for savers to earn interest on their savings. b. They direct money to its highest valued uses. c. They help form the bridge between savers and investors. d. They organize initial public offerings for firms. ANSWER: d 196. How do banks engage in specialization and division of labor? a. Banks are the only avenue for savers to save their money and for borrowers to borrow for projects. b. Banks specialize in lending to risky borrowers. c. Banks coordinate the collection of lenders' funds and employ specialists in risk assessment to ensure that the funds are safely used. d. Banks specialize in facilitating initial public offerings.
ANSWER: c 197. Which chain of events explains the functions of banks in the process of economic growth? a. Savers deposit their savings in banks. Banks direct these funds to firms that invest and engage in capital
accumulation that furthers economic growth. b. Savers deposit their savings in banks. Banks engage in capital accumulation, which plays an important role in economic growth. c. Firms borrow from stock and bond markets issued through banks. These funds are used for investment, which leads to the capital accumulation that furthers economic growth. d. Banks determine the demand for loanable funds and that demand fuels investment that in turn furthers economic growth.
ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 9 198. Crowding out occurs because the government increases the demand for loanable funds, drives up interest rates, and causes: a. saving to rise. b. saving to fall. c. consumption and private investment to rise. d. consumption and private investment to fall. ANSWER: d 199. Which is NOT a characteristic of a Treasury bill (T-bill)? a. It has coupon payments. b. It has a maturity of 26 weeks or less. c. It is sold at a discount from its face value. d. Its price fluctuates with T-bill demand. ANSWER: a 200. Which is NOT a characteristic of a Treasury bill (T-bill)? a. It has an implicit interest rate. b. It reaches maturity after 30 years. c. It is sold at a discount from its face value. d. It has almost zero default risk. ANSWER: b 201. A bond is a(n): a. liability for the issuer. b. asset for the issuer. c. promise by the buyer to pay. d. asset for the issuer and a promise by the buyer to pay. ANSWER: a 202. Which represents loaning money to a firm? a. buying a bond b. selling a bond c. buying stock d. selling stock ANSWER: a 203. Junk bonds are bonds: a. garbage companies issue. b. backed by subprime mortgages. c. rated lower than BBB–. Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 9 d. that mature 30 years into the future. ANSWER: c 204. An increase in government borrowing will cause the: a. demand for borrowing to shift to the right. b. demand for borrowing to shift to the left. c. supply of savings to shift to the right. d. supply of savings to shift to the left. ANSWER: a 205. An increase in government borrowing will cause the interest rate to: a. rise and private spending to rise. b. rise and private spending to fall. c. fall and private spending to fall. d. fall and private spending to rise. ANSWER: b 206. When the U.S. government borrows, it sells: a. federal paper. b. Treasury bonds. c. government stocks. d. federal paper, Treasury bonds, and government stocks. ANSWER: b 207. A corporation is planning to construct new offices, but it has limited funds. The corporation is likely to: a. supply loanable funds by selling bonds. b. supply loanable funds by buying bonds. c. demand loanable funds by selling bonds. d. demand loanable funds by buying bonds. ANSWER: c 208. In the loanable funds market, an increase in government borrowing will MOST likely: a. decrease bond prices and increase interest rates. b. increase bond prices and decrease interest rates. c. increase both bond prices and interest rates. d. decrease both bond prices and interest rates. ANSWER: a 209. The crowding-out effect of government borrowing refers to a decrease in: a. private consumption only. b. private investment only. Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 9 c. both private consumption and private investment. d. neither private consumption nor private investment. ANSWER: c 210. Economists call the potential of a bond issuer not being able to repay the bondholder: a. moral hazard. b. default risk. c. payment jeopardy. d. repayment peril. ANSWER: b 211. Why do rating agencies rate bonds? a. to indicate the chance of a bond being repaid b. to show a bond's probable rate of return c. to validate the amount of collateral involved d. to verify the cost of the bond ANSWER: a 212. What does crowding out mean? a. Government borrowing causes private investment and consumption to decrease. b. Too many private lenders make it difficult for the government to borrow. c. Too many private savers compete for higher rates of return. d. The government gives tax breaks to many segments of the economy at one time. ANSWER: a 213. We call the buying and selling of equally risky assets to ensure equal returns: a. risk exchange. b. default swap. c. arbitrage. d. crowding out. ANSWER: c 214. If interest rates fall, what happens to bond prices? a. They will fall. b. They remain stable. c. They initially fall, and then return to their initial level. d. They will rise. ANSWER: d 215. If a zero-coupon bond with a face value of $1,000 costs $800, the rate of return if held to maturity would be: Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 9 a. −20%. b. 20%. c. −25%. d. 25%. ANSWER: d 216. When interest rates increase, bond prices: a. must increase. b. must decrease. c. will not change. d. will first increase and then decrease. ANSWER: b 217. A saver buys a $10,000 zero-coupon government bond for $9,375. When it matures a year from now, what will be the approximate implied interest rate? a. 625.00% b. 6.25% c. 6.67% d. 12.67% ANSWER: c 218. If zero-coupon bonds are available with an implied interest rate of 5% and a face value of $30,000, what is the approximate purchase price for those bonds? a. $28,571.43 b. $30,000.00 c. $1,428.57 d. $31,428.57 ANSWER: a 219. After purchasing a zero-coupon bond with a face value of $1,000 for $945, news arrives that interest rates on savings accounts at banks have risen to 7%. As a result of the change in interest rates, the price of this bond will: a. rise by $10.42. b. fall by $10.42. c. fall by $66.12. d. rise by $66.12. ANSWER: b 220. Which statement is NOT true? a. Interest rates and bond prices move inversely with each other. b. Corporate bonds have no interest rate risk in the long run. Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 9 c. Arbitrage keeps interest rates on equally risky assets the same. d. A longer term to maturity exposes a bondholder to greater interest rate risk. ANSWER: b 221. A $10,000 face-value bond costs $9,250 and matures in one year. If the interest rate on similar bonds rises by 2%, what is the approximate price change for this bond? a. The price of the bond rises to $9,804. b. The price remains unchanged at $9,250. c. The price of the bond falls to $9,082. d. The price of the bond rises to $9,424. ANSWER: c 222. When a given bond's price increases, we know that interest rates: a. remain unchanged. b. must have increased. c. must have decreased. d. could have increased, decreased, or remained unchanged. ANSWER: c 223. Which BEST explains the crowding-out effect? a. the decrease in the supply of loanable funds that results from an increase in budget deficits b. an increase in consumption among households that crowds out savings c. the decrease in investment opportunities for small businesses resulting from increased borrowing by larger corporations d. the decrease in private investment due to higher interest rates that result from increased government borrowing to finance larger budget deficits
ANSWER: d 224. A zero-coupon bond matures in one year. The price of the bond is $500, and it will pay $1,000 in one year's time. What is the rate of return on the bond? a. 20% b. 50% c. 100% d. 500% ANSWER: c 225. Collateral is: a. the first time a corporation sells stock to the public to raise capital. b. a sophisticated IOU that documents who owes how much and when payment is due. c. something of value that by agreement becomes the property of the lender if the borrower defaults. d. the decrease in private consumption and investment that occurs when the government borrows more. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 9 226. Crowding out is: a. the first time a corporation sells stock to the public to raise capital. b. a sophisticated IOU that documents who owes how much and when payment is due. c. something of value that by agreement becomes the property of the lender if the borrower defaults. d. the decrease in private consumption and investment that occurs when the government borrows more. ANSWER: d 227. If a bond for Alexcorp has a 10% rate of return and an otherwise identical bond for Tylercorp has a 15% rate of return, which bond carries greater risk? a. The Alexcorp bond is riskier. b. The Tylercorp bond is riskier. c. The two bonds are equally risky. d. It is impossible to calculate the riskiness of the bonds. ANSWER: b 228. The U.S. federal government finances MOST of its new spending by: a. issuing bonds. b. charging user fees. c. borrowing directly from banks and investors. d. printing money. ANSWER: a 229. The crowding-out effect of government borrowing refers to the reduction of private: a. consumption due to a lower interest rate. b. savings due to a higher interest rate. c. investment due to higher taxes. d. investment due to a higher interest rate. ANSWER: d 230. Suppose you pay $450 for a zero-coupon bond with a face value of $500. The rate of return for this bond at maturity is: a. 10%. b. 11.1%. c. 9.99%. d. −5%. ANSWER: b 231. The buyer of a bond is a: a. borrower. b. lender. Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 9 c. stockholder. d. banker. ANSWER: b 232. The issuer of a bond is a: a. borrower. b. lender. c. stockholder. d. banker. ANSWER: a 233. Something of value that by agreement becomes the property of the lender if the borrower defaults is called: a. a stock. b. a bond. c. collateral. d. a liability. ANSWER: c 234. Economists call the decrease in private consumption and investment that occurs when the government borrows more: a. collateral damage. b. the substitution effect. c. the wealth effect. d. the crowding-out effect. ANSWER: d 235. Bond prices and bond interest rates move: a. together when there is collateral damage. b. together when there is arbitrage. c. in the same direction. d. in opposite directions. ANSWER: d 236. An initial public offering is: a. the first time a corporation sells stock to the public to raise capital. b. a sophisticated IOU that documents who owes how much and when payment is due. c. something of value that by agreement becomes the property of the lender if the borrower defaults. d. the decrease in private consumption and investment that occurs when the government borrows more. ANSWER: a 237. Which represents ownership in a corporation? Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 9 a. bonds b. IOUs c. stocks d. saving deposits ANSWER: c 238. Which is NOT a characteristic of stocks that are sold at initial public offerings? a. They are being sold for the first time. b. They allow the firm selling the stock to acquire funds for investment. c. They transfer ownership of the company. d. They represent ownership of government-run enterprises only. ANSWER: d 239. In the market for loanable funds, _____ coordinates between the savers and borrowers. a. a market supplier b. an investor c. a financial intermediary d. the government ANSWER: c 240. Which is NOT a financial intermediary? a. bank b. stock market c. bond market d. the U.S. Treasury ANSWER: d 241. How do banks earn a profit? a. by receiving rebates from the government based on the amount of deposits b. by receiving rebates from the government based on the interest rate c. by charging higher interest rates on loans than they pay on deposits d. by charging higher interest rates on deposits than they pay on loans ANSWER: c 242. Which is NOT a service that banks provide as financial intermediaries? a. providing intermediate goods b. spreading risk c. minimizing information costs d. evaluating borrowers and investments ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 9 243. Which is true of Standard & Poor's bond ratings? a. A rating of AAA means the borrower is in default. b. The higher the bond rating, the greater the risk of default. c. Ratings range from AAA to E. d. We call any bond with a rating below BBB– a junk bond. ANSWER: d 244. A bond is: a. a loan agreement between a saver and a business or government borrower. b. a contract between the government and someone who borrows tax revenue. c. a promise by a firm to complete construction of an investment project. d. issued when a bank transfers savings into a loan pool of funds. ANSWER: a 245. Interest rates on loans _____ tend to be lower than on similar loans _____. a. to high-risk borrowers; to low-risk borrowers b. when demand for loans is high; when demand for loans is low c. when saving levels are low; when saving levels are high d. with collateral; without collateral ANSWER: d 246. When the government becomes a major borrower in a country's loanable funds market: a. fewer consumers will choose to save. b. the rate of return to those investing in capital tends to rise. c. fewer savings are available for consumers and investors to borrow. d. interest rates tend to fall to low levels. ANSWER: c 247. What is crowding out? a. a reduction in consumption by borrowers when those who pay cash can buy goods and services first b. a reduction in production that results from reserving land to remain in its natural state c. a reduction in consumption and private investment when government borrowing rises d. an increase in interest rates following a reduction in the supply of loanable funds ANSWER: c 248. When interest rates rise, what happens in the bond market? a. The prices of bonds rise. b. The prices of bonds fall. c. The demand for bonds rises. d. The supply of bonds falls. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 9 249. Suppose the face value of a bond is $5,000 and the current interest rate is 7%. What is the price of the bond if it is a zero-coupon bond? a. $4,367.19 b. $4,672.90 c. $4,996.50 d. $5,350.00 ANSWER: b 250. What is the relationship between interest rates and bond prices? a. Bond prices rise regardless of whether interest rates rise or fall. b. They move in the same direction with a constant level of difference between them. c. They move in the same direction with accelerating differences. d. They move in opposite directions. ANSWER: d 251. A share of stock provides its owner with: a. a loan to be repaid from future profits. b. reduced or preferential interest rates on loans. c. a loan to fund capital investments. d. partial ownership in a company. ANSWER: d 252. Financial intermediation can break down because of: a. low inflation. b. stable inflation. c. government controls on interest rates. d. private ownership of banks. ANSWER: c 253. Which is NOT a direct result of poorly developed or corrupt financial intermediaries within a country? a. smaller markets for loans b. higher government budget deficits c. less effective use of savings d. less investment ANSWER: b 254. Financial intermediation can break down because of: a. the government granting property rights. b. free adjustments of interest rates in the loanable funds market. c. bank panics. Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 9 d. a high savings rate. ANSWER: c 255. During a financial crisis in the early 2000s, the government of Argentina partially froze bank accounts for a year. Given the supply of savings and the demand to borrow functions, we would expect this action to cause the interest rate to: a. increase and borrowing to increase. b. increase and borrowing to decrease. c. decrease and borrowing to decrease. d. decrease and borrowing to increase. ANSWER: b 256. Insecure property rights in bank account deposits typically lead to a(n): a. increase in the supply of savings. b. decrease in the supply of savings. c. increase in the demand to borrow. d. decrease in the demand to borrow. ANSWER: b 257. When governments freeze bank accounts, they fail to: a. regulate the banking industry. b. guarantee savings accounts. c. promote consumption and spending. d. provide secure property rights. ANSWER: d 258. To be binding and effective, an interest rate ceiling must: a. shift the supply of savings function outward. b. shift the demand to borrow function outward. c. be above equilibrium. d. be below equilibrium. ANSWER: d 259. A binding and effective interest rate ceiling will lead to a(n): a. higher return on saving. b. increase in savings. c. shift in the demand for borrowing curve. d. reduction of savings. ANSWER: d 260. If the government imposes an interest rate ceiling below the equilibrium interest rate in the loanable funds market, then the: Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 9 a. quantity of savings supplied will be less than the quantity of loanable funds demanded. b. quantity of savings supplied will be more than the quantity of loanable funds demanded. c. quantity of savings supplied will be equal to the quantity of loanable funds demanded. d. ceiling will have no effect on the quantity of savings supplied and the quantity of loanable funds demanded. ANSWER: a 261. What is the most harmful consequence to GDP from interest rate ceilings? a. Lenders cannot earn a normal market return. b. Investment falls, dragging down GDP and future growth. c. Consumption increases and savings get too high. d. A surplus of savings occurs. ANSWER: b 262. A binding and effective interest rate ceiling creates a(n) _____ loanable funds. a. shortage of b. surplus of c. equilibrium quantity of d. increase in ANSWER: a 263. A ceiling on interest rates results in a(n): a. surplus of loanable funds. b. shortage of loanable funds. c. decrease in the demand for borrowing. d. increase in the supply of loanable funds. ANSWER: b 264. When banks that the government owns or heavily influences engage in politicized lending: a. economic growth increases. b. everyone benefits. c. they are less likely to channel loanable funds to their highest-valued uses. d. the return to saving increases. ANSWER: c 265. The larger the fraction of government-owned banks a country has the: a. slower its growth rate of GDP per capita. b. faster its growth rate of GDP per capita. c. more volatile its growth rate of GDP per capita. d. more loans go to their highest-valued uses. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 9 266. In the early years of the Great Depression, what percentage of banks failed in the United States? a. less than 10% b. about 25% c. around 50% d. over 80% ANSWER: c 267. According to former Fed chairman and economist Ben Bernanke, bank failures during the onset of the Great Depression: a. are urban legends. b. made it harder for households, farmers, and small firms to get credit, worsening the recession. c. increased the rate of investment, which ultimately got the United States out of depression. d. were not as harmful as the stock market crash. ANSWER: b 268. Countries that have good financial intermediaries: a. have savings that are used less effectively. b. channel fewer savings into funding for investments in capital. c. have smaller loan markets. d. make more good investments. ANSWER: d 269. The reasons for financial intermediation to be disrupted and fail do NOT include: a. controls on interest rates. b. politicized lending. c. unprotected property rights. d. reductions in the cost of borrowing. ANSWER: d 270. If property rights of savings are not secure, then: a. the government cannot take ownership of private savings. b. interest rates will drop. c. the effectiveness of banks will be enhanced. d. people will be reluctant to save at their local bank. ANSWER: d 271. Usury laws: a. specify what investments loans can cover. b. specify what sources of funds can be used for loans. c. set price ceilings on interest rates. d. set price floors on interest rates. Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 9 ANSWER: c 272. What results when a price ceiling is placed on interest rates in the loanable funds market? a. shortage of loanable funds b. surplus of loanable funds c. decrease in demand for loanable funds d. increase in interest rates ANSWER: a 273. What is NOT a common cause of the failure of financial intermediaries? a. usury laws b. politicized lending c. property rights enforcement d. economic and banking panics ANSWER: c 274. What problems can usury laws create in the loanable funds market? a. shortages b. surpluses c. restrictions on supply d. restrictions on demand ANSWER: a 275. Which would likely cause a shortage in the loanable funds market? a. higher interest rates b. an economic panic c. insecure property rights on physical capital d. strict limits on interest rates ANSWER: d 276. A leverage ratio is the ratio of: a. equity to debt. b. debt to equity. c. unpaid mortgage to equity. d. equity to unpaid mortgage. ANSWER: b 277. Economists call the process in which institutions bundle bank loans together and sell the bundles as financial assets: a. securitization. b. grouping. Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 9 c. aggregation. d. consolidation. ANSWER: a 278. Critics of securitization argue that, leading up to the housing crisis of 2008, banks often: a. failed to research their borrowers properly. b. offered interest rates that were too high. c. did not sell off enough loans in private markets. d. sold securitized assets to sovereign wealth funds. ANSWER: a 279. Lehman Brothers was which type of an institution? a. a commercial bank b. an insurance company c. an investment bank d. a pension fund manager ANSWER: c 280. The shadow banking system does NOT include: a. hedge funds. b. money market funds. c. investment banks. d. commercial banks. ANSWER: d 281. Which did NOT contribute to the financial crisis of 2007–2008? a. highly leveraged investment banks b. highly leveraged homeowners c. fear on the part of short-term lenders d. high interest rates ANSWER: d 282. If the down payment for a $250,000 home is $50,000 and the mortgage is $200,000, the leverage ratio is: a. 0.25. b. 1.25. c. 4.00. d. 5.00. ANSWER: c 283. A higher leverage ratio means that the: a. firm has a lower risk of defaulting on loans. Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 9 b. firm's debts exceed the value of its assets. c. firm is better able to securitize its assets. d. firm is at a greater risk of becoming insolvent. ANSWER: d 284. If you buy a $500,000 house with $50,000 down, the leverage ratio is: a. 5. b. 9. c. 10. d. 50. ANSWER: b 285. When Lehman Brothers went bankrupt in 2008, most of Lehman's managers: a. also went bankrupt. b. were unaffected. c. lost some money but still ended up being very rich. d. committed suicide. ANSWER: c 286. Because of high leverage, during the financial crisis of 2007–2008 losses on mortgages: a. pushed banks toward insolvency. b. were fully hedged against. c. increased the amount of credit available in the economy. d. prevented a financial meltdown. ANSWER: a 287. Which is NOT a reason for the financial crisis of 2007–2008? a. increases in the leverage ratios for financial intermediaries b. collapse of the shadow banking system c. excessive securitization of liabilities d. excessive confidence about the stock market ANSWER: d 288. A firm can become insolvent with a small decrease in its asset value if it has: a. more assets. b. a high collateral-to-debt ratio. c. a high leverage ratio. d. more equity. ANSWER: c 289. Economists call the process of bundling loans together and selling them on the market as financial assets: Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 9 a. collateralization. b. crowding out. c. securitization. d. arbitrage. ANSWER: c 290. Suppose a couple purchase a home that is valued at $420,000. The balance on their mortgage loan is $300,000. What is the value of their owner's equity? a. 28.6% b. 40.0% c. −$120,000 d. $120,000 ANSWER: d 291. Suppose a couple purchase a home that is valued at $420,000. The balance on their mortgage loan is $300,000. What is their leverage ratio? a. 28.6% b. 1.4 c. 2.5 d. $120,000 ANSWER: c 292. Suppose that 10 years ago a couple purchased a home for $300,000 with a $100,000 down payment and a $200,000 mortgage. Currently the couple still owe $154,000 on their mortgage and the home is valued at $400,000. What is their current owner's equity? a. 0.6 b. 2.0 c. $146,000 d. $246,000 ANSWER: d 293. Suppose that 10 years ago a couple purchased a home for $300,000 with a $100,000 down payment and a $200,000 mortgage. Currently the couple still owe $154,000 on their mortgage and the home is valued at $400,000. What is their current leverage ratio? a. 0.3 b. 0.4 c. 0.6 d. 2.0 ANSWER: c 294. Suppose that four firms each have assets worth $1,000,000. The answer options give the current value and trend of each firm's liabilities. Which firm is currently insolvent? Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 9 a. Firm A: Liabilities = $1,000,000 and steady b. Firm B: Liabilities = $1,200,000 and steady c. Firm C: Liabilities = $800,000 and rising d. Firm D: Liabilities = $1,000,000 and falling ANSWER: b 295. Suppose a firm has assets valued at $5,000,000 and liabilities of $4,800,000. If assets fall in value by 3%, the firm will be _____ with an equity of _____. a. solvent; $50,000 b. solvent; $344,000 c. insolvent; −$50,000 d. insolvent; −$344,000 ANSWER: a 296. Suppose a firm has assets valued at $5,000,000 and liabilities of $4,800,000. If assets fall in value by 5%, the firm will be _____ with an equity of _____. a. solvent; $50,000 b. solvent; $250,000 c. insolvent; −$50,000 d. insolvent; −$250,000 ANSWER: c 297. What does securitizing mortgage loans mean? a. Borrowers have been carefully evaluated for default risk. b. Financial intermediaries charge extra fees to borrowers to cover any potential defaults. c. A lender bundles the mortgage loans and sells them on the market as financial assets. d. There is collateral on the mortgage loans. ANSWER: c 298. Besides coordinating between savers and borrowers in the loanable funds market, financial intermediaries: a. invest in capital, establish government policy, and make payments. b. collect savings, evaluate investments, and diversify risk. c. evaluate investments, establish government policy, and invest in capital. d. diversify risk, invest in capital, and smooth investment. ANSWER: b 299. What is the future value of $3,000 invested at 6% for two years? a. $3,060.60 b. $3,120.00 c. $3,360.00 d. $3,370.80 Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 9 ANSWER: d 300. The future value of a bond is: a. its coupon value. b. its face value. c. the reciprocal of its interest rate. d. the inverse of the interest rate. ANSWER: b 301. The Lehman Brothers bankruptcy was, at the time, the largest in history. a. True b. False ANSWER: a 302. Financial intermediation may fail if something causes a(n): a. increase in the effectiveness of saving. b. reduction in the costs of intermediation. c. increase in the politicization of lending. d. increase in the volume of intermediation. ANSWER: c 303. Suppose a homeowner owes $200,000 on a house that is worth $220,000. What is the homeowner's leverage ratio? a. 10 b. 1 c. 11 d. 22 ANSWER: a 304. Suppose a homeowner owes $400,000 on a house that is worth $450,000. What is the homeowner's leverage ratio? a. 10 b. 8 c. 11 d. 80 ANSWER: b 305. Suppose a homeowner puts $30,000 down on the purchase of a $120,000 home and mortgages the rest. What is the homeowner's leverage ratio? a. 3 b. 30 c. 4 Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 9 d. 40 ANSWER: a 306. Suppose a homeowner puts $40,000 down on the purchase of a $120,000 home and mortgages the rest. What is the homeowner's leverage ratio? a. 3 b. 30 c. 2 d. 20 ANSWER: c 307. Securitization is when: a. the federal government guarantees loans. b. a loan has a fixed interest rate. c. loans have collateral. d. lenders bundle loans together into a pool and then sell claims to the pool as marketable securities. ANSWER: d 308. If a bank bundles its loans and sells marketable claims on the pool, economists call this: a. leverage. b. collateral. c. securitization. d. equitization. ANSWER: c 309. Savings are necessary for capital accumulation. a. True b. False ANSWER: a 310. If someone buys a bond, economists would say that person is saving, not investing. a. True b. False ANSWER: a 311. If someone buys a bond, economists would say that person is investing, not saving. a. True b. False ANSWER: b 312. Investment occurs when a person's income exceeds her spending on consumption goods. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 9 b. False ANSWER: b 313. Saving occurs when a person's income exceeds their spending on consumption goods. a. True b. False ANSWER: a 314. Most individuals want to smooth consumption. a. True b. False ANSWER: a 315. Most individuals prefer to consume as much as their income allows in every period. a. True b. False ANSWER: b 316. Time preference is the same from person to person. a. True b. False ANSWER: b 317. A person who is impatient tends to save less. a. True b. False ANSWER: a 318. A person who is patient tends to save less. a. True b. False ANSWER: b 319. The supply and demand of loanable funds determine the interest rate. a. True b. False ANSWER: a 320. The interest rate is simply another example of a market price. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 9 321. The interest rate is a market quantity. a. True b. False ANSWER: b 322. The interest rate is a market price. a. True b. False ANSWER: a 323. In the lifecycle theory, a worker does MOST of their borrowing during their prime working years. a. True b. False ANSWER: b 324. In the lifecycle theory, a worker does MOST of their borrowing during their early working years. a. True b. False ANSWER: a 325. Individuals borrow to smooth consumption. a. True b. False ANSWER: a 326. The lower the interest rate, the lower the quantity of funds demanded. a. True b. False ANSWER: b 327. The lower the interest rate, the higher the quantity of funds demanded in the loanable funds market. a. True b. False ANSWER: a 328. The interest rate is the cost of borrowing. a. True b. False ANSWER: a 329. An increase in the interest rate leads to a decrease in the quantity of funds demanded to borrow. Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 9 a. True b. False ANSWER: a 330. An increase in the interest rate leads to an increase in the quantity of funds demanded to borrow. a. True b. False ANSWER: b 331. Businesses borrow when they expect the return on their investment to be greater than the interest rate. a. True b. False ANSWER: a 332. A result of an increase in consumption without any change in income is an increase in the equilibrium interest rate. a. True b. False ANSWER: a 333. A surplus of loanable funds will decrease supply in the loanable funds market, hence lowering interest rates. a. True b. False ANSWER: b 334. Trading in the market for loanable funds determines the equilibrium interest rate. a. True b. False ANSWER: a 335. An increase in domestic borrowing today will lead to an increase in the supply of loanable funds and an increase in domestic interest rates. a. True b. False ANSWER: b 336. An increase in the supply of savings increases borrowing and reduces the interest rate. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 9 337. If the government ceases to tax income earned on savings, other things equal, it is likely that interest rates will rise. a. True b. False ANSWER: b 338. If the government ceases to tax income earned on savings, other things equal, it is likely that interest rates will fall. a. True b. False ANSWER: a 339. If the government offers an investment tax credit, other things equal, it is likely that interest rates will rise. a. True b. False ANSWER: a 340. If the government offers an investment tax credit, other things equal, it is likely that interest rates will fall. a. True b. False ANSWER: b 341. One function of banks is to spread risk. a. True b. False ANSWER: a 342. The source of the supply of loanable funds in the loanable funds market is banks and other financial intermediaries. a. True b. False ANSWER: b 343. The bond market allows both corporations and governments to borrow directly from the public instead of through banks. a. True b. False ANSWER: a 344. Some U.S. Treasury bonds have terms of 30 years. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 9 ANSWER: a 345. Treasury bills (T-bills) have a term of 30 years. a. True b. False ANSWER: b 346. Interest rates and bond prices move in the same direction. a. True b. False ANSWER: b 347. Interest rates and bond prices move in opposite directions. a. True b. False ANSWER: a 348. Government borrowing crowds out private savings because of its effects on the loanable funds market. a. True b. False ANSWER: b 349. The buyer of a bond is a lender. a. True b. False ANSWER: a 350. The buyer of a bond is a borrower. a. True b. False ANSWER: b 351. The issuer of a bond is a lender. a. True b. False ANSWER: b 352. The issuer of a bond is a borrower. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 70
Name:
Class:
Date:
Chapter 9 353. Bonds sold by the U.S. government have almost zero default risk. a. True b. False ANSWER: a 354. T-bills are usually the safest form of government-issued debt instruments. a. True b. False ANSWER: a 355. When a bond comes due, the possibility that the borrower will not be able to pay is called nonpayment risk. a. True b. False ANSWER: b 356. Collateral is something of value that by agreement becomes the property of the lender if the borrower defaults. a. True b. False ANSWER: a 357. Crowding out occurs when private individuals and firms increase investment and consumption at the same time that the government increases borrowing. a. True b. False ANSWER: b 358. A fortunate investor purchases a bond with a 10% return and watches interest rates fall to 5%. a. True b. False ANSWER: a 359. Bond prices will increase if interest rates increase. a. True b. False ANSWER: b 360. Arbitrage means that financial assets with different levels of risk can have the same returns. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 71
Name:
Class:
Date:
Chapter 9 361. Bond prices move inversely with interest rates and time spans to maturity. a. True b. False ANSWER: a 362. A share of stock is a certificate of ownership in a corporation. a. True b. False ANSWER: a 363. An IPO represents the second time a stock is sold after being released by the government. a. True b. False ANSWER: b 364. An IPO represents the first time a stock is made available to the public. a. True b. False ANSWER: a 365. A ceiling on interest rates is likely to result in a surplus in the loanable funds market. a. True b. False ANSWER: b 366. A ceiling on interest rates is likely to result in a shortage in the loanable funds market. a. True b. False ANSWER: a 367. Studies have shown that the larger the fraction of government-owned banks in a country, the faster the country's rate of per capita GDP growth. a. True b. False ANSWER: b 368. A decrease in the leverage ratio for financial intermediaries contributed to the financial crisis of 2007– 2008. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 72
Name:
Class:
Date:
Chapter 9 369. An insolvent firm has assets that exceed liabilities. a. True b. False ANSWER: b 370. The fall in housing prices that began in 2006 caused many people to default on their mortgages. a. True b. False ANSWER: a 371. A cause of the financial crisis in 2007–2008 was high inflation. a. True b. False ANSWER: b 372. Which event would cause the equilibrium interest rate in the market for loanable funds to increase? a. a rightward shift in the demand for loanable funds b. a downward shift in the demand for loanable funds c. a rightward shift in the supply of loanable funds d. a downward shift in the supply of loanable funds ANSWER: a 373. Which event would cause the equilibrium interest rate in the market for loanable funds to decrease? a. an upward shift in the demand for loanable funds b. an upward shift in the supply of loanable funds c. a leftward shift in the demand for loanable funds d. a leftward shift in the supply of loanable funds ANSWER: c 374. What could be the effect of a ceiling on interest rates? a. It would create a surplus of savings. b. It would create a shortage of savings. c. There would be no effect on the equilibrium level of savings. d. It would create either a shortage or a surplus of savings, depending on whether the ceiling is high or low. ANSWER: b 375. The study of financial institutions such as banks, stock markets, and bond markets is usually included in finance courses. Why are these finance topics covered in a macroeconomics course? ANSWER: Banks, bond markets, and stock exchanges bridge the gap between savers and borrowers. Decisions about savings and investment in large part determine macroeconomic outcomes. It is essential to include these institutions as part of our model to fully understand how the macroeconomy works, and what possible policy measures might be helpful when it doesn't. Copyright Macmillan Learning. Powered by Cognero.
Page 73
Name:
Class:
Date:
Chapter 9 376. Explain how the AIDS crisis in Africa affects consumption smoothing. ANSWER: AIDS has dramatically reduced life expectancy in southern Africa. As a result, many poorer Africans do not save much because, sadly, they expect to die young. There is little incentive to save during peak earning years to protect one's lifestyle in old age if the perceived probability of living to an old age is low.
377. Briefly discuss the four major factors that determine the supply of savings. ANSWER: feedback: 1) Most people want to keep their level of consumption roughly constant over the course of their lives. To do this, they save during peak earning years and use those savings to maintain consumption in their retirement years. 2) They also borrow when young because people are impatient. They have different levels of impatience, or time preferences, but the more impatient a person, the more likely that person's savings rate will be low. 3) Marketing and psychology also play a role. People are more likely to save if saving seems natural or if it is the default option. Behavioral economics studies how people may not be entirely rational when making decisions, including decisions about saving. 4) The quantity of savings also depends on the interest rate. The higher the interest rate, the higher the opportunity cost of consumption, so the higher the quantity of savings supplied.
378. Why do businesses often borrow funds to finance large investments in physical capital? ANSWER: Borrowing plays an important role in the economy. Many new businesses could not get under way without borrowing. Even large, established businesses may not have the ability to finance projects in-house. The ability to borrow greatly increases the ability to invest and higher investment increases the standard of living and the rate of economic growth.
379. Briefly describe the market for loanable funds. Be sure to indicate who participates in this market and what outcomes the market determines. ANSWER: The market for loanable funds is a financial market where borrowers and lenders interact to exchange funds through loans. The participants in this market include individuals, households, businesses, and government entities. Borrowers in the market for loanable funds seek to obtain funds to finance investments, to buy big-ticket items like houses and cars, and to finance government deficits. Lenders can be individuals, banks, financial institutions, or other entities that have excess funds available. They supply funds with the expectation of receiving interest income in return. The outcomes determined in the market for loanable funds include the interest rate and the quantity of loanable funds exchanged. The interaction of the supply and demand for loanable funds determines the interest rate. The quantity of loanable funds exchanged in the market depends on the willingness of borrowers to demand loans and the availability of funds from lenders. When the demand for loans is high relative to the supply of funds, it puts upward pressure on interest rates. Conversely, when the supply of funds is high relative to the demand for loans, it puts downward pressure on interest rates.
380. Using the loanable funds market, explain and graphically illustrate the effect of a government running larger budget deficits. Be sure to indicate any curve shifts and interest rate effects that result from this change in policy. ANSWER: See Figure 29.10 (9.10). When the government borrows more money, the demand for loanable funds curve shifts to the right, pushing interest rates up. As a result, private consumption and investment fall, which economists call crowding out. The higher interest rates create an incentive for people to save more, which reduces consumption. The higher interest rates also mean that some investments and other projects are no longer profitable, so at a higher interest rate, private borrowing falls.
381. Why are investment tax credits usually temporary? ANSWER: The government uses such credits to boost investment in a recession. Making them temporary pushes businesses to undertake projects sooner rather than later in an attempt to shorten the recession.
382. Use a figure of the loanable funds market to explain, briefly, what will happen to the equilibrium interest rate and the equilibrium quantity of savings and borrowing if an improvement in health-care services increases people's life expectancy. Copyright Macmillan Learning. Powered by Cognero.
Page 74
Name:
Class:
Date:
Chapter 9 ANSWER: See Figure 29.7 (9.7). Increased life expectancy means people will save more to smooth consumption over a longer period. The supply of loanable funds curve will shift to the right, pushing the interest rate lower and the equilibrium quantity of loanable funds higher.
383. Explain how interest is the price paid for the use of funds in the loanable funds market. ANSWER: Savers postpone the use of some of their income, enabling borrowers to undertake their projects more quickly. Savers are providing a service to borrowers and deserve to be compensated for that service. Borrowers pay interest to get access to savers' funds.
384. With the aid of a diagram for the loanable funds market, briefly discuss the crowding-out effect of an increase in government spending financed by selling bonds. ANSWER: See Figure 29.10 (9.10). When the government sells more bonds, it shifts the demand for loanable funds curve to the right. This pushes the interest rate higher, causing some consumers to move more of their income into savings, reducing consumption. The higher interest rate also means investment projects that cleared the hurdle at the previous interest rate will no longer be funded because the higher interest rate is above the expected return. As the government borrows more, both consumption and investment fall, or are crowded out.
385. Explain how an increase in government borrowing reduces private consumption spending and investment spending. What is this effect called? ANSWER: When the government borrows more, it shifts the demand for loanable funds curve to the right. This pushes the interest rate higher, causing some consumers to move more of their income into savings, reducing consumption. The higher interest rate also means investment projects that cleared the hurdle at the previous interest rate will no longer be funded because the higher interest rate is above the expected return. As the government borrows more, both consumption and investment fall. We call this process crowding out.
386. Imagine that you want to buy a zero-coupon bond that will pay $1,000 in one year. If the current interest rate is 5% on comparable bonds, what price should you expect to pay for the bond? ANSWER: For a one-year zero-coupon bond, the price is the face value divided by one plus the interest rate. In this case, P = $1,000 ÷ 1.05 = $952.38.
387. Suppose you own a $10,000 zero-coupon bond that you purchased for $9,100. What is the rate of return on this bond? ANSWER: The rate of return is the expected gain divided by the purchase price, usually expressed as a percentage: ($10,000 − $9,100) ÷ $9,100 = 9.8%.
388. Explain why there is an inverse relationship between bond prices and the bond interest rate. ANSWER: Suppose the rate of return on a bond initially matches the going interest rate. If interest rates fall, the rate of return on the bond makes it more attractive than interest-bearing accounts, so the savers will bid up the price of the bond. If interest rates rise, the return on the bond is now lower than the rate earned on interest-bearing accounts. Savers will not be as interested in the bond, and its price will fall.
389. Briefly discuss four factors that can cause financial intermediation to fail. ANSWER: 1) Insecure property rights make savers reluctant to put their money into banks over which the government may later assume control. Businesses may be reluctant to undertake expensive investment projects if they are unsure about receiving the benefits. Stock markets may be unattractive options for savers if there is insufficient protection of their claims. 2) Interest rate controls cause shortages of loanable funds, and the funds that are available may not go to the best projects. Some of the projects lured into demanding funds by the low interest rate did not have an expected return at least as high as the equilibrium interest rate. This means some of the scarce funds will almost certainly go to inferior projects. 3) Government-owned banks and banks heavily influenced by the government replace objective evaluations of proposed Copyright Macmillan Learning. Powered by Cognero.
Page 75
Name:
Class:
Date:
Chapter 9 projects with a desire to maximize profits with goals of empowering the rulers and helping their supporters. 4) Banking systems that have a history of failures and other problems lose the confidence of savers, making bank runs and the subsequent upheaval in the wider economy more likely. Savers may also turn to non-traditional saving methods or try to move their funds out of the country.
390. How do interest rate controls have effects similar to price ceilings? Use a graph to support your answer. ANSWER: See Figure 29.12 (9.12). A mandated interest ceiling below the equilibrium interest rate will reduce the quantity of loanable funds supplied and increase the quantity demanded. The result will be a shortage in the market. The borrowers enticed by the lower interest rate will probably get some of the funds available, even though their projects do not benefit society as much as the projects that do not receive funding but would have without the usury law.
391. Besides decreasing the number of banks, how do bank failures hinder financial intermediation? ANSWER: Without insurance of the sort the FDIC offers, people's savings would be wiped out, immediately reducing the supply of loanable funds. People may be reluctant to put or keep their money in banks for fear of further failures. Surviving banks may become reluctant to make loans to solidify their position. The reduced spending stemming from the loss of wealth means that revenues will fall for businesses, spreading the economic problems further.
392. How does politicized lending cause banks to fail as financial intermediaries? ANSWER: Government-owned or -controlled banks are useful to authoritarian regimes that use the banks to direct capital to political supporters. Government-owned banks and banks heavily influenced by the government replace objective evaluations of proposed projects with a desire to maximize profits with goals of empowering the rulers and helping their supporters. Using scarce capital to promote political ends instead of the projects that have the highest returns hurts growth rates and the society's standard of living.
393. Emmett has a choice between two bonds—Bond A and Bond B. Both bonds have a future value of $10,000. Bond A earns 3% interest and Bond B earns 5% interest, and both bonds have a term to maturity of 3 years. a. Calculate the PV (present value) of the two bonds. b. If Emmett decides to ignore the relative risk of the two bonds and is only interested in locking up the least amount of money in a bond today, which bond will he choose? c. From this example, what can you say about the relationship between bond prices and interest rates? ANSWER: a. Calculating the PV of Bond A: FV = $10,000, r = 3% = 0.03, n = 3 years
PV of Bond A = $10,000 ÷ (1 + 0.03)3 PV of Bond A ≈ $8,744.09 Calculating the PV of Bond B: FV = $10,000, r = 5% = 0.05, n = 3 years PV of Bond B = $10,000 ÷ (1 + 0.05)3 PV of Bond B ≈ $8,535.48 b. In terms of choosing the bond that requires locking up the least amount of money today, Emmett would choose Bond B since it has a lower present value ($8,535.48) compared to Bond A ($8,744.09). This means that Emmett would need to invest less upfront to receive the same future value of $10,000. c. From this example, we can observe an inverse relationship between bond prices and interest rates. When interest rates increase, the present value of a bond decreases, making it cheaper to buy. Conversely, when interest rates decrease, the present value of a bond increases, making it more expensive to buy.
Copyright Macmillan Learning. Powered by Cognero.
Page 76
Name:
Class:
Date:
Chapter 10 1. Which statement is TRUE? a. To reduce portfolio risk, you should buy the majority of stocks from the industry that you work in. b. The riskiest stocks are those that move up and down the most with the overall economy. c. NASDAQ is composed of fewer stocks than the S&P 500. d. The least risky assets are positively correlated with your portfolio. ANSWER: b 2. Which statement is TRUE? a. In the long run, stock returns are higher than bond returns. b. Passive investments underperform active investments. c. One can earn higher returns by investing in funds with high loading costs. d. The efficient markets hypothesis only holds in the short run. ANSWER: a 3. Which statement is TRUE? a. One should avoid investing in bonds because they give lower returns than do stocks. b. If you need your money for something in two years, avoid putting it in stocks. c. Retirees should allocate more of their investments to stocks. d. Recent college graduates should allocate more of their money to bonds than to stocks. ANSWER: b 4. Which statement is TRUE? a. Investing in art is more lucrative than investing in stocks and bonds. b. Investing in bonds is more lucrative than investing in stocks. c. Investing in real estate is more lucrative than investing in stocks. d. Because there is a fun factor associated with owning art, the returns to investing in art are reduced by this fun factor.
ANSWER: d 5. John Stossel's dart-throwing experiment showed that: a. picking stocks at random can outperform the stock picks of major Wall Street experts. b. Wall Street experts have inside information, which makes beating their stock picks difficult. c. companies with longer names are likely to outperform market averages. d. economic theory regarding the stock market is flawed. ANSWER: a 6. John Stossel's investment strategy of _____ beats 90% of the experts' portfolios. a. buying low-priced but high-valued stocks b. picking the highest-priced stocks c. picking stocks by throwing darts at a newspaper's stock page d. buying stocks of companies with newly released products Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 10 ANSWER: c 7. Which is an example of passive investing? a. investing in one specific stock b. investing in a mutual fund that tries to mimic the S&P 500 c. investing in a mutual fund that is actively managed by a fund manager d. researching many different stocks and accumulating your own portfolio of investments ANSWER: b 8. Which statement is TRUE regarding active investing? a. Active investing typically has higher average returns than passive investing. b. Active investing and passive investing typically have equal returns on average. c. Active investments typically have higher fees and lower returns on average than passive investments. d. Active investing has been shown to be the only type of investing that can consistently "beat the market." ANSWER: c 9. The manager of a passive mutual fund: a. invests only in risk-free assets like Treasury bonds. b. reacts slowly to changes in stock markets. c. does nothing. d. tries to track a broad stock market index. ANSWER: d 10. When a mutual fund attempts to mimic a broad stock market index, the mutual fund is a(n): a. passive fund. b. active fund. c. tracking fund. d. long-term fund. ANSWER: a 11. When a fund manager tries to pick stocks to outperform the market averages, the mutual fund is called a(n): a. active fund. b. passive fund. c. random walk fund. d. loaded fund. ANSWER: a 12. A comparison of the historical performance of mutual funds and the S&P 500 suggests that: a. most mutual funds consistently outperform the S&P 500. b. active funds consistently outperform the S&P 500, and passive funds consistently underperform the S&P 500. c. mutual funds outperform the S&P 500 when they are undervalued. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 10 d. mutual funds on average underperform the S&P 500 at least half of the time. ANSWER: d 13. In the Alfred Hitchcock Presents episode "Mail Order Prophet," a man receives mysterious letters that accurately predict the movements of certain stocks. After being correct several times in a row, the man, upon the letter's request, sends money to the market prophet in exchange for his latest stock tip. At the end of the episode, we learn that the "prophet" is actually a con man who sends a letter to many people with half the letters predicting a stock will increase and the other half predicting it will decrease. How does this Hitchcock episode illustrate one particular theory of Warren Buffet's wealth? a. It was very difficult to send out all those letters; hard work pays off. b. Like the letters in the story, Buffet happened to be right several times in a row. c. Buffet conned his way to the top, using insider information to become wealthy. d. Diversification is an important way to protect investments and build wealth. ANSWER: b 14. A mutual fund is: a. an investment fund that pools money from many investors and invests that money in the stocks of many firms. b. generally a share of company stock owned by multiple people. c. a company that specializes in lending new businesses money. d. the source of funds that banks use to make home and automobile loans. ANSWER: a 15. An active fund is a fund that: a. uses stock-picking techniques to buy stocks that are projected to beat market averages. b. invests in the most actively traded stocks. c. avoids investing in low-return assets, such as bonds and real estate. d. is diversified in stocks, bonds, currency, and precious metals. ANSWER: a 16. A passive fund is a fund that: a. uses dividend reinvestment strategies to seek long-term capital appreciation. b. tries to time the market when buying and selling stocks. c. uses technical analysis to pick winning stocks. d. invests in the companies that constitute a broad market index. ANSWER: d 17. Which of these statements is TRUE? a. Active funds perform better than passive funds. b. Passive investing in the S&P 500 Index beats the majority of all mutual funds. c. Warren Buffet is skilled at buying and selling and so always beats the market. d. None of these statements are true. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 10 18. Which of these statements is TRUE? a. Passive funds perform better than active funds. b. Passive investing in the S&P 500 Index underperforms the majority of all mutual funds. c. Warren Buffet is skilled at buying and selling and so always beats the market. d. All of these statements are true. ANSWER: a 19. Passively investing in the S&P 500 Index: a. provides rates of return that are approximately 5% higher than the Dow Jones Industrial Average Index. b. beats the rate of returns of the majority of all mutual funds in a typical year. c. is a strategy that is less profitable over the long term than investing in actively managed funds. d. provides rates of return that are about 20% lower than the Dow Jones Industrial Average Index. ANSWER: b 20. Suppose 80 experts flip a coin to predict whether the prices of stocks will rise or fall for the year. After four years, how many experts will have correctly predicted the direction of the stock market? a. 13 b. 8 c. 33 d. 5 ANSWER: d 21. Suppose 200 experts flip a coin to predict whether the price of stocks will rise or fall next year. After six years, how many experts will have correctly predicted the direction of the stock market? a. 25 b. 3 c. 13 d. 50 ANSWER: b 22. Suppose there are 560 stock market investors trying to predict whether the market will go up or down, and each year exactly half of them guess right. How many of these investors, on average, will be right three years in a row? a. 280 b. 140 c. 70 d. 35 ANSWER: c 23. Suppose there are 720 stock market investors trying to predict whether the market will go up or down, and each year exactly half of them guess right. How many of these investors, on average, will be right four years in Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 10 a row? a. 360 b. 180 c. 90 d. 45 ANSWER: d 24. The investment approach of one of PIMCO's mutual funds "leverages PIMCO's decades of experience investing in global banks to capture opportunities in bank securities around the world—an attractive opportunity set that may offer the potential for higher yields with lower interest rate sensitivity than traditional fixed income." This fund is a(n): a. active fund. b. passive fund. c. asset fund. d. market fund. ANSWER: a 25. The investment approach of one of Invesco's mutual funds is: "[This fund] . . . includes 100 of the largest domestic and international nonfinancial companies listed on the NASDAQ Stock Market based on market capitalization. The Fund and the Index are rebalanced quarterly and reconstituted annually." This fund is a(n): a. active fund. b. passive fund. c. asset fund. d. market fund. ANSWER: b 26. The S&P 500 Index fund is a(n) _____ fund. a. active b. passive c. dormant d. moving ANSWER: b 27. A mutual fund run by a manager who picks stocks is termed a(n) _____ fund. a. active b. passive c. dormant d. moving ANSWER: a 28. The S&P 500 Index fund performs _____ active funds. a. worse than most Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 10 b. worse than all c. better than most d. better than all ANSWER: c 29. _____ mutual fund managers can consistently beat the market average. a. All b. No c. Relatively many d. Relatively few ANSWER: d 30. Which of these is TRUE of mutual funds? I. Active funds generally give higher returns than passive funds. II. Most mutual funds generally give higher returns than broad stock indexes. a. I only b. II only c. both I and II d. neither I nor II ANSWER: d 31. Which refers to a mutual fund for which its manager buys and sells stocks regularly in order to maximize the fund's returns? a. liquid fund b. efficient market fund c. active fund d. passive fund ANSWER: c 32. Which statement is TRUE about Warren Buffett? a. His past performance has been purely a result of luck. b. He has not been able to beat the market at any time. c. He always beats the market using inside information. d. It has become harder for him to beat the market over time. ANSWER: d 33. Which of these is NOT an advantage of saving your money in a mutual fund? a. You have professional fund management. b. Mutual funds have always outperformed the S&P 500. c. People with smaller amounts of money can diversify risk. d. All of these are advantages of saving your money in a mutual fund. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 10 ANSWER: b 34. Figure: Mutual Funds
From this mutual funds figure (John Stossel's dart-throwing experiment), we can say that: a. mutual funds typically outperform the S&P 500. b. mutual fund managers are no smarter than monkeys. c. knowledge of stock market behavior does not guarantee its predictability. d. mutual funds can never outperform the stock market. Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 10 ANSWER: c 35. The major difference between active and passive mutual funds is that active funds: a. are classed as mutual funds, but passive funds are not. b. involve stock picks by managers, while passive funds involve stock picks by the investors themselves. c. are more risky than passive funds. d. involve stock picks by managers, while passive funds match the movements of a broad market index. ANSWER: d 36. In a market of 2,000 investors who each year flip a coin to predict market success or failure, how many investors will have been consistently right after five years? (Assume the coin tosses yield heads exactly 50% of the time.) a. 31 b. 62 c. 500 d. 1,000 ANSWER: b 37. Which is NOT helpful in stock investment strategies? a. buying undervalued stocks b. holding stocks for a long period of time c. lucky picks d. putting all investment funds in high-risk stocks ANSWER: d 38. Which of these statements is NOT true? a. A mutual fund pools money from many different investors and uses that money to invest in many different
firms. b. Mutual funds that are run by managers who try to pick the best-performing stocks usually outperform the S&P 500. c. Passive mutual funds do not try to select winning stocks; they mimic broader markets like the S&P 500.
d. None of these statements are true. ANSWER: b 39. Which investment strategy is typically more profitable over a long period of time? a. active b. passive c. introversive d. subversive ANSWER: b 40. If each of the approximately 320,000 securities and financial service agents in the United States bet on whether the market would go up or down for each of the next 10 years by flipping a coin, we would expect that Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 10 approximately 312 agents would be right 10 years in a row. This example suggests that: a. it is easy to beat the market averages. b. famous investors like Warren Buffett may have merely been lucky. c. there are above-normal profit opportunities in the stock market. d. investors should just flip a coin to determine stock picks. ANSWER: b 41. A mutual fund pools money from many customers and invests the money in many firms. The fees charged by fund managers are: a. lower in bond funds. b. higher in passive funds. c. lower in passive funds. d. higher in bond funds. ANSWER: c 42. Some skeptical economists say that successful brokers like Warren Buffett are: a. able to see the future. b. just lucky. c. incredibly smart at picking winning stocks. d. likely to remain successful. ANSWER: b 43. Suppose 1,000 experts flip a coin once each year, and half say the market will go up while the other half say the market will go down. After six years, how many experts would have been correct every year? a. 15 b. 62 c. 8 d. 31 ANSWER: a 44. The fact that the majority of stock mutual funds cannot outperform the stock market averages is consistent with the: a. no-free-lunch principle. b. risk-return trade-off principle. c. efficient markets hypothesis. d. active trading hypothesis. ANSWER: c 45. According to the efficient markets hypothesis, stock prices: a. reflect all publicly available information about the stock market. b. reflect all private company information that is known only to company insiders. Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 10 c. contain both public and private information that helps some investors to outperform other investors. d. contain no useful information. ANSWER: a 46. The efficient markets hypothesis implies that in the stock market: a. everyone can earn more than everyone else some of the time. b. no one can systematically earn more than the average market return. c. people with more funds earn higher returns. d. people can use technical analysis to systematically earn high returns. ANSWER: b 47. Which of these statements are TRUE? I. According to the efficient markets hypothesis, stock prices reflect all publicly available information. II. Investors will not outperform the market in the long term. III. Investors who use inside information may outperform the market in the short term. a. I and II only b. I and III only c. II and III only d. I, II, and III ANSWER: d 48. According to the efficient markets hypothesis, the person who MOST likely earns the highest return for holding the stock of Company ABC on a single day is: a. a person who follows a buy-and-hold strategy. b. an active trader who knows the historical prices of ABC. c. ABC's CEO, who has inside information about the company's new projects. d. a person who trades for ABC based on current news events. ANSWER: c 49. One of the problems with investment advice that claims you should buy stock in a certain company or sector of the economy is that: a. no one else knows such advice. b. asset prices likely reflect that information already. c. investment advice is not regulated. d. sellers know less than buyers in the financial markets. ANSWER: b 50. The efficient markets hypothesis implies that an investor: a. cannot systematically outperform the market as a whole over time. b. should rely on publicly available information to outperform the market. c. should buy and sell lower volumes of shares. d. can manage a portfolio and regularly outperform the whole market. Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 10 ANSWER: a 51. Someone who is using information outside the efficient markets hypothesis: a. has information about the aging U.S. population and expects stock for companies that cater to senior citizens to increase in value. b. reads in the newspaper about a merger between two profitable firms and expects the stock prices for these companies to rise. c. while auditing a dishonest company realizes that its profit estimates are greatly inflated and immediately sells their stock in the company. d. hears a rumor that a top bank may be in trouble and decides to sell their stock in that company.
ANSWER: c 52. The only way to beat a well-functioning market and make money in the short run is: I. through the efficient markets hypothesis. II. if one has insider information. III. through extreme speed and foresight. a. I only b. II and III only c. II only d. I, II, and III ANSWER: b 53. Stocks are a good investment if one: I. is prepared to hold them for a while through market fluctuations. II. can buy them immediately after prices have fallen. III. is not averse to risk. a. I only b. I and II only c. I and III only d. I, II, and III ANSWER: c 54. Consider the market for Facebook's stock. What would happen in this market if multiple companies temporarily halted advertising on the platform until Facebook implemented policies that the companies found favorable? a. Facebook's stock price would likely fall. b. Facebook's stock price would likely rise. c. Facebook would issue more stock. d. There would be no change in Facebook's stock price or the quantity of stock issued. ANSWER: a 55. Consider a pharmaceutical company in 2020 that is likely to develop a vaccine for COVID-19. The price of the stock of this company: a. has likely already increased to reflect this development. Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 10 b. should increase in the future, so an investor should buy stock in the company now. c. has likely already decreased to reflect this development. d. should decrease in the future, so an investor should sell stock in the company now. ANSWER: a 56. Consider a pharmaceutical company whose patent for a profitable product will expire in a year. The price of the stock of this company: a. has likely already increased to reflect this development. b. should increase in the future, so an investor should buy stock in the company now. c. has likely already decreased to reflect this development. d. should decrease in the future, so an investor should sell stock in the company now. ANSWER: c 57. Consider a social media company that has acquired another social media platform. The price of the stock of this company: a. has likely already increased to reflect this development. b. should increase in the future, so an investor should buy stock in the company now. c. has likely already decreased to reflect this development. d. should decrease in the future, so an investor should sell stock in the company now. ANSWER: a 58. Which of these statements is TRUE? I. For every transaction in the stock market, there is a buyer and a seller. II. At any point in time, the price of a stock tends to reflect all available public information about the company's future prospects. III. A revolutionary cancer treatment pill will be released next year. An investor will get rich by buying stock in that company now. a. I and II only b. III only c. II and III only d. I, II, and III ANSWER: a 59. An efficient stock market means that: a. it is difficult to outperform the market, since stock prices convey all relevant public information about a company. b. traders with inside information cannot even outperform market averages.
c. new information is slowly reflected in stock prices. d. traders in a market will choose to buy stocks based on gut feelings. ANSWER: a 60. Technical analysis: Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 10 a. looks for patterns in stock prices. b. can systematically beat market averages, according to research economists. c. is useful for predicting when stocks will stay above certain price thresholds. d. uses current news events to predict stock prices. ANSWER: a 61. When Chernobyl melted down in the Soviet Union, the: a. price of U.S. basketballs increased. b. prices of assets reacted slowly to the information. c. price of U.S. potatoes increased. d. stock prices of U.S. nuclear plants increased. ANSWER: c 62. The efficient markets hypothesis states that: a. the price of assets already reflects all publicly available information. b. arbitrage is impossible in financial markets. c. in financial markets both buyers and sellers will be equally informed. d. financial markets are, on average, more efficient than product markets. ANSWER: a 63. In the stock market, profiting from inside information: a. is nearly impossible because of the efficient markets hypothesis. b. can lead to above-normal market returns for a long period. c. requires the investor to keep the information secret and not act for a long period. d. requires purchasing or selling large quantities of stock very quickly. ANSWER: d 64. The field of technical analysis: a. has been able to beat the market in the long run if enough data are analyzed. b. has been unable to consistently beat the market. c. is also known as active investing. d. is difficult since stock market data are hard to come by. ANSWER: b 65. Based on the efficient markets hypothesis, which of these mutual funds has the better chance of beating the market in the long run? a. a low-fee fund that is actively managed by a highly respected fund manager b. a passive fund that simply attempts to mimic a financial index such as the S&P 500 c. a portfolio of stocks that you choose, since nobody has more incentive to manage your money correctly than you do d. Forget about it—it is nearly impossible to choose a fund that will systematically outperform the market.
Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 10 ANSWER: d 66. One reason that stock picking cannot work well in the long run is that: a. the stock market is controlled by a small number of investors. b. stock market information is widely available. c. there is always inside information that most investors do not have. d. the stock market is heavily regulated by the government. ANSWER: b 67. Which statement is consistent with the efficient markets hypothesis? a. The majority of stock mutual funds cannot outperform stock composite indexes. b. No mutual funds can outperform stock composite indexes at any time. c. No one can earn a return in the stock market. d. Technical analysis is the only way to beat the market over time. ANSWER: a 68. What does the efficient markets hypothesis tell us about the movement in a stock price? a. It tells what happens to the stock price in the past but not in the future. b. It reflects only what the buyers, not the sellers, think about the future movement of the stock price. c. It reflects all public information that leads to its movement. d. It always predicts how the stock price will move in the future. ANSWER: c 69. According to the efficient markets hypothesis: a. everyone can outperform the stock market indexes. b. when one investor outperforms the stock market index, another investor must underperform. c. ordinary investors should always follow the advice of market geniuses like Warren Buffet. d. no investor can consistently outperform the stock market indexes. ANSWER: d 70. Which principle explains why it is hard to beat the market? a. technical investing principle b. efficient markets hypothesis c. systematic risk evaluation principle d. buy-and-hold principle ANSWER: b 71. If a cable news channel breaks news one morning that a major lightbulb company announced a new longlasting lightbulb and you call your broker the next day to buy stock in the company, will you make money based on this information? a. Yes, because it will take a while for the company to recover the R&D costs of the lightbulbs. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 10 b. Yes, because it will take time before the lightbulbs show up in stores (and thus time before the new revenue's reflected in the company's bottom line). c. No, because the broker fees will eat away all your profits.
d. No, because the new information will already be reflected in the stock price when you purchase the stock. ANSWER: d 72. High-frequency trading involves scanning the latest news and stock quotes with high-tech computers and using the information to trade stocks very quickly. Because it is highly automated, it happens a thousand times faster than an eye can blink. Though each trade might make a fraction of a penny, it accounts for about twothirds of the stock market trading. How does this financing trend reflect the efficient markets hypothesis? a. Computers ensure that public knowledge is instantly embodied in the stock price. b. Buying and holding stocks allow the investor to circumvent this volatility. c. Investing in stocks this way has a low risk of failure, thus a low return. d. The firms that make a lot of money using this strategy are likely just very lucky. ANSWER: a 73. Between the years 1993 and 1998, U.S. senators' stock portfolio outperformed the market by an average of 12% a year. Does this fact overturn the efficient markets hypothesis? a. Yes, because all the relevant information is clearly not embodied in the price. b. Yes, because it is inefficient to channel money this way. c. No, because senators are probably trading using nonpublic information. d. No, because senators are unusually smart people. ANSWER: c 74. The efficient markets hypothesis implies that: a. it is easy to earn above market rates of return using the appropriate investment strategies at the right time. b. investors don't make mistakes when determining when to buy and sell stocks. c. it is not possible to systematically pick stocks that outperform the market. d. stock prices are never too high or too low; they always accurately reflect the underlying value of the company. ANSWER: c 75. The efficient markets hypothesis is the idea that: a. asset prices represent all publicly available information. b. stock values revert to their historical mean values. c. the prices of assets are systemically biased, allowing savvy investors to make above-market returns by exploiting the efficiency losses. d. stock buyers are more likely to assess financial information more efficiently than the sellers of stocks.
ANSWER: a 76. Stock markets' reactions to the Chernobyl nuclear power plant meltdown was a lesson that: a. it is not possible to profit from nonpublic information. b. investors are slow to respond to new information. Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 10 c. the prices of assets quickly adjust to new information. d. prices are sticky in the short run. ANSWER: c 77. Which of these statements is TRUE? I. Technical analysis has been found to outperform most investing strategies. II. Technical analysis looks for patterns in stock price movements to best determine when to buy and sell. III. Technical analysis is the use of insider information to help determine when to buy and sell. a. I and II only b. II and III only c. II only d. I and III only ANSWER: c 78. Which of these statements is TRUE? I. Technical analysis has not been found to outperform most investing strategies. II. Technical analysis looks for patterns in stock price movements to best determine when to buy and sell. III. Technical analysis tells us that asset prices represent all publicly available information. a. I only b. II only c. III only d. I and II only ANSWER: d 79. The efficient markets hypothesis says that the _____ value of traded assets reflects all _____ information. a. current; privately held b. past; publicly available c. current; publicly available d. past; privately held ANSWER: c 80. The efficient markets hypothesis MOST clearly implies that extra-market returns are: a. common in the long run. b. rare in the long run. c. always attained in the long run. d. never attained in the long run. ANSWER: b 81. The disaster at Chernobyl caused the price of oil to: a. increase. b. decrease. c. remain the same. Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 10 d. change in an indeterminate direction. ANSWER: a 82. The disaster at Chernobyl caused the price of potatoes to: a. increase. b. decrease. c. remain the same. d. change in an indeterminate direction. ANSWER: a 83. The disaster at Chernobyl caused the stock price of U.S. nuclear power plant companies to: a. increase. b. decrease. c. remain the same. d. change in an indeterminate direction. ANSWER: b 84. As a result of the disaster at Chernobyl, related stock prices changed within: a. months. b. days. c. hours. d. minutes. ANSWER: d 85. When inside information becomes public information, profit opportunities: a. grow. b. evaporate. c. remain the same. d. change in an indeterminate direction. ANSWER: b 86. Which statement is consistent with the strategy of diversification in stock investment? a. Buy all stocks in the stock market. b. Pick stocks that you believe are undervalued. c. Buy a mutual fund of a broad stock market index. d. Buy and sell a stock at the same time. ANSWER: c 87. Diversification is an investment strategy to: a. maximize the return in stock investment. b. minimize the risk in personal finance. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 10 c. outperform the average stock market return. d. reduce the risk of a given investment portfolio. ANSWER: d 88. A mutual fund is a good way for an investor to diversify in investment because: a. a mutual fund consists of a large number of stocks, so the cost of buying all of them at the same time is lower. b. when the prices of risky stocks go up, the prices of less risky stocks must go down. c. not all stock prices move up or down at the same time. d. there are many buyers of a mutual fund, so the risk is spread across all the buyers. ANSWER: c 89. To succeed in investing: I. diversify. II. invest in only one type of stock. III. choose a broker with low fees. IV. take advantage of compound interest. a. I, III, and IV only b. I, II, and IV only c. I and IV only d. I and III only ANSWER: a 90. All of these are U.S. stock price indexes EXCEPT the: a. Dow Jones Industrial. b. S&P 500. c. NASDAQ Composite. d. CPI. ANSWER: d 91. To diversify, an engineer working in an electric-power-generating plant should invest in: a. stocks of wind-power-generating companies. b. stocks of their own company. c. a mutual fund that consists of only electric-power-generating companies. d. nothing. ANSWER: a 92. To diversify, an oil drilling rig operator working on an oil and gas reservoir should invest in: a. stocks of renewable energy companies. b. stocks of their own oil company. c. a mutual fund that consists of only oil and nonrenewable energy companies. d. nothing. Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 10 ANSWER: a 93. An investor who already has a stock portfolio can BEST diversify further investment by: a. keeping all the money as cash. b. holding assets that are negatively correlated with the existing portfolio. c. buying stocks with no risk. d. depositing the money in a bank. ANSWER: b 94. "Buy and hold" involves buying stocks and holding them: a. until a cheaper stock comes along. b. for a time proportional to the real interest rate. c. until the price increases even just a little. d. for the long run. ANSWER: d 95. How should you approach broker fees and why? a. Seek high ones, because it signals a better investment product. b. Seek high ones, because money managers will have a stronger incentive to make you more money. c. Seek low ones, because only top investors need to pay the higher price. d. Seek low ones, because no money manager could be worth a premium price. ANSWER: d 96. Roulette is a gambling game where a wheel with 37 (Fr.) or 38 (Am.) squares spins around in one direction and a ball runs along its circumference in the opposite direction. Eventually, the ball loses momentum and lands in a square. Roulette wheels pay 35-to-1 on a winning square. In other words, a $10 bet on square 20 will pay $350 if the ball lands on square 20. Many people feel this is an excellent payout and thus consider it superior to other games with lower payouts. Why is this payout less of a good deal than some might think? a. The risk of losing is greater than 97%. b. The opportunity cost of holding your money while the wheel spins is high. c. The efficient markets hypothesis suggests it costs up-front money to play this game. d. There are fewer than 35 squares on the wheel, so the expected payoff is low. ANSWER: a 97. Due to banking regulations, banks in the early part of the twentieth century were not allowed to nationalize, and thus many banks had most of their investments tied up in the agricultural sector. The Dust Bowl and retaliatory tariffs caused many banks to fail, particularly during the Great Depression. Ignoring legal and cultural restrictions, what piece of advice would have served banks very well during this time? a. employing compound returns b. diversification c. having more low-risk investments d. reducing the fees the banks charged on checking accounts Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 10 ANSWER: b 98. Over time, _____ to beat the market. a. all forms of technical analysis are shown b. some forms of technical analysis are shown c. no forms of technical analysis are shown d. technical analysis has been abandoned as a means ANSWER: c 99. If the efficient markets hypothesis is valid, then a person should: I. buy mutual funds. II. diversify. III. follow a buy-and-hold strategy. a. I and II only b. I and III only c. II and III only d. I, II, and III ANSWER: d 100. Which of these statements is TRUE? I. The riskiest stocks tend to move in sync with the economy. II. A relatively safe stock is one that does not vary much with the state of the economy. III. Health-care stocks are some of the riskiest stocks. a. III only b. I and II only c. II and III only d. I only ANSWER: b 101. If a person diversifies their stock portfolio, then: a. the expected return of their portfolio will increase. b. the risk of their portfolio will decrease. c. both the risk and expected return of their portfolio will increase. d. neither the risk nor the expected return of their portfolio will change. ANSWER: b 102. If a person follows a buy-and-hold strategy, they will initially hold stocks: a. until the stock prices rise. b. until the stock prices fall. c. until the stock prices stabilize. d. whether or not stock prices rise or fall. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 10 103. Popular U.S. stock indexes include: I. FDIC. II. Dow Jones Industrial Average. III. NASDAQ. a. I and II only b. I and III only c. II and III only d. I, II, and III ANSWER: c 104. Popular U.S. stock indexes include: I. S&P 500. II. CPI. III. Dow Jones Industrial Average. a. I only b. II only c. III only d. II and III only ANSWER: c 105. In a stock market, a riskier stock typically has a: a. higher covariance with the market as a whole. b. lower covariance with the market as a whole. c. higher correlation with some stocks and a lower correlation with other stocks. d. lower correlation with the market as a whole. ANSWER: a 106. Which of these tends to be LEAST risky in its stock value when the economy is in a deep recession? a. an automobile manufacturer b. a homebuilder c. a high-end department store d. a utility company that supplies water to government buildings ANSWER: d 107. The stock for which company tends to be MOST risky when the economy is in a recession? a. fine dining restaurant chain b. automobile parts supplier c. big-box retailer d. electric utility company ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 10 108. To diversify, a person who already holds stocks that move in the opposite direction of the stock market as a whole should: a. always buy more of the same stocks. b. buy stocks that move in the same direction of the stock market as a whole. c. buy stocks that have about the same expected returns as the stocks they already hold. d. sell all their stocks immediately. ANSWER: b 109. Someone who purchased stock in _____ companies seems to have followed a diversification strategy. a. lumber, paper, and furniture b. oil, telecommunications, and clothing c. silicon chips, computers, and cell phone d. cat food, dog food, and dog bone ANSWER: b 110. An individual who buys _____ has a poor diversification strategy. a. stock in gun manufacturing, ammunitions, and rifle companies b. stock in textbook publishing, tea and coffee production, and the technology sector c. T-bills, corporate bonds, and technology stocks d. government bonds, technology stocks, and agricultural stocks ANSWER: a 111. An investor who is interested in a diversification strategy would purchase stock in: a. automobile manufacturers, tires, and airbag companies. b. candy, snack foods, and beverage companies. c. smartphone producers, cellular service providers, and computer companies. d. high-end restaurants, men's clothing retailers, and amusement park companies. ANSWER: d 112. An investor who is interested in a diversification strategy will buy stock in: a. pet food, horse farms, and pet supply retailers. b. corporate farms, food manufacturers, and restaurant supply companies. c. mutual funds, private education companies, and high-end department stores. d. social media platforms, online retailers, and Internet service providers. ANSWER: c 113. A risky portfolio is one that: I. is poorly diversified. II. has a volatile stock in a basket of 200 stocks. III. has a positive correlation between most of its stock prices. a. I only b. II and III only Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 10 c. I and III only d. I, II, and III ANSWER: c 114. The Dow Jones Industrial Average: a. weights larger companies' stocks more than small companies' stocks. b. has stocks from thousands of companies. c. has stocks from 500 companies. d. has stocks from 30 companies. ANSWER: d 115. When a stock index rises, it means that: a. all stocks on the index have risen in value. b. the weighted average of all stock prices in the index has risen. c. all stocks on that index are equally weighted. d. most of the stock prices in the index have risen. ANSWER: b 116. The NASDAQ: a. weights individual stocks equally. b. gives greater weight to low-tech stocks than does the Dow. c. gives greater weight to small stocks than does the Dow. d. has 500 stocks. ANSWER: c 117. The NASDAQ: a. weights individual stocks equally. b. gives greater weight to larger stocks than does the Dow. c. gives greater weight to high-tech stocks than does the Dow. d. has 30 stocks. ANSWER: c 118. A stock that has a high covariance with market conditions is considered risky because: a. the stock belongs to a small company. b. the stock does not fluctuate in value. c. the stock moves against the market. d. when the market is declining, that stock will decline too. ANSWER: d 119. Why would stock for a high-end store with expensive clothing be considered risky in a recession? a. Consumers demand cheaper clothes in times of recession, and that company would be expected to make lower profits.
Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 10 b. Consumers do not buy stock when recessions occur. c. High-end clothing store stocks have low covariance with the market. d. Stocks from such companies depend heavily on oil prices. ANSWER: a 120. Which of these investment instruments would a risk-averse individual choose? a. stocks that are negatively correlated with the rest of one's portfolio b. agricultural stocks in a foreign agricultural economy c. oil stocks d. technology stocks ANSWER: a 121. Which of these investment instruments would a risk-loving individual choose? a. government bonds b. stocks from a company listed on the Dow Jones Industrial Average c. stock from a very new company that has high growth potential d. a low-risk mutual fund ANSWER: c 122. A buy-and-hold strategy would work BEST for someone who: a. will retire in three years. b. is 25 years old and just started a good job. c. lives paycheck-to-paycheck. d. lives on Social Security checks. ANSWER: b 123. Which of these stock portfolios offers the greatest diversification? a. 3M and Raytheon b. Adobe Systems and Sara Lee c. Nucor and Wyeth d. Ashland, Baker Hughes, Bemis, and BMC Software ANSWER: d 124. If your investment money is evenly divided among stocks in your investment portfolio, which of these four stock portfolios would suffer the MOST from an Adobe Systems bankruptcy? a. Adobe Systems b. Adobe Systems and Best Buy c. Adobe Systems, Nucor, and Wyeth d. Adobe Systems, Ashland, Baker Hughes, Bemis, BMC Software, CA Inc., Century Telephone, Dean Foods, Dover Corp., Eastman Kodak, EQT Corp., and Exxon Mobil
ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 10 125. The BEST trading strategy is to buy: a. low and sell high. b. high and sell low. c. a couple of stocks and hold them for the long run. d. a large bundle of stocks and hold them for the long run. ANSWER: d 126. Which is NOT a major stock index? a. The Heathrow 2,000 b. The Dow Jones Industrial Average c. The Standard and Poor's 500 d. The NASDAQ Composite Index ANSWER: a 127. Diversification: a. increases risk and return. b. decreases risk and return. c. increases risk. d. decreases risk. ANSWER: d 128. Which is NOT a typical index used to practice a buy-and-hold strategy? a. The Dow Jones Industrial Average b. The Moody Index Scorecard c. The Standard and Poor's 500 d. The NASDAQ Composite Index ANSWER: b 129. One important "secret" to picking stocks is to: a. find a highly respected fund manager to pick them for you. b. pick a lot of them. c. choose the best-performing stock and put the majority of your investments in that one stock. d. only invest in no-fee funds. ANSWER: b 130. Diversification: a. reduces risk but also reduces expected returns. b. increases risk but also increases your expected returns. c. reduces risk but does not reduce your expected returns. d. reduces risk and increases your expected returns. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 10 131. To buy stocks and hold them is the BEST investment strategy if: a. you do not want to beat the market in the long run. b. your opportunity cost of researching stocks is high. c. you disagree with the efficient markets hypothesis but realize the value of diversification. d. you accept the efficient market hypothesis and the value of diversification. ANSWER: d 132. The riskiest stocks tend to be those that: a. are positively correlated with the market. b. are negatively correlated with the market. c. have done well in the past. d. have done poorly in the past. ANSWER: a 133. The secret to stock picking is to: a. pick one stock and hold it for a long time. b. invest in a large basket of stocks from different sectors of the economy. c. invest in stocks held by Berkshire-Hathaway. d. invest in stocks from companies that sell green technologies. ANSWER: b 134. The S&P 500: a. is an index that tracks the stock prices of 500 large companies. b. is Spain's largest stock exchange, consisting of 500 of the largest European companies. c. comprises the stocks of at least 500 of the smallest (S) but most profitable (P) companies in the world. d. consists of 500 stocks and 500 bonds from the world's largest companies. ANSWER: a 135. The Dow Jones Industrial Average: a. consists of the 100 largest companies in the world. b. tracks the earnings of the 10 largest companies in America. c. is made up of 30 leading American stocks. d. consists of 1,000 stocks from the world's largest companies. ANSWER: c 136. People who accept the efficient markets hypothesis should: a. buy a large number of stocks from different companies and hold them for a long period. b. buy a small number of stocks from several companies, selling the stocks whose price has fallen and keeping the rest. c. buy stocks only at a low price and sell them when their prices have increased by more than the market average.
Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 10 d. constantly buy and sell stocks to avoid the risk of large price swings. ANSWER: a 137. Diversification typically _____ portfolio risk. a. increases b. decreases c. maintains d. eliminates ANSWER: b 138. In modern financial markets, it has become _____ to diversify one's portfolio. a. more difficult b. easier c. impossible d. unavoidable ANSWER: b 139. One BEST reduces risk by buying _____ stocks in _____ sectors. a. a few; a few b. a few; many c. many; a few d. many; many ANSWER: d 140. One BEST reduces risk by buying _____ stocks in _____ geographic regions. a. a few; a few b. a few; many c. many; a few d. many; many ANSWER: d 141. One's BEST trading strategy according to the efficient markets hypothesis is summarized as: a. buy and sell. b. sell and hold. c. buy and hold. d. buy, sell, and hold. ANSWER: c 142. High fees: a. are not likely to generate higher returns in the long run, because of the efficient markets hypothesis. b. are not likely to generate higher returns in the long run, because of diversification issues. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 10 c. can often signal a higher-quality management and thus higher returns in the long run. d. have little impact on your long-run returns to investing. ANSWER: a 143. Compare a fund that charges a 0.25% annual fee with a fund that charges a 1.25% annual fee. If an investment of $5,000 earns an average return of 8% over the course of five years, approximately how much more will fees over those five years be for the higher-fee fund? a. $4 b. $20 c. $330 d. $2,000 ANSWER: c 144. Compare a fund that charges a 0.50% annual fee with a fund that charges a 2.50% annual fee. If an investment of $8,000 earns an average return of 12% over the course of three years, approximately how much more will fees over those three years be for the higher-fee fund? a. $160 b. $240 c. $480 d. $585 ANSWER: d 145. Mutual funds with high fees: a. tend to perform better than funds with low fees. b. are usually active funds. c. should be avoided because high fees reduce your return. d. are poor performers in the short run but provide above-market returns if held for a decade or longer. ANSWER: b 146. Table: Mutual Funds Mutual Fund Name Expense Ratio A 2.9% B 1.5% C 0.5% D 4.0% Which mutual fund would be BEST for a retirement savings plan? a. Mutual Fund A b. Mutual Fund B c. Mutual Fund C d. Mutual Fund D ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 10 147. Table: Index Funds S&P Index Funds Annual Cost Expense Ratio Vanguard 500 Index mutual fund Admiral Shares (VFIAX) 0.09% Vantagepoint 500 Stock Index mutual fund Class II Shares (VPSKX) 0.25% T. Rowe Price Equity Index 500 mutual fund (PREIX) 0.35% California Investment S&P 500 Index mutual fund (SPFIX) 0.36% Which index fund would be BEST to include in a retirement savings plan? a. Vanguard 500 b. California Investment c. Vantagepoint 500 d. T. Rowe Price Equity Index ANSWER: a 148. Stockbrokers make _____ commissions the _____ frequently their clients buy and sell stocks. a. lower; more b. higher; more c. higher; less d. zero; more ANSWER: b 149. For a mutual fund, a load is the: a. expected return of the fund. b. risk of the fund. c. fee for managing the fund. d. charge for insuring the fund. ANSWER: c 150. The textbook recommends buying mutual funds that: a. charge high commissions. b. charge large management fees. c. have high loads. d. have the lowest fees. ANSWER: d 151. Why does it make sense to avoid paying high fees when investing with mutual funds or stockbrokers? a. The funds with high fees are too expensive. b. The funds with high fees likely hire managers who are not experts. c. The funds with high fees do not perform any better than other funds. d. It does make sense, since you should pay high fees to get access to experts. ANSWER: c 152. Stocks are better than bonds: Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 10 a. in the short run. b. because stocks have guaranteed returns. c. in the long run. d. because bonds are issued only by companies in financial distress. ANSWER: c 153. Historically, stocks offer _____ returns than (as) bonds in the _____ run. a. higher; long b. lower; long c. the same; short d. the same; long ANSWER: a 154. Which refers to the ability of an asset to generate returns, the returns of which are then reinvested to generate their own returns? a. buy and hold b. compounding c. simple returns d. extrapolation ANSWER: b 155. Suppose you invest $1,000 in a mutual fund. If the annual return of that fund is 5%, how many years will it take before your fund is worth $2,000? a. 10 years b. 14 years c. 20 years d. never ANSWER: b 156. A person purchases stocks of two companies in 2009. One has an annual return of 2.5%, and the other's return is 3%. The difference between the dollar returns on the two company stocks would be the greatest in: a. 2010. b. 2012. c. 2013. d. 2015. ANSWER: d 157. A real return of 10% per year means that a $10,000 investment will grow to $20,000 in: a. 10 years. b. 7 years. c. 15 years. Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 10 d. 20 years. ANSWER: b 158. How fast will a $10,000 portfolio double if it is earning 10% annual returns? a. every 10 years b. every 7 years c. every 5 years d. every 14 years ANSWER: b 159. Approximately how many years will it take for an investment of $1,000 that yields 5% a year to double in value? a. 10 b. 14 c. 20 d. 35 ANSWER: b 160. The rule of 70 explains how: a. many stocks you need to completely diversify your portfolio. b. much money you need to invest monthly to retire comfortably. c. long it takes an investment to double in value. d. long it takes for an investment to achieve the efficient markets hypothesis. ANSWER: c 161. How long will it take an investment of $10,000 in a mutual fund that consistently earns an annual rate of return of 5% to double in value? a. 5 years b. 14 years c. 70 years d. 350 years ANSWER: b 162. How valuable would an investment of $15,000 in a mutual fund that consistently earns an annual rate of interest of 7% be in 20 years? a. $30,000 b. $60,000 c. $120,000 d. $240,000 ANSWER: b 163. How valuable would an investment of $140,000 in a mutual fund that consistently earns an annual rate of Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 10 interest of 5% be in 42 years? a. $280,000 b. $560,000 c. $1,120,000 d. $2,240,000 ANSWER: c 164. Investors should avoid buying mutual funds with high fees because mutual funds with high fees: a. do not consistently outperform other funds. b. are difficult to redeem. c. do not diversify enough. d. are always risky. ANSWER: a 165. What rule of thumb generates the number of periods required for an investment to double at a given interest rate? a. simple growth b. rule of 70 c. rule of 100 d. linear growth ANSWER: b 166. The principle of compounding implies that: a. we should diversify enough so that the returns on different stocks will be the same at some time in the future. b. any difference in the rate of investment returns will stay constant over time. c. a small difference in the rate of investment returns makes no difference over a long period. d. a small difference in the rate of investment returns can have a large difference over a long period. ANSWER: d 167. Because historically stock indexes offer higher returns than bonds, the rule of 70 implies that we should invest: a. in bonds. b. in stock indexes. c. half in stock indexes and half in bonds. d. in neither stocks nor bonds. ANSWER: b 168. According to the rule of 70, if the interest rate on a bank deposit is 5% per year, how long will it take for the bank deposit to double in value? a. 25 years b. 20 years Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 10 c. 14 years d. It depends on the amount of bank deposit. ANSWER: c 169. When a stock has an average rate of return of 10% per year, then the value of the stock will: a. triple in 5 years. b. double in 7 years. c. double in 10 years. d. triple in 10 years. ANSWER: b 170. How long does it take your money to double at an annual return of 10%? a. 10 years b. 17 years c. 3.5 years d. 7 years ANSWER: d 171. Assume that the money in your investment account grew from $30,000 to $60,000 in nine years. What was your approximate annual rate of return? a. 5.0% b. 6.5% c. 7.8% d. 11.8% ANSWER: c 172. Assume that the money in your investment account grew from $42,000 to $168,000 in 12 years. What was your approximate annual rate of return? a. 5.8% b. 10.3% c. 11.7% d. 23.3% ANSWER: c 173. According to the rule of 70, a stock portfolio growing at a rate of 7% will double approximately every _____ years. a. 5 b. 10 c. 20 d. 40 ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 10 174. According to the rule of 70, a stock portfolio growing at a rate of 3.5% will double approximately every _____ years. a. 5 b. 10 c. 20 d. 40 ANSWER: c 175. According to the rule of 70, a stock portfolio growing at a rate of 1.75% will double approximately every _____ years. a. 5 b. 10 c. 20 d. 40 ANSWER: d 176. According to the rule of 70, a stock portfolio growing at a rate of 14% will double approximately every _____ years. a. 5 b. 10 c. 20 d. 40 ANSWER: a 177. Stocks typically earn a higher average rate of return than bonds because: a. stocks are riskier than bonds. b. bonds are unsecured. c. stocks are better managed than bonds. d. there is a higher demand for stocks. ANSWER: a 178. After adjusting for risk, the expected return on different assets should be: a. higher for stocks than bonds. b. higher for actively managed assets than for passively managed assets. c. zero. d. equal. ANSWER: d 179. Which of these investments would you expect to have the highest rate of return in the long run? a. real estate b. owning your own Major League Baseball franchise Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 10 c. an index fund (such as the S&P 500) d. art ANSWER: c 180. Which is consistent with the no-free-lunch principle? a. Risk and return are unrelated in financial investment. b. An asset that brings higher returns must come with higher risk. c. The best way to get rich is to invest in stocks. d. Investing in U.S. Treasury bills is the best advice in personal finance. ANSWER: b 181. Figure: Risk
Which curve in the diagram correctly identifies the relationship between risk and return? a. A b. B c. C d. D ANSWER: b 182. Choose the series that places these financial instruments in order of increasing average return. Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 10 a. U.S. T-Bills, corporate bonds, small stocks, S&P 500 Index fund b. corporate bonds, U.S. T-Bills, small stocks, S&P 500 Index fund c. U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks d. corporate bonds, U.S. T-Bills, S&P 500 Index fund, small stocks ANSWER: c 183. Choose the series that places these financial instruments in order of increasing average risk. a. U.S. T-Bills, corporate bonds, small stocks, S&P 500 Index fund b. corporate bonds, U.S. T-Bills, small stocks, S&P 500 Index fund c. U.S. T-Bills, corporate bonds, S&P 500 Index fund, small stocks d. corporate bonds, U.S. T-Bills, S&P 500 Index fund, small stocks ANSWER: c 184. Choose the series that places these financial instruments in order of decreasing average return. a. small stocks, S&P 500 Index fund, corporate bonds, U.S. T-Bills b. corporate bonds, small stocks, U.S. T-Bills, S&P 500 Index fund c. small stocks, S&P 500 Index fund, U.S. T-Bills, corporate bonds d. corporate bonds, S&P 500 Index fund, small stocks, U.S. T-Bills ANSWER: a 185. Choose the series that places these financial instruments in order of decreasing average risk. a. small stocks, S&P 500 Index fund, corporate bonds, U.S. T-Bills b. corporate bonds, small stocks, U.S. T-Bills, S&P 500 Index fund c. small stocks, S&P 500 Index fund, U.S. T-Bills, corporate bonds d. corporate bonds, S&P 500 Index fund, small stocks, U.S. T-Bills ANSWER: a 186. In financial investment, a riskier asset typically has: a. a higher expected return. b. a lower expected return. c. the same expected return as a less risky asset. d. a higher or lower expected return, depending on the industry. ANSWER: a 187. A financial investor faces the lowest risk by investing in: a. a corporate bond. b. a three-month U.S. Treasury bill. c. the stocks of a new company. d. a mutual fund of small company stocks. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 10 188. The textbook uses the no-free-lunch principle in financial investment to indicate that: a. investment opportunities with high expected returns come with higher risk. b. investment opportunities with high expected returns come with lower risk. c. there is no relationship between risk and expected returns. d. there is always risk in holding any investment opportunity. ANSWER: a 189. Which statement correctly describes the relationship between risk and return? a. Risk and return have no relationship. b. Risk and return have a positive relationship. c. Zero-risk instruments have the highest returns. d. The lower the risk is, the higher the return is. ANSWER: b 190. What is the risk-return trade-off? a. Assets with the least risk tend to outperform the market. b. To invest in less risky assets means higher returns. c. Bonds earn higher returns than stocks because bonds are riskier. d. To earn higher rates of return, a person must accept higher risk. ANSWER: d 191. Table: Investment Investment Rate of Return A 10.00% B 4.50% C 47.36% D 18.00% Rank the investments in order from the LEAST risky to the MOST risky. a. A, B, C, D b. C, B, A, D c. B, A, D, C d. C, D, A, B ANSWER: c 192. Compared to stocks, art investments have _____ monetary returns because they offer _____ nonmonetary returns. a. lower; lower b. higher; higher c. lower; higher d. higher; lower ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 10 193. The risk-return trade-off is an example of the: a. sunk cost principle. b. no-free-lunch principle. c. capitalist principle. d. inelastic principle. ANSWER: b 194. Financial returns on houses are _____ over long periods of time because part of the return on housing is from _____. a. close to zero; the joys of ownership b. about 7% per year; homeowner improvements c. about 12% per year; paying low property taxes d. negative; depreciation ANSWER: a 195. Investing in antique guitars: a. is likely to bring high returns because many people enjoy playing guitar. b. will not bring high returns because fun activities yield lower financial returns. c. is a good idea because they "ain't making any more." d. will bring good returns because guitars are in high demand. ANSWER: b 196. The risk-return trade-off refers to the fact that: a. low risk means high potential returns. b. high risk means low potential returns. c. high risk means high potential returns. d. low risk can be eliminated by high returns. ANSWER: c 197. When an investor believes that buying and holding stock is the BEST investment strategy, they: I. accept the efficient markets hypothesis. II. accept the value of diversification. III. do not believe that compound interest is important in investing. a. I and II only b. II and III only c. I, II, and III d. I only ANSWER: a 198. An investor who diversifies the risk will be: I. dependent on how much an individual stock moves up and down. II. dependent on how much the portfolio moves up and down. Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 10 III. dependent on how much some stocks move up while others move down. a. I and II only b. II and III only c. I, II, and III d. I only ANSWER: b 199. The expected returns of different assets, adjusted for risk, should be: a. equal. b. different. c. sometimes equal but often different. d. unknown in most cases. ANSWER: a 200. On average, returns on investments in art _____ returns in the stock market. a. exceed b. underperform c. equal d. cannot compare to ANSWER: b 201. Jemal has invested $1,000 in a mutual fund that pays, on average, 3.5% per year. How long can Jemal expect it will take to double the initial investment? a. 245 years b. 20 years c. 35 years d. 2.5 years ANSWER: b 202. Katrina has invested $1,000 in a mutual fund that will double in 35 years. What interest rate is Katrina earning on this mutual fund? a. 2.0% b. 3.5% c. 10.0% d. 0.2% ANSWER: a 203. Harper has invested $7,000 in a mutual fund that will be worth $56,000 in 30 years. What interest rate is Harper earning on this mutual fund? a. 0.7% b. 3.0% Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 10 c. 7.0% d. 14.0% ANSWER: c 204. Tony has seen his investment double in 10 years. What interest rate is Tony earning on investment? a. 10.0% b. 7.0% c. 3.5% d. 5.0% ANSWER: b 205. Suppose the benefit of owning a painting, in terms of your personal enjoyment, is worth 5% of the value of the painting. If the expected rate of return on stocks is 7%, then the painting should grow in value by _____ per year. a. 5% b. 12% c. 7% d. 2% ANSWER: d 206. Suppose the benefit of owning a house, in terms of your personal comfort and freedom, is worth 9% of the value of the house. If the expected rate of return on stocks is 10%, then the house should grow in value by _________% per year. a. 1% b. 9% c. 10% d. 19% ANSWER: a 207. In what way do stock prices NOT act as a signal for the future value of the firm? a. If firms merge, stock prices could rise, indicating that the merger can result in greater profitability. b. If stock prices rise, they could be indicating future profitability for the firm. c. If stock prices fall, they could be indicating declining economic conditions. d. In recessions, stock prices always decrease. ANSWER: d 208. Which statement is NOT true? a. The lure of stock market riches gives entrepreneurs an incentive to develop new products. b. Stock markets allow incompetent managers to be replaced by more competent managers. c. Stock prices provide information on whether the firm is making good decisions. d. Stock prices reflect most of the information available to the public. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 10 ANSWER: d 209. The benefits of stock markets for the economy include: a. serving as an intermediary between savers and investors. b. revealing information about firm performance. c. increasing the efficiency of resource allocation among firms. d. All of these are benefits of stock markets for the economy. ANSWER: d 210. Investing in the U.S. stock market offers: a. worse odds than gambling in Vegas or with a local bookie. b. better odds than gambling in Vegas or with a local bookie. c. the same odds as gambling in Vegas or with a local bookie. d. impossible odds. ANSWER: b 211. To say that a stock price is a signal means that: a. society can determine the value of a firm. b. people transfer firm ownership via the signals. c. lower stock prices imply better value. d. speculative bubbles can be avoided. ANSWER: a 212. Stock markets are a way of: a. making everyone rich. b. raising capital for new investments. c. equalizing the distribution of wealth. d. securing long-term savings. ANSWER: b 213. All of these are economic roles of the stock market, EXCEPT that it: a. is an alternative to gambling. b. channels funds from savers to firms that need capital. c. provides valuable information about how firms are run. d. helps finance new firms. ANSWER: a 214. Which of these statements is (are) TRUE? a. Stock prices provide signals on how well a company is performing. b. The stock market is a mechanism that firms use to raise money to buy capital. c. The stock market provides a mechanism for poorly managed companies to be taken over by more competent managers.
Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 10 d. All of these are true. ANSWER: d 215. A speculative bubble happens when: a. assets are priced much higher than is warranted by the profitability of the assets. b. assets are priced much lower than is warranted by the profitability of the assets. c. asset prices are high and profits are even higher. d. market manipulation by dominant hedge funds bids up the market prices of assets. ANSWER: a 216. When a speculative bubble bursts: a. people feel poorer because of lower stock prices and thus spend less. b. employment usually increases. c. there is minimal effect on the overall economy. d. the effects are contained in the market whose prices have collapsed. ANSWER: a 217. Which statement is NOT true? a. The stock market helps companies raise capital for new investment. b. Stock prices help give investors information on how well a company is run. c. Stocks ensure that the most competent people run the company. d. All of these statements are true. ANSWER: c 218. A speculative bubble: a. is a situation in which high stock prices cannot be explained by companies' prospects and profits. b. is easy to identify with technical analysis. c. is not based on psychological factors. d. always occurs when good information on the future is available. ANSWER: a 219. A speculative bubble: a. is something only inexperienced traders are prone to. b. is often easy to understand. c. is based on psychological factors. d. has only been seen outside of the United States. ANSWER: c 220. A speculative bubble: a. results in capital that is invested in areas in which it is not very valuable. b. has a bursting point that is easy to predict. Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 10 c. has rarely been seen in the United States. d. results in high profits for all investors. ANSWER: a 221. Around the year 2000, there was a _____ in _____. a. boom and bust; tech stocks b. boom and bust; housing prices c. speculative bubble; crayons d. speculative bubble; oysters ANSWER: a 222. If a stock market bubble bursts, aggregate: a. demand in the economy decreases. b. demand in the economy increases. c. supply in the economy decreases. d. supply and demand in the economy decrease. ANSWER: a 223. Which statement is TRUE of speculative bubbles in stock prices? a. They are easy to detect by simply looking at the trends in stock prices. b. They can never be detected even after they occur. c. They are difficult to detect until after they burst. d. They never exist in stock markets. ANSWER: c 224. A speculative bubble: a. explains the rise of Microsoft's stock price over the last 30 years. b. can help the macroeconomy. c. can be easily identified, leading to higher than normal returns. d. arises when stock prices rise more rapidly than they should. ANSWER: d 225. During the price rise associated with a speculative bubble, capital is invested: a. efficiently. b. in areas where it is not valuable. c. with less risk than usual. d. to prepare for another wave of price rises. ANSWER: b 226. Asset price bubbles are: a. avoidable. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 10 b. possibly solved through greater transparency in assessing company values. c. inevitable. d. a recent phenomenon. ANSWER: b 227. If stock prices rise at a very fast rate, this may be indicative of: a. a speculative bubble. b. low covariance with the market. c. moderate profitability forecasts. d. excellent opportunities to earn long-term profits. ANSWER: a 228. Stock market bubbles have real effects in the economy because: a. overvalued stocks cause inflationary effects in the economy. b. overvalued stocks violate the efficient markets hypothesis. c. overvalued stocks divert capital to less productive uses. d. when these bubbles burst, they raise the value of capital in those industries. ANSWER: c 229. Bursting stock market bubbles have which of these effects? a. decreased wealth b. decreased production in those industries whose stocks have collapsed c. unemployment in those industries whose stocks have collapsed d. Bursting stock market bubbles can have all of these effects. ANSWER: d 230. Which statement is NOT true? a. Portfolio managers should diversify investments. b. The promise of higher returns is accompanied by higher risk. c. A single investor can consistently beat the market over the long term. d. Active stock markets are an important part of the economy. ANSWER: c 231. Paying an expert to help pick stocks will likely yield better returns than MOST alternative strategies for stock selection. a. True b. False ANSWER: b 232. A Random Walk Down Wall Street claimed that the money and fame that went to stock-picking gurus were a sham and a waste. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 10 a. True b. False ANSWER: a 233. John Stossel used a monkey to throw darts at a giant wall-sized version of the stock pages of the Wall Street Journal. a. True b. False ANSWER: b 234. John Stossel followed his "dart-picked" portfolio for a year and found it beat 90% of the experts. a. True b. False ANSWER: a 235. According to the evidence, very few mutual fund managers can beat the market averages. a. True b. False ANSWER: a 236. Warren Buffett will likely continue to beat the market, as he has done for the past few decades. a. True b. False ANSWER: b 237. Active mutual funds historically outperform passive mutual funds. a. True b. False ANSWER: b 238. In a typical year, passive investing in the S&P 500 Index does not beat the majority of all mutual funds. a. True b. False ANSWER: b 239. It is possible for active investing to consistently beat average market returns. a. True b. False ANSWER: b 240. No investor will ever be able to consistently beat the market. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 10 b. False ANSWER: a 241. The efficient markets hypothesis implies that active investing strategies can outperform passive investing strategies. a. True b. False ANSWER: b 242. Passive investing is buying the stocks that make up a broad market index; there is no attempt to figure out which stocks will perform better than others. a. True b. False ANSWER: a 243. The efficient markets hypothesis states that current prices reflect all publicly available information. a. True b. False ANSWER: a 244. Because baby boomers are retiring, investing in firms that produce goods and services for senior citizens is definitely a sure road to riches. a. True b. False ANSWER: b 245. The efficient markets hypothesis suggests that it is no better to invest in a mutual fund that has performed well for five years in a row than one that has performed poorly for five years in a row. a. True b. False ANSWER: a 246. The efficient markets hypothesis says that the stock's price reflects all available public information, making it difficult for active investors to beat market averages. a. True b. False ANSWER: a 247. A mutual fund manager must demonstrate high ability to beat the market over a one-year span. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 10 248. A mutual fund manager must demonstrate high ability to beat the market over a 10-year span. a. True b. False ANSWER: b 249. Stock picking usually beats the market when buyers and sellers have the same information. a. True b. False ANSWER: b 250. You cannot get rich, on average, by buying and selling on public information. a. True b. False ANSWER: a 251. The prices of traded assets, such as stocks and bonds, reflect all publicly available information. a. True b. False ANSWER: a 252. The way you can take advantage of information that other people do not have is to start buying or selling large numbers of shares. a. True b. False ANSWER: a 253. According to the efficient markets hypothesis, investors who trade stocks actively earn higher than average returns. a. True b. False ANSWER: b 254. If the efficient markets hypothesis holds, then only investors with inside information can earn a return higher than the stock market average return. a. True b. False ANSWER: a 255. Since for every buyer of a stock there is a seller of that stock, someone can likely become very rich acting on public information. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 10 ANSWER: b 256. According to the efficient markets hypothesis, the prices of traded assets, such as stocks and bonds, reflect all publicly traded information. a. True b. False ANSWER: a 257. One of the exceptions to the efficient markets hypothesis is that experts can get better returns than others. a. True b. False ANSWER: b 258. The number of senior citizens will double by 2020, so investing in medical care and retirement homes is likely to generate above-normal market returns. a. True b. False ANSWER: b 259. The efficient markets hypothesis suggests that reading the Wall Street Journal will help you pick topperforming stocks. a. True b. False ANSWER: b 260. To follow the buy-and-hold strategy, an investor must buy stocks when they are at low prices and hold them only when the prices are rising. a. True b. False ANSWER: b 261. It is recommended that investors buy stocks from a large number of different companies, avoid high fees, and hold the stocks for a long period. a. True b. False ANSWER: a 262. Mutual funds help investors diversify their investments. a. True b. False ANSWER: a 263. NASDAQ stands for the National Association of Security Dealers Automated Quotations. Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 10 a. True b. False ANSWER: a 264. The riskiest stocks are those that have a high positive correlation with the market as a whole. a. True b. False ANSWER: a 265. The main objective of diversification is to maximize the return of an investment portfolio. a. True b. False ANSWER: b 266. The first secret to picking stocks is to pick many of them! a. True b. False ANSWER: a 267. It is always BEST to put all your "eggs" in one basket, with respect to investing. a. True b. False ANSWER: b 268. Mutual funds can let you invest in hundreds of stocks with just one purchase. a. True b. False ANSWER: a 269. The Dow Jones Industrial Average is the MOST famous stock price index. a. True b. False ANSWER: a 270. A buy-and-hold strategy only works for stocks that are very volatile. a. True b. False ANSWER: b 271. Diversification means buying a stock at a low price and then selling it later at a higher price. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 10 ANSWER: b 272. Mutual funds primarily offer the service of diversification of investments. a. True b. False ANSWER: a 273. The risk of a stock depends on how the stock price varies with the rest of the market. a. True b. False ANSWER: a 274. Diversification is the only strategy that leads to a higher-than-market-average return. a. True b. False ANSWER: b 275. A diversified portfolio reduces risk. a. True b. False ANSWER: a 276. For a person holding a mutual fund, compounding the returns on the fund leads to a higher total return in the future than not compounding. a. True b. False ANSWER: a 277. The rule of 70 states that an investment will double in 70/x years, where x is the annual rate of return rate. a. True b. False ANSWER: a 278. The expected return on different assets, after adjusting for risk, will be equal to zero. a. True b. False ANSWER: b 279. The risk-return trade-off means that a stock with a high risk tends to have a lower return. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 10 280. The basic relationship between risk and return is that to earn higher returns, one must accept more risk, which is why bonds provide higher returns than stocks. a. True b. False ANSWER: b 281. High returns reward savers for bearing high risks. a. True b. False ANSWER: a 282. The Dow is a better indicator of the market as a whole than the S&P 500. a. True b. False ANSWER: b 283. If the expected return on stocks is 10%, the monetary return from investing in art will be less than 10% because there is a fun return to art. a. True b. False ANSWER: a 284. The benefit of a stock market to the economy is that it makes some people rich without making other people poor. a. True b. False ANSWER: b 285. A stock market bubble is a rise in stock prices that does not reflect the underlying fundamentals of the company. a. True b. False ANSWER: a 286. Bursting stock market bubbles create labor adjustment costs. a. True b. False ANSWER: a 287. Suppose that the stock market for any given year can be characterized as being one of these: (1) poor, (2) average, (3) good, or (4) excellent. If there are 1,800 people who randomly predict stock market performance for this and each of the next three years, how many people will have been right four years in a row? ANSWER: Each year, 25% of all the people that make predictions will be correct. Thus: Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 10 Year 1: Year 2: Year 3: Year 4: After the first year, 450 will be right. After the second year, 112 will be right both years. After the third year, 28 will be right all three years. Finally, after the fourth year, only 7 will be right all four years.
288. A friend argues that we should select mutual funds whose managers actively trade stocks. Is this correct? Explain your answer. ANSWER: A mutual fund with managers who actively trade stocks are known as "active" funds. These usually charge a higher management fee, known as a "load," than the average fee. This makes active funds less alluring. In addition, active funds have not been proven to systematically perform better than "passive" funds, which are funds that simply mimic a broad stock market index such as the S&P 500. These passive funds require lower fees, and they tend to perform better than actively picked stocks. It is very clear that very few, if any, mutual fund managers can consistently beat the market averages.
289. You are starting your first job after college and are looking for a mutual fund in which to invest some of your retirement savings. You research a number of mutual funds and find that Fund A has generated abovenormal returns for the past two years and has a highly respected fund manager. You also find that Fund B has earned slightly below-average returns for the past two years, is being advertised as a good buy, and is expected to break through and earn high returns in the upcoming year. Based on the efficient markets hypothesis, which fund should you choose? Explain. ANSWER: The efficient markets hypothesis says that the prices of traded assets, such as stocks and bonds, reflect all publicly available information. If an investor is able to consistently beat the market average, then the investor is probably relying on inside information, which will become public soon enough. Therefore, the highly respected manager will not be able to systematically outperform the market average for long. The chances of either mutual fund succeeding are equal. The fund that you should use is the one with the lower management fee.
290. Discuss the main reason that it is "hard to beat the market" in financial investment. ANSWER: The main reason it is "hard to beat the market" in financial investment is because of the efficient market hypothesis. The efficient market hypothesis says that the price of traded assets, such as stocks and bonds, reflects all publicly available information. Unless an investor is trading on inside information, they will not systematically outperform the market as a whole over time.
291. What MOST likely happened to the stock for Apple because of the iPhone and iPad? Explain using a demand and supply graph. ANSWER: The demand of the stock for Apple rose along with the price of the stock. Demand should shift rightward on the demand and supply graph.
292. Briefly list several important lessons for investing wisely that economics offers. ANSWER: Passively managed funds outperform the majority of actively managed funds. Due to the efficient market hypothesis, we know that markets are efficient; the prices of traded assets, such as stocks and bonds, reflect all publicly available information. Unless an investor is trading on inside information, they will not systematically outperform the market as a whole over time. Investors should diversify their investments to reduce risk. Investors should avoid funds with high management fees, or "loads." Stocks outperform bonds in the long run. Higher risk also results in higher potential return, the risk-return trade-off. Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 10 Investments that have a nonmonetary "fun" factor, such as owning a house or a piece of art, trade off financial returns for the nonmonetary "fun" returns.
293. Briefly discuss the four pieces of advice on financial investment given in the text. ANSWER: 1. Diversify your investments. This is buying a large number of stocks in different industries, preferably industries not connected to your career's industry, or simply buying a mutual fund that holds a large number of stocks. Also, hold on to these investments over time. 2. Avoid high fees in investments and mutual funds. Many investment opportunities with high fees do not outperform those with lower fees. Higher fees will result in less return. 3. Understand compound growth. When compounded, small differences in investment returns can have a large effect. 4. Understand the risk-return trade-off. The more risk an asset has, the higher the expected return on that asset.
294. While luck is certainly useful in picking stocks, there are some strategies for good investing. List these strategies. ANSWER: Diversify your investments. Buy and hold your investments, as in do not buy just to sell back hoping to make a quick profit. Avoid high fees in investments and mutual funds.
295. Discuss the different ways that a person can diversify. ANSWER: There are many ways to diversify. Diversification can happen in the selection of stocks. This means buy a large number of different stocks in different industries and even in different countries. Some of these stocks will move up and some will move down over time, but there is no reliance on the movement of just one individual stock; what matters in a diversified portfolio is the direction of the portfolio as a whole. A person can also diversify by investing in mutual funds that already have large numbers of stocks. Diversification can also happen through other types of investments such as bonds, housing, and art.
296. Suppose that someone has decided to follow a buy-and-hold strategy in technology stock purchases and buys these stocks eight years before retirement. The stocks grow in value, and this person's retirement wealth increases. Critically evaluate this investment decision. Was it smart? Could it have been improved? ANSWER: While this strategy worked for this individual, economists would generally urge against this sort of investing. The person puts all of their "eggs" in one basket, and if that single investment went bad, the outcome could have been much worse. The individual would have been better off diversifying their portfolio, that is buying a large number of stocks in different industries and even in different countries. This is a much safer approach to investing. This risky strategy could have lost this individual a great deal of money while only having eight years left before retirement.
297. You are starting your first job after college and are looking for a mutual fund in which to invest some of your retirement savings. Your college economics course taught that it is virtually impossible to beat the market in the long run given the efficient markets hypothesis, so you are looking at funds that try to mimic the market and produce the same 7% annual return as the market has produced since 1802. You have narrowed it down to three mutual funds (A, B, and C), all of which have consistently produced an average annual rate of return of 7%. Fund A charges a 1.5% annual fee, Fund B charges 0.2% annually, and Fund C is a no-fee fund. Compare how much your investment will be worth after 10 years if you initially invest $10,000 in Fund A versus Fund B versus Fund C. How much will you end up paying in fees for each fund over the course of 10 years if your initial investment is $10,000? ANSWER: At an annual return of 7%, using the rule of 70,
, it will take 10 years for the investment to double in value if
there are no initial fees. Fund A: Since there is an annual fee of 1.5%, the effective annual return on the investment is 5.5% per year. Year 1: Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 10 Year 2: Year 3: Year 4: Year 5: Year 6: Year 7: Year 8: Year 9: Year 10: Fund B: Since there is an annual fee of 0.2%, the effective annual return on the investment is 6.8% per year. Year 1: Year 2: Year 3: Year 4: Year 5: Year 6: Year 7: Year 8: Year 9: Year 10: Fund C: Since there is no annual fee in this fund, the effective annual return on the investment is 7%. $10,000 (1.07)10 = $19,671.51. Thus, using Fund A, the amount paid in fees over 10 years would be $19,671.51 − $17,081.44 = $2,590. 07. Using Fund B, the amount paid in fees over 10 years would be $19,671.51 − $19,306.90 = $364.61. Using Fund C, the amount paid in fees over 10 years would be $0.
298. Suppose you have two individuals, one of whom is very risk-averse and the other loves risk. What kind of financial instruments would you advise these individuals to purchase based solely on their risk tolerance levels? ANSWER: The risk-averse person should go for bonds, such as U.S. T-Bills and long-term government bonds. They could also opt for corporate bonds, but only from very stable corporations. The person who loves risk should opt for stocks. This person should still, however, diversify their portfolio by investing in many different stocks in different sectors and different countries even.
299. Suppose there is a rumor that company X is about to merge with another very profitable company. Now suppose that a major broker spreads this rumor, and people take that broker seriously. Could this broker cause the company to "appear" to be a profitable stock to hold? ANSWER: If enough people react to the rumor, then yes, this broker could cause the company to "appear" to be a profitable stock to hold. If enough people believe the rumor and start to buy the stock, they will cause the price of the stock to rise. This can make the company appear as though it is profitable even before this supposed merger has taken place. Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 10 300. Speculative bubbles can make some people very rich and other people very poor. Explain why these bubbles are bad for the economy as a whole. What role does price as a conveyor of information play? Explain. ANSWER: Speculative bubbles, and their bursting, can hurt an economy. A speculative bubble in the price of stock arises when stock prices rise far higher, and more rapidly, than can be accounted for by the fundamental prospects of the companies at hand. As the price of a stock rises, more people might buy in in hopes of it rising more, even when it shouldn't, causing the price to continue rising. During the rise of the bubble, capital is invested in areas where it is not very valuable. Once the bubble crashes, more problems arise. Lower stock prices mean that people feel poorer and so they will spend less. The collapse of the bubble also means that workers must move from one sector to another, such as from high tech to retailing, or from real estate to export industries. Shifting labor from sector of an economy to another creates labor adjustment costs. Speculative bubbles can—and have—occurred with other assets as well as stocks, the most notable being the bubble in home prices that burst in 2007.
301. Someone offers you a hot tip that promises a large payoff in the stock market. How would you respond to this person, based on the simple and practical guidance found in this chapter? ANSWER: As this chapter has pointed out, it is difficult for an investor to consistently beat the market over long periods. I would be skeptical of anyone who promises a quick profit off of the stock market as the prices reflect all publicly available information. It would be best to just stick to the guidelines set forth in this chapter: diversify your investments by buying many different stocks in many different markets and in different countries, avoid high fees, try to generate a high compound return over time, and understand that the promise of high returns is often accompanied by higher risk.
Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 11 1. Which correctly describes a country's labor force? a. A country's labor force consists only of those employed. b. A country's labor force consists of those employed and unemployed. c. All citizens in a country are included in its labor force. d. All adults in a country are included in its labor force. ANSWER: b 2. In a strong, growing economy, what happens to the number of jobs and types of jobs? a. The number of jobs grows and the types of jobs grow as well. b. The number of jobs varies with the old types of jobs and the new types of jobs. c. There are fewer workers in each type of job as machines replace them, though there is no change in the types of jobs. d. The average trend is that there is an increase in the number of jobs but some types of jobs cease to exist while other, new types of jobs replace them.
ANSWER: d 3. Who of these would be considered unemployed? a. Mark, laid off from his job as a bricklayer, returned to school full time. b. Sarah, who earned nearly $80,000 per year in her previous job, is a stay-at-home mom. c. Tim, a 13-year-old high school student, is looking for a part-time job. d. Janice, who graduated from the university in May, is waiting for her new job to start in July. ANSWER: d 4. A country's total civilian noninstitutionalized adult population is 1 million, and 500,000 people in this country are working, with another 20,000 people looking for work. Which of these statements about the labor force statistics in this country is accurate? a. The employment rate is 50%, and the unemployment rate is 2%. b. The unemployment rate is 2%, and the labor force participation rate is 52%. c. The employment rate is 96.15%, and the labor force participation rate is 52%. d. The labor force is 500,000, and the labor force participation rate is 50%. ANSWER: c 5. The labor force consists of: a. employed workers only. b. adults who do not have a job but who are looking for work. c. employed workers and adults who do not have jobs but who are looking for work. d. all adult noninstitutionalized civilians. ANSWER: c 6. A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. How many people in this country are in the labor force? Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 11 a. 15 million b. 20 million c. 25 million d. 30 million ANSWER: b 7. A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. What is this country's unemployment rate? a. 10.0% b. 16.7% c. 25.0% d. 40.0% ANSWER: c 8. A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. What is this country's labor force participation rate? a. 50.0% b. 66.7% c. 75.0% d. 83.3% ANSWER: b 9. A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. How many discouraged workers does this country have? a. 5 million b. 10 million c. 15 million d. 20 million ANSWER: a 10. A country has 50 million people, 30 million of whom are adults. Of the adults, 5 million are not interested in working, another 5 million are interested in working but have given up looking for work, and 5 million are still looking for work. Of those who do have jobs, 5 million are working part time but would like to work full time, and the remaining 10 million are working full time. What is this country's underemployment rate? a. 20% b. 25% Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 11 c. 40% d. 50% ANSWER: c 11. Which of these is part of the labor force? a. a homemaker b. a full-time student c. a person who was laid off and is now looking for work d. a retiree ANSWER: c 12. An unemployed person is one who: a. stays at home and is not looking for work. b. works for a job that pays less than they expected. c. is not willing to work even though they are able to. d. does not have a job but is actively looking for one. ANSWER: d 13. If the adult population of a country is 200 million, 100 million are employed, and 10 million are unemployed, this country's labor force is: a. 200 million. b. 190 million. c. 110 million. d. 100 million. ANSWER: c 14. If the adult population of a country is 200 million, 100 million are employed, and 10 million are unemployed, this country's unemployment rate is: a. 5.0%. b. 9.1%. c. 10.0%. d. 11.0%. ANSWER: b 15. If the adult population of a country is 200 million, 100 million are employed, and 10 million are unemployed, this country's labor force participation rate is: a. 5%. b. 9%. c. 50%. d. 55%. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 11 16. People are officially unemployed only if they are: a. unwilling and unable to work and cannot find a job. b. unwilling but able to work and cannot find a job. c. willing but unable to work and cannot find a job. d. willing and able to work but cannot find a job. ANSWER: d 17. Who is considered unemployed? a. Julia, a full-time college student, has a part-time job. b. Jason, a full-time caregiver, was searching for a part-time position two months ago, but hasn't since. c. Javier, a retired college professor, does community volunteer work. d. John, on temporary layoff from his work, awaits recall. ANSWER: d 18. Table: Employment, Unemployment, and Labor Force Participation 2009 2010 Population 380 million 400 million Adults in labor force 255 million 260 million Adults not in labor force 78 million 80 million Employed workers 245 million 247 million What was the labor force participation rate of this country in 2010? a. 72% b. 76% c. 85% d. 93% ANSWER: b 19. Table: Employment, Unemployment, and Labor Force Participation 2009 2010 Population 380 million 400 million Adults in labor force 255 million 260 million Adults not in labor force 78 million 80 million Employed workers 245 million 247 million What was the unemployment rate of the country in 2010? a. 3% b. 4% c. 5% d. 6% ANSWER: c 20. Table: Employment, Unemployment, and Labor Force Participation 2009 2010 Population 380 million 400 million Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 11 Adults in labor force 255 million 260 million Adults not in labor force 78 million 80 million Employed workers 245 million 247 million What was the employment rate of the country in 2009? a. 95% b. 96% c. 97% d. 98% ANSWER: b 21. Table: Employment, Unemployment, and Labor Force Participation 2009 2010 Population 380 million 400 million Adults in labor force 255 million 260 million Adults not in labor force 78 million 80 million Employed workers 245 million 247 million What was the labor force participation rate of this country in 2009? a. 64% b. 67% c. 77% d. 88% ANSWER: c 22. Table: Employment, Unemployment, and Labor Force Participation 2009 2010 Population 380 million 400 million Adults in labor force 255 million 260 million Adults not in labor force 78 million 80 million Employed workers 245 million 247 million What was the unemployment rate of the country in 2009? a. 3.0% b. 3.9% c. 4.0% d. 5.0% ANSWER: b 23. Table: Employment, Unemployment, and Labor Force Participation 2009 2010 Population 380 million 400 million Adults in labor force 255 million 260 million Adults not in labor force 78 million 80 million Employed workers 245 million 247 million What was the employment rate of the country in 2010? a. 95% Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 11 b. 96% c. 97% d. 98% ANSWER: a 24. Which of these individuals can be counted as unemployed? a. Darren, a 10-year-old child b. Moesha, a full-time college student c. Nazma, a stay-at-home mom d. Juan, a recent college graduate looking for his first job ANSWER: d 25. Which of these individuals can be counted as unemployed? a. a woman who works only part time b. a temp worker, who is currently responding to job advertisements from the newspaper c. a man who was laid off from an auto manufacturing plant in Detroit d. a husband who stays at home to raise his two children ANSWER: c 26. Which of these individuals can be counted as unemployed? a. Hannah and Harold, who are serving time for armed robbery b. Jason and Jill, who have not looked for work for the last 2 years c. Stewart and Susan, who are currently housed in a mental institution d. Jean, who left her job to search for a higher-paying position ANSWER: d 27. Which individual is part of the civilian labor force? a. someone who retired four months ago b. someone who is collecting unemployment benefits c. someone who just celebrated a 15th birthday d. someone who is on active military duty ANSWER: b 28. A country has 24 million people in the labor force, and 21.5 million of them are employed. What is the unemployment rate in this country? a. 2.5% b. 10.4% c. 21.5% d. 89.6% ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 11 29. A country's labor force participation rate and its unemployment rate are both very low. Which answer explains why this may be the case? a. A large percentage of the population consists of children. b. A large percentage of the population is aging and has retired. c. A large percentage of the population is unemployed. d. A large percentage of the population is employed. ANSWER: b 30. The labor force is made up of: a. institutionalized people, the military, and employed workers. b. employed and unemployed workers. c. unemployed workers, employed workers, and students over 16 years of age. d. all adult noninstitutionalized civilians. ANSWER: b 31. What population categories go into the formula for the unemployment rate? a. unemployed and employed b. civilian, military, and unemployed c. adults not in labor force, employed, and unemployed d. unemployed, employed, and discouraged workers ANSWER: a 32. What is the unemployment rate for a nation with 6 million employed and 2 million unemployed? a. 10% b. 15% c. 20% d. 25% ANSWER: d 33. Adults who do not have a job but who are looking for work are: a. unemployed. b. not part of the labor force. c. unwilling to accept employment. d. discouraged workers. ANSWER: a 34. The percentage of adults in the labor force is the: a. unemployment rate. b. employment rate. c. labor force participation rate. d. workforce participation rate. Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 11 ANSWER: c 35. When workers lose their jobs and become officially unemployed, the unemployment rate: a. remains constant. b. increases. c. decreases. d. becomes difficult to predict. ANSWER: b 36. When workers lose their jobs and become officially unemployed, the number of people in the labor force: a. remains constant. b. increases. c. decreases. d. becomes difficult to predict. ANSWER: a 37. Which of these BEST defines a nation's labor force? a. the total number of persons between the ages of 16 and 65 b. the total number of employed and unemployed persons c. the total number of persons working full time and part time d. the total number of persons who are willing and able to work but cannot find a job ANSWER: b 38. An unemployed person is BEST defined as an adult who: a. does not have a job but is looking for work. b. is working fewer hours than they want to. c. is a full-time homemaker or a full-time student and is therefore not working. d. has given up looking for work after being laid off for a long period of time. ANSWER: a 39. Table: Labor Data Adult population 200 million Labor force 150 million Employed persons 138.75 million Discouraged workers 10.5 million According to the labor data, the unemployment rate is: a. 7.0%. b. 0.7%. c. 5.6%. d. 7.5%. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 11 40. Table: Labor Data Adult population 200 million Labor force 150 million Employed persons 138.75 million Discouraged workers 10.5 million According to the accompanying labor data, the labor force participation rate is: a. 60.4%. b. 99.3%. c. 69.4%. d. 75.0%. ANSWER: d 41. Which of these is an example of an unemployed person? a. a retiree working as a volunteer in a hospital b. a worker who is willing to work more hours if available c. a recent college graduate looking for their first job d. a full-time student working part time at night ANSWER: c 42. Which of these is NOT a reason the unemployment rate is considered to be an incomplete indicator of the overall health of the labor market? a. It does not measure how well people are matched to the jobs at which they work. b. It does not count discouraged workers. c. It does not correctly define the adult population. d. It counts part-time workers who would like to work full time as employed. ANSWER: c 43. What is the term for workers who have given up looking for a job but would still like one? a. jobless workers b. discouraged workers c. laid-off workers d. discarded workers ANSWER: b 44. Discouraged workers and underemployed workers are examples of: a. workers that lead to an underestimation of the unemployment rate. b. populations that cause higher unemployment taxes. c. users of unemployment insurance. d. poor national employment planning. ANSWER: a 45. Individuals who have given up looking for work but still would take a job are considered: Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 11 a. unemployed workers. b. displaced workers. c. discouraged workers. d. part of the labor force. ANSWER: c 46. The presence of discouraged workers causes the measured unemployment rate to be: a. correctly stated. b. overstated. c. understated. d. either overstated, understated, or correctly stated. ANSWER: c 47. Discouraged workers are people who: a. have given up looking for work but would still like to work. b. are willing and able to work but cannot find a job. c. are looking for a job that pays more than they are currently earning. d. are working for fewer hours than they want to. ANSWER: a 48. According to the Bureau of Labor Statistics, which of these would be counted as unemployed? a. discouraged workers b. workers who are overqualified for their current position c. workers who have a part-time job but want a full-time job d. new graduates who are looking for their first job ANSWER: d 49. Discouraged workers are workers who have: a. given up looking for work but would still like a job. b. given up looking for work and are not available for work. c. not given up looking for work but are not available for work. d. not given up looking for work and still would like a job. ANSWER: a 50. A discouraged worker is a(n): a. person working for fewer hours than they prefer. b. worker who is being discouraged by their employer when asking for a promotion. c. person who has given up looking for work but would still like a job if one is available. d. unemployed person who has temporary part-time employment. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 11 51. Which of these would NOT be counted as employed? a. an underemployed person b. an employee working overtime every day c. a part-time worker d. a discouraged worker ANSWER: d 52. Economists count discouraged workers as part of the: a. labor force. b. unemployed. c. employed. d. adult population. ANSWER: d 53. The unemployment rate measures the: a. quality of jobs. b. number of discouraged workers. c. number of underemployed workers. d. share of the labor force that is unemployed. ANSWER: d 54. The unemployed in a country are all of the: a. people who are not employed. b. adults who are not employed. c. adults who are not employed and who are actively looking for work. d. adults who have lost their jobs or are retired from their jobs. ANSWER: c 55. Suppose a country's population of 1,000,000 people includes 300,000 children and 700,000 adults. The 700,000 adults consist of 90,000 retirees, 10,000 institutionalized persons, 50,000 full-time students and homemakers, 40,000 people seeking employment, and 510,000 people who are working. What is the country's unemployment rate? a. 4.0% b. 5.7% c. 7.3% d. 7.8% ANSWER: c 56. Suppose a country's population of 1,000,000 people includes 300,000 children and 700,000 adults. The 700,000 adults consist of 90,000 retirees, 10,000 institutionalized persons, 50,000 full-time students and homemakers, 40,000 people seeking employment, and 510,000 people who are working. What is the country's labor force participation rate? Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 11 a. 72.8% b. 78.6% c. 79.7% d. 92.7% ANSWER: c 57. Suppose a country's population of 1,000,000 people includes 200,000 children and 800,000 adults. The 800,000 adults include 70,000 full-time students and homemakers, 120,000 retirees, 10,000 institutionalized persons, 40,000 people seeking employment, and 560,000 people working. What is the unemployment rate in this country? a. 5.0% b. 6.7% c. 7.1% d. 16.7% ANSWER: b 58. Suppose a country's population of 1,000,000 people includes 200,000 children and 800,000 adults. The 800,000 adults include 70,000 full-time students and homemakers, 120,000 retirees, 10,000 institutionalized persons, 40,000 people seeking employment, and 560,000 people working. What is the labor force participation rate in this country? a. 42.8% b. 50.6% c. 70.9% d. 75.9% ANSWER: d 59. When discouraged workers are present, the unemployment rate is _____ because some people who _____ counted in the labor force. a. underestimated; want to work are not b. underestimated; do not want to work are c. overestimated; want to work are not d. overestimated; do not want to work are ANSWER: a 60. What is NOT a common concern about unemployment? a. Unemployment means that output is lower than it should be. b. Unemployment is overestimated due to discouraged workers. c. Unemployment can be psychologically devastating to people. d. Unemployment can cause financial crises for households. ANSWER: b 61. What measure does NOT tend to increase during recessions? Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 11 a. number of discouraged workers b. size of the labor force c. number of unemployed d. unemployment rate ANSWER: b 62. Frictional unemployment is caused by: a. incomplete information. b. recessions. c. the transformation of the United States into a service economy. d. globalization. ANSWER: a 63. What is one of the causes of frictional unemployment? a. uneducated workforce b. willingness to take lower-level jobs c. scarcity of information d. overabundance of job vacancies ANSWER: c 64. In a year without a recession, the majority of U.S. unemployment is: a. frictional. b. structural. c. cyclical. d. recurrent. ANSWER: a 65. In the late 1990s, the rising popularity of Barnes & Noble and Borders shifted workers from independent bookshops to larger chains. What type of unemployment was associated with this reallocation of the workforce? a. frictional unemployment b. technological substitution c. creative destruction d. structural unemployment ANSWER: a 66. The short-term unemployment caused by the ordinary difficulties of matching employee to employer is called: a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. seasonal unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 11 ANSWER: a 67. Creative destruction occurs at the level of the: a. firm. b. industry. c. entire economy. d. firm, industry, and entire economy. ANSWER: d 68. Frictional unemployment is BEST defined as: a. long-term unemployment caused by the changing features of an economy. b. short-term unemployment caused by the difficulties of matching employees to employers. c. unemployment caused by the cyclical conditions of an economy. d. a normal level of unemployment caused by high wages. ANSWER: b 69. Someone who recently moved to Florida because of its warmer climate will need to spend some time looking for a new job. This is an example of: a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. underemployment. ANSWER: a 70. When the country is not in a recession, the largest fraction of unemployment in the United States lasts: a. less than 5 weeks. b. between 5 and 14 weeks. c. between 15 and 26 weeks. d. more than 27 weeks. ANSWER: a 71. Following the 2007–2009 recession, in 2010, the largest fraction of unemployment in the United States lasted: a. less than 5 weeks. b. between 5 and 14 weeks. c. between 15 and 26 weeks. d. more than 27 weeks. ANSWER: d 72. Which of these is the best example of frictional unemployment? a. John, a coal miner, was laid off because of a lack of demand for workers in his industry. He is looking into new opportunities in computer programming, but they require him to gain some new skills.
Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 11 b. Heather recently graduated with her doctorate in economics. She is searching for a job that matches her skills. c. Peter, a highly skilled construction worker, lost his job when the recession began. He is looking for work, but demand in the construction industry is still low. d. Allison, a recent high school graduate with high aspirations, is seeking a job as the CEO of a Fortune 500 company.
ANSWER: b 73. Frictional unemployment is: a. short-term unemployment due to the normal difficulties of matching employers and employees. b. persistent and long-term unemployment caused by shocks that make it more difficult for workers to find jobs. c. long-term unemployment caused by a mismatch between the skills workers possess and the skills that the market is looking to hire. d. unemployment due to fluctuations in the business cycle.
ANSWER: a 74. The MOST likely influence of the Internet on the rate of frictional unemployment has been to: a. raise it. b. lower it. c. have no effect on it. d. have an unpredictable effect on it. ANSWER: b 75. Which of these is TRUE of frictional unemployment? a. It arises as a result of too much market competition. b. It has a short duration. c. It is a result of the minimum wage law. d. It rises in a recession. ANSWER: b 76. During a typical year that does not have a recession, the duration for at least half of the unemployed is: a. less than 1 week. b. less than 14 weeks. c. between 15 and 26 weeks. d. more than 27 weeks. ANSWER: b 77. Which type of unemployment is an outcome of economist Joseph Schumpeter's "creative destruction" process within an industry? a. cyclical unemployment b. structural unemployment c. seasonal unemployment d. frictional unemployment Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 11 ANSWER: d 78. Which of these is a case of frictional unemployment? a. Timothy is looking for a job where he can apply his expertise in computer programming. b. Terrance, who has a certificate in TV/VCR repair, cannot find a TV/VCR repair shop in his town where he can apply for a job. c. Tina was laid off temporarily during a period of low demand. Tina is using the time off to volunteer at her church rather than look for a new job. d. Thomas recently quit his job to start his own business.
ANSWER: a 79. The causes of frictional unemployment include: a. the business cycle. b. the scarcity of information. c. changes in economic structure. d. labor unions. ANSWER: b 80. An example of frictional unemployment is a woman who is unemployed: a. because there are more people seeking work than there are jobs available. b. because she does not have the skills sought in current job openings. c. when she leaves the labor force due to discouragement. d. while she waits for a job offer after her job interview. ANSWER: d 81. There are more jobs available than there are unemployed people and the unemployed have the necessary skills for the job openings. Most of the unemployed people are unemployed for no more than five weeks as they seek a new job and are hired. What type of unemployment is described in this situation? a. cyclical unemployment b. structural unemployment c. frictional unemployment d. seasonal unemployment ANSWER: c 82. Which would NOT be consistent with frictional unemployment? a. It takes a few weeks for unemployed people to apply, interview, and be offered a job. b. The unemployed people do not have the specific skills sought in job openings. c. Employers must post job openings and review applications before hiring new employees. d. There are plenty of vacant jobs available. ANSWER: b 83. Oil shocks, the shift from manufacturing to service jobs, and the use of new technologies are reasons for _____ unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 11 a. frictional b. cyclical c. structural d. permanent ANSWER: c 84. The persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy is called: a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. seasonal unemployment. ANSWER: b 85. A worker repairing VHS cassette-tape players was laid off because most of their customers have started using DVD players and streaming services. This worker is now: a. a discouraged worker. b. frictionally unemployed. c. cyclically unemployed. d. structurally unemployed. ANSWER: d 86. The shift toward more of a service economy and less of a manufacturing economy in the United States has caused an increase in: a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. seasonal unemployment. ANSWER: b 87. Which of these programs could help overcome structural unemployment? a. worker retraining b. limitations to unemployment benefits c. job-search assistance programs d. worker retraining, limitations to unemployment benefits, and job-search assistance ANSWER: d 88. Over the past few decades, the U.S. economy has switched from being primarily a manufacturing economy to a service economy. Many individuals working in manufacturing positions lost their jobs, and many new jobs opened up in services. For those who lost jobs in manufacturing, this is an example of: a. industry unemployment. b. frictional unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 11 c. structural unemployment. d. cyclical unemployment. ANSWER: c 89. Which of these does NOT contribute directly to the persistence of structural unemployment? a. unemployment benefits b. unions c. employment protection laws d. work tests ANSWER: d 90. Structural unemployment is: a. caused by the ordinary difficulties of matching employee to employer. b. caused by long-lasting shocks or changes in permanent features of an economy. c. unemployment correlated with the business cycle. d. natural unemployment. ANSWER: b 91. The phrase "persistent long-term unemployment" means that: a. a substantial fraction of the unemployed have been so for more than one year. b. the unemployment problem has lasted for a long time. c. a substantial fraction of the unemployed have been so for more than one year and that this problem has
lasted for a long time. d. a small fraction of the unemployed have been so for more than one year, but that this problem has not lasted for a long time.
ANSWER: c 92. Research establishes a connection between structural unemployment and: a. higher rates of output. b. lower levels of stress. c. higher levels of happiness. d. higher rates of suicide. ANSWER: d 93. Structural unemployment is a bigger problem in Europe than in the United States because of: a. technological differences. b. labor market regulations. c. oil prices. d. drug use. ANSWER: b 94. Long-lasting unemployment benefits tend to: Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 11 a. increase the rate of structural unemployment. b. decrease the rate of structural unemployment. c. increase the rate of frictional unemployment. d. decrease the rate of frictional unemployment. ANSWER: a 95. Minimum wage laws and unions tend to: a. lower wages and raise unemployment. b. raise wages and raise unemployment. c. lower wages and lower unemployment. d. raise wages and lower unemployment. ANSWER: b 96. If employers can fire an employee for any reason, other things being equal: a. it will be easier for job seekers to find employment. b. it will be more difficult for job seekers to find employment. c. the long-term unemployment rate will be higher. d. labor markets will be less flexible and dynamic. ANSWER: a 97. Active labor market policies: a. cause riots in France. b. enforce collective bargaining over wages, benefits, and working conditions. c. state that an employee may quit and an employer may fire an employee at any time and for any reason. d. focus on getting unemployed workers back to work. ANSWER: d 98. Europe has unemployment that is more persistent and longer in duration than unemployment in the United States. This suggests that Europe has higher: a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. underemployment. ANSWER: b 99. Which of these is NOT true of structural unemployment? a. It is persistent over time. b. It is long term in duration. c. It results from industry restructuring. d. It results from scarcity of information. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 11 100. Higher levels of unemployment benefits and employment protection: a. raise structural unemployment. b. lower structural unemployment. c. raise cyclical unemployment. d. lower cyclical unemployment. ANSWER: a 101. Structural unemployment is caused by: a. job rationing. b. the time that it takes to match workers and jobs. c. periodic declines in business activity that give rise to an inadequate demand for workers in the economy. d. long-lasting shocks to permanent features of an economy that make it more difficult for some workers to find jobs.
ANSWER: d 102. Which of these is a case of structural unemployment? a. Aaron is leaving his job to take a higher-paying position. b. Amanda has been searching over a year for a position working as a travel agent. c. Ashley took an early retirement package. d. Alfred is searching for a position in which he can use his expertise in criminal forensics. ANSWER: b 103. Compared to the United States, unemployment rates in Western Europe tend to be: a. lower because of more labor regulations. b. lower because of fewer labor regulations. c. higher because of more labor regulations. d. higher because of fewer labor regulations. ANSWER: c 104. Which of these does NOT raise structural unemployment? a. higher union membership b. more unemployment benefits c. higher minimum wages d. active labor market policies ANSWER: d 105. Which of these elements reduces structural unemployment? a. the enhancement of worker retraining programs b. the extension of unemployment benefits c. the growth of labor unions d. the existence of employment protection laws Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 11 ANSWER: a 106. Which of these elements increases structural unemployment? a. active labor market policies b. bonuses for early employment c. job-search assistance programs d. employment protection laws ANSWER: d 107. Legal and cultural issues contribute significantly to what category of unemployment? a. structural b. cyclical c. short-term d. frictional ANSWER: a 108. Structural unemployment is more persistent in France than in the United States because: a. French workers have less incentive to quickly seek a new position since their unemployment benefits are much higher. b. France's labor regulations require a mandatory waiting period before a worker can reapply for a new job.
c. American workers have many more job opportunities than French workers. d. labor unions are weaker in France than they are in the United States. ANSWER: a 109. If a national government improves its unemployment benefits, its unemployment rate will MOST likely: a. increase. b. decrease. c. remain the same. d. follow the global trend, regardless of national policy. ANSWER: a 110. Higher unemployment benefits tend to: a. increase the unemployment rate. b. reduce the unemployment rate. c. have no impact on the unemployment rate. d. have an unpredictable impact on the unemployment rate. ANSWER: a 111. An increase in unemployment benefits tends to: a. lower the incentive to search for a job and raise structural unemployment. b. lower the incentive to search for a job and lower structural unemployment. c. raise the incentive to search for a job and raise structural unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 11 d. raise the incentive to search for a job and lower structural unemployment. ANSWER: a 112. Figure: Labor Market
How many people are employed at the market wage? How many people end up unemployed due to the implementation of a $10 minimum wage? a. 40; 20 b. 40; 40 c. 60; 40 d. 60; 20 ANSWER: c 113. Figure: Labor Market
Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 11
What is the unemployment rate in this market with a $10 minimum wage? a. 20% b. 25% c. 50% d. 100% ANSWER: c 114. Figure: Labor Market
Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 11
If this market is initially in equilibrium, then the government imposes a $10 minimum wage, the quantity of labor employed will fall by: a. 20. b. 40. c. 60. d. 80. ANSWER: a 115. Figure: Labor Supply and Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 11
What is the unemployment rate caused by the labor union's action to increase its wage demands to $11 an hour? a. 40.0% b. 60.0% c. 66.7% d. 75.6% ANSWER: a 116. Figure: Labor Supply and Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 11
What is the quantity of labor that is unemployed as a result of the labor union's action to increase its wage demands to $11 an hour? a. 700 b. 1,100 c. 1,800 d. 2,700 ANSWER: c 117. Figure: Labor Supply and Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 11
How much will the quantity of labor employed decline as a result of the labor union's action to increase its wage demands to $11 an hour? a. 700 b. 1,100 c. 1,800 d. 2,700 ANSWER: a 118. _____ reduce the quantity of labor demanded. a. Minimum wages b. Union wages c. Both minimum wages and union wages d. Neither minimum wages nor union wages ANSWER: c 119. A minimum wage is: a. an employment protection law. b. a labor market price ceiling. c. the equilibrium wage in an unskilled labor market. d. a labor market price floor. ANSWER: d 120. Which of these tends to increase unemployment? Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 11 a. unemployment benefits b. minimum wages c. labor unions d. unemployment benefits, minimum wages, and labor unions ANSWER: d 121. Countries in Western Europe have higher: a. minimum wages than the United States. b. median wages than the United States. c. unemployment rates than the United States. d. minimum wages, higher median wages, and higher unemployment than the United States. ANSWER: d 122. If the median wage is $9 in country X and $8 in country Y and both countries have similar elasticities of labor supply and demand, then a minimum wage of $4 in both countries will tend to: a. make unemployment higher in country X than in country Y. b. make unemployment higher in country Y than in country X. c. make unemployment the same in both countries. d. have no effect in either country. ANSWER: b 123. If the equilibrium wage is $9 in the market for hotel workers and $8 in the market for restaurant workers and both markets have similar elasticities of labor supply and demand, then a minimum wage of $4 in both markets will: a. cause more unemployment among hotel workers than restaurant workers. b. cause more unemployment among restaurant workers than hotel workers. c. cause the same amount of unemployment in both markets. d. have no effect in either market. ANSWER: d 124. If the equilibrium wage is $9 in the market for hotel workers and $8 in the market for restaurant workers and both markets have similar elasticities of labor supply and demand, then a minimum wage of $10 in both markets will: a. cause more unemployment among hotel workers than restaurant workers. b. cause more unemployment among restaurant workers than hotel workers. c. cause the same amount of unemployment in both markets. d. have no effect in either market. ANSWER: b 125. Which of these BEST describes the effects of a major labor union that maintains a union wage above the market wage? a. The quantity of labor demanded exceeds the quantity of labor supplied, and the unemployment rate increases. Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 11 b. The quantity of labor demanded exceeds the quantity of labor supplied, and the unemployment rate
decreases. c. The quantity of labor supplied exceeds the quantity of labor demanded, and the unemployment rate increases.
d. The quantity of labor supplied exceeds the quantity of labor demanded, and the unemployment rate decreases.
ANSWER: c 126. What information does the World Bank's "rigidity of employment index" provide? a. a summary of the average length of unemployment over a five-year period b. a measure of the effects of shrinking manufacturing firms in developed nations c. a summary of firms' costs for hiring, firing, and adjusting employment hours d. a measure of the available government assistance for workers seeking employment ANSWER: c 127. What allows an employee to quit at any time and an employer to fire at any time for any reason? a. employment-at-will b. contractual autonomy c. right-to-hire d. termination sovereignty ANSWER: a 128. What problem do employment protection laws create? a. They encourage workers to change jobs more frequently. b. They are costly for governments to maintain. c. Employers have difficulty keeping qualified workers. d. Employers are reluctant to hire new workers. ANSWER: d 129. Which of these statements about the employment-at-will doctrine is TRUE? a. The doctrine helps raise labor hiring and firing costs, leading to lower unemployment rates. b. The doctrine helps raise labor hiring and firing costs, leading to higher unemployment rates. c. The doctrine helps lower labor hiring and firing costs, leading to lower unemployment rates. d. The doctrine helps lower labor hiring and firing costs, leading to higher unemployment rates. ANSWER: c 130. What types of laws affect young, minority, and unemployed workers MOST negatively? a. employment-at-will b. employment protection c. constructive discharge d. fair labor ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 11 131. Which of these does NOT explain persistently higher unemployment in Europe than in the United States? a. labor unions b. minimum wages c. the extent of globalization d. employment protection laws ANSWER: c 132. Which doctrine indicates that an employee may quit and an employer may fire an employee at any time for any reason? a. laissez faire b. employment-at-will c. rational ignorance d. equal pay for equal work ANSWER: b 133. Which of these is TRUE of the effects of employment protection laws? a. They make labor markets more flexible in adjusting for changes in market conditions. b. They reduce the duration of unemployment. c. They reduce the unemployment rates among young and minority workers. d. They create employment security for workers with a job. ANSWER: d 134. Which of these policies will NOT reduce unemployment? a. job retraining b. work tests c. job-search assistance d. raising unemployment benefits ANSWER: d 135. Structural unemployment has been a more serious problem in Europe than in the United States because of: a. a low level of labor regulations. b. active labor unions. c. more generous unemployment benefits. d. much tighter government control. ANSWER: c 136. Both unions and minimum wages: a. increase the quantity of labor demanded and reduce unemployment. b. decrease the quantity of labor demanded and increase unemployment. c. increase the quantity of labor supplied and reduce unemployment. d. decrease the quantity of labor supplied and increase unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 11 ANSWER: b 137. If minimum wages are higher than the median wage, then minimum wages will affect: a. more people and create more unemployment. b. more people and create less unemployment. c. fewer people and create more unemployment. d. fewer people and create less unemployment. ANSWER: a 138. The most basic U.S. employment law stipulating that an employee may quit and an employer may fire at any time and for any reason is called: a. affirmative action. b. the employee privacy law. c. the Equal Employment Opportunity Act. d. the employment-at-will doctrine. ANSWER: d 139. Increases in the minimum wage will MOST likely lead to: a. higher living standards for low-income workers. b. higher unemployment. c. lower wages in complement industries. d. increases in worker education programs. ANSWER: b 140. Consider countries A and B. In country A, the minimum wage is 30% of the median wage, and in country B, the minimum wage is 60% of the median wage. As a result, the minimum wage will affect more workers in country _____ and create more unemployment in country _____. a. A; A b. A; B c. B; B d. B; A ANSWER: c 141. Laws that make it more difficult (and more expensive) to fire workers: a. lead to higher rates of long-term unemployment. b. may raise unemployment rates but typically only in the short term. c. lead to higher rates of employment. d. typically lead to higher wages on average. ANSWER: a 142. Job-search programs and work tests for unemployed workers are likely to be sponsored by: a. firms. Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 11 b. unions. c. governments. d. workers. ANSWER: c 143. Which of these is an example of an active labor market policy? a. minimum wage laws b. paying unemployed workers who find a job c. extending unemployment benefits d. worker unions ANSWER: b 144. Which of these is NOT a factor that can increase structural unemployment? a. oil shock b. globalization c. early employment bonuses d. fundamental technology ANSWER: c 145. Structural unemployment is both _____ and _____. a. brief; widespread b. long term; narrowly focused c. brief; narrowly focused d. persistent; long term ANSWER: d 146. Which is NOT a type of law or regulation that is known to sometimes increase the unemployment rate? a. employment protection laws b. unemployment benefits c. product safety regulations d. minimum wage laws ANSWER: c 147. The unemployment benefit program that would create the greatest incentive to return to work as quickly as possible while helping to replace lost income is the unemployment benefit that: a. can be paid for up to one year. b. is contingent on the recipient applying for new jobs each week. c. provides housing assistance as well as monthly cash payments. d. replaces 80% of the unemployed worker's previous wage. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 11 148. Minimum wage laws that raise wages will _____ unemployment because _____. a. increase; there are more people seeking work but fewer firms wanting to hire at higher wages b. increase; a larger portion of the workers seeking jobs have higher skill levels c. decrease; there are fewer people wanting to work even though more firms want to hire at higher wages d. decrease; firms want to avoid paying higher wages ANSWER: a 149. What impact do unions tend to have on the wages of union employees? a. Unions tend to push wages higher. b. Wages of union members tend to be lower. c. Wages of union employees are equal to the median wage. d. Unions have no impact on the wages of union employees. ANSWER: a 150. Which is NOT something typically negotiated with employers by a union representing a group of workers? a. wages b. tax levels c. working conditions d. benefits ANSWER: b 151. The median wage is the: a. average wage. b. wage of workers who are halfway through their working years. c. wage halfway between the highest wage and the lowest wage. d. wage for which half of workers earn more and half of workers earn less. ANSWER: d 152. The employment-at-will doctrine in the United States: a. has no exceptions. b. means an employee can quit for any reason but an employer cannot fire an employee for any reason. c. means that anyone who wants a job is entitled to a job. d. gives an employee the right to quit and an employer the right to fire an employee with some exceptions to both.
ANSWER: d 153. The higher the costs of hiring new workers and the higher the costs of firing unproductive workers, the: a. more reluctant firms are to hire new workers. b. more eager firms are to hire new workers. c. higher wages tend to be. d. greater the incentive for firms to rely on labor rather than capital. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 11 ANSWER: a 154. What relationship exists between the World Bank's rigidity of employment index and unemployment rates across countries? a. There is a positive relationship. b. There is a negative relationship. c. Rigidity of employment is unchanging regardless of the unemployment rate. d. There is no relationship or predictable pattern between the two measures. ANSWER: a 155. Which worker might be viewed by a firm as posing the greatest risk of not performing well if hired to work in a specific field of expertise? a. a new graduate of a local university with a degree in the desired field of expertise but no work experience in that field of expertise b. someone working for a competitor with a degree and eight years of work experience in the desired field of expertise c. a recent graduate of an international university with a degree and two years of part-time work in a related field of expertise d. a high school graduate with three years of work in an unrelated field of expertise
ANSWER: d 156. Employment protection laws do NOT: a. decrease the duration of unemployment. b. increase the unemployment rates of young and minority workers. c. provide greater job security to workers with full-time jobs. d. make labor markets less flexible and less dynamic. ANSWER: a 157. Which policy tends to increase rather than decrease structural unemployment? a. requiring that those receiving unemployment benefits be actively seeking a job b. making it more costly for firms to fire workers c. requiring those receiving unemployment benefits to spend time in gaining new job skills d. paying a bonus to workers who get a new job quickly ANSWER: b 158. The Keynesian explanation for cyclical unemployment is: a. that labor is reallocated across different industries. b. the same as that for frictional and structural unemployment. c. that wage demands are too high relative to changing prices. d. that it is a normal response to real shocks in the economy. ANSWER: c 159. Which of these is NOT a reason that unemployment rises during recessions? Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 11 a. labor reallocation among affected industries in response to real economic shocks b. wages that do not fall as fast as prices c. increases in aggregate demand d. inability of firms to employ as many workers ANSWER: c 160. Comparing current real GDP growth to _____ will give a good indication of the change in the unemployment rate. a. nominal GDP growth b. average real GDP growth c. real growth rates for the past two years d. per capita real GDP growth ANSWER: b 161. Figure: Business Cycles and Unemployment
Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 11
Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 11 162. Unemployment correlated with the business cycle is called: a. frictional unemployment. b. structural unemployment. c. cyclical unemployment. d. seasonal unemployment. ANSWER: c 163. During recessions, the unemployment rate: a. decreases. b. increases. c. remains relatively constant. d. fluctuates randomly. ANSWER: b 164. Higher GDP growth is generally associated with: a. decreases in the unemployment rate. b. increases in the unemployment rate. c. no change in the unemployment rate. d. random fluctuations in the unemployment rate. ANSWER: a 165. Which type of unemployment is likely to be higher when real GDP growth is lower? a. structural unemployment b. frictional unemployment c. cyclical unemployment d. natural unemployment ANSWER: c 166. Which of these is the best example of cyclical unemployment? a. John is a house painter in northern Michigan. During the winter months, John is unemployed. b. Heather recently graduated with her doctorate in economics. She is searching for a job that matches her skills. c. Peter, a highly skilled construction worker, lost his job when the recession began. He is looking for work, but demand in the construction industry is still low. d. Allison, a recent high school graduate with high aspirations, is seeking a job as the CEO of a Fortune 500 company.
ANSWER: c 167. Cyclical unemployment is: a. short-term unemployment caused by the ordinary difficulties of matching employee to employer. b. persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs.
Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 11 c. unemployment correlated with the business cycle. d. natural unemployment. ANSWER: c 168. If the wage demands of workers are high relative to the prices of products: a. cyclical unemployment will be higher. b. cyclical unemployment will be lower. c. frictional unemployment will be lower. d. structural unemployment will be higher. ANSWER: a 169. Which type of unemployment increased the MOST during the 2007–2009 recession? a. cyclical unemployment b. frictional unemployment c. structural unemployment d. search unemployment ANSWER: a 170. Unemployment correlated with the ups and downs of the business cycle is called: a. cyclical unemployment. b. frictional unemployment. c. structural unemployment. d. temporary unemployment. ANSWER: a 171. Which of these is a case of cyclical unemployment? a. Glenn quit his job to move to another state. b. Grace is an accountant temporarily unemployed since tax season has ended. c. Garrett lost his job after the company closed during last year's recession. d. Gwyneth is still seeking a job that will use her skills in statistics. ANSWER: c 172. Which of these is NOT true regarding the natural rate of unemployment? a. The natural rate of unemployment equals the sum of the frictional and structural rates. b. If the economy is operating at the natural rate of unemployment, cyclical unemployment is equal to zero. c. The natural rate of unemployment correlates positively with the level of GDP growth in an economy. d. The actual rate of unemployment varies around the natural rate over time. ANSWER: c 173. The natural unemployment rate is the rate of _____ unemployment plus the rate of _____ unemployment. a. cyclical; frictional Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 11 b. structural; frictional c. cyclical; structural d. frictional and structural; cyclical ANSWER: b 174. Which of these is NOT part of natural unemployment? a. cyclical unemployment b. frictional unemployment c. structural unemployment d. frictional and structural ANSWER: a 175. Which of these is TRUE of the natural unemployment rate? a. It is equal to zero when the economy is not in a recession. b. It has been fixed at 4% during the post–World War II period. c. It is higher if structural or frictional unemployment is higher. d. It can change dramatically within a matter of months. ANSWER: c 176. The natural rate of unemployment is defined as the rate of: a. frictional plus cyclical unemployment. b. structural plus cyclical unemployment. c. structural plus frictional unemployment. d. structural plus frictional plus cyclical unemployment. ANSWER: c 177. Cyclical unemployment can turn into structural unemployment if: a. workers remain on unemployment benefits for too long. b. a recession lasts longer than a year. c. the government extends the unemployment benefits. d. the economy develops stagflation. ANSWER: a 178. Table: Unemployment Statistics for Country X Type of Unemployment 1995 2005 Frictional unemployment 1.5% 1.0% Cyclical unemployment 3.4 4.7 Structural unemployment 2.5 1.9 Using the data in the table, what is the natural unemployment rate for this country in the year 1995? a. 1.5% b. 4.0% c. 3.4% Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 11 d. 2.5% ANSWER: b 179. Table: Unemployment Statistics for Country X Type of Unemployment 1995 2005 Frictional unemployment 1.5% 1.0% Cyclical unemployment 3.4 4.7 Structural unemployment 2.5 1.9 Using the data in the table, what is the natural unemployment rate for this country in the year 2005? a. 1.0% b. 4.7% c. 2.9% d. 1.9% ANSWER: c 180. Table: Unemployment Statistics for Country X Type of Unemployment 1995 2005 Frictional unemployment 1.5% 1.0% Cyclical unemployment 3.4 4.7 Structural unemployment 2.5 1.9 Using the data in the table, country X is likely to be in a recession in: a. 1995. b. 2005. c. both 1995 and 2005. d. neither 1995 nor 2005. ANSWER: c 181. How can people who are laid off from work due to a recession eventually turn into structurally unemployed people? a. by failing to file for unemployment benefits b. by becoming discouraged workers c. by staying unemployed so long that their skills become outdated d. by receiving food stamps ANSWER: c 182. What type of unemployment can increase or decrease dramatically in a few months? a. frictional b. structural c. cyclical d. frictional, structural, and cyclical ANSWER: c 183. The actual unemployment rate varies around the: Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 11 a. frictional unemployment rate. b. structural unemployment rate. c. cyclical unemployment rate. d. natural unemployment rate. ANSWER: d 184. The natural unemployment rate consists of: a. frictional and structural unemployment. b. frictional and cyclical unemployment. c. structural and cyclical unemployment. d. frictional, cyclical, and structural unemployment. ANSWER: a 185. During the business cycle, the number of jobs _____ during boom periods and _____ during recessions. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases ANSWER: b 186. Economists of the Keynesian point of view believe that _____ cause(s) cyclical unemployment. a. insufficient labor laws b. restrictive labor laws c. insufficient aggregate demand d. insufficient aggregate supply ANSWER: c 187. The natural rate of unemployment is based on unemployment due to _____ and _____ causes. a. frictional; cyclical b. structural; frictional c. cyclical; structural d. normal; average ANSWER: b 188. What affects labor force participation rates? a. the demographic structure of a population b. the tax structure of an economy c. technological advances such as the birth control pill d. demographics, tax structure, and technological advances such as the birth control pill ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 11 189. A country has a population of 160 million. Thirty million of its people are under the age of 16, and 10% of the population is either in the military or institutionalized. Seventy million people have jobs, and 5 million are looking for work. What is the labor force participation rate in this country? a. 52% b. 62% c. 66% d. 70% ANSWER: c 190. Which of these is NOT a reason that there are more women in the U.S. labor force today than there were before 1965? a. a trend toward greater equality for women in the workplace b. the move from a manufacturing to a service economy c. the availability and use of the birth control pill d. a ban on the sale of contraceptives ANSWER: d 191. What is the labor force participation rate for a nation with an adult population of 20 million, 12 million employed workers, and 3 million unemployed workers? a. 50% b. 60% c. 75% d. 90% ANSWER: c 192. When workers lose their jobs and become officially unemployed, the labor force participation rate: a. remains constant. b. increases. c. decreases. d. changes unpredictably. ANSWER: a 193. The labor force participation rate of a country tends to be higher if the government: a. allows retirees to work and receive government pensions without penalty. b. allows retirees to work only if they give up government pensions. c. allows retirees to work only when they pay higher income taxes than younger workers. d. does not allow retirees to work at all. ANSWER: a 194. As the baby boomers retire, the U.S. labor force participation rate will: a. increase. b. decrease. Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 11 c. remain the same. d. fluctuate unpredictably. ANSWER: b 195. Suppose that Congress decided to exempt seniors from paying income tax on labor income. What would happen to the labor force participation rate for seniors? a. It would increase. b. It would decrease. c. It would remain the same. d. It is impossible to tell. ANSWER: a 196. The invention of birth control in pill form substantially _____ labor force participation. a. increased male b. decreased male c. increased female d. decreased female ANSWER: c 197. Which of these does NOT determine the labor force participation rate? a. lifecycle effects b. demographics c. incentives d. education ANSWER: d 198. Which of these is a concern among economists regarding the aging of the U.S. population? a. Since older people typically consume less, the aging of the population will lead to lower consumption and thus
lower GDP. b. Since older people typically consume different goods (more health care and prescription drugs, less pizza and beer), an aging population will lead to increased structural unemployment in certain areas of the economy (such as the pizza and beer industries). c. Since older people are less likely to work, an aging population will lead to a decreased labor force participation rate in the United States and lower tax revenues. d. Since older people are less likely to favor increasing Medicare and prescription drug benefits, an aging population will alter political support for such programs.
ANSWER: c 199. The labor force participation rate is highest among those: a. under 16 years of age. b. between 16 and 19 years of age. c. between 25 and 54 years of age. d. over 65 years of age. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 11 ANSWER: c 200. Most economists expect labor force participation rates in the United States to: a. remain constant over time. b. increase over time. c. decrease over time. d. first increase and then decrease over time. ANSWER: c 201. A worker who works past retirement age but loses retirement benefits: a. is practicing consumption smoothing. b. is essentially being taxed for working. c. usually has a greater net gain from working. d. has a higher incentive to keep working. ANSWER: b 202. Which two nations have a high percentage of older workers participating in the labor force? a. Belgium and France b. Germany and the United States c. Japan and the United States d. Sweden and the Netherlands ANSWER: c 203. Higher implicit tax rates tend to cause labor force participation rates to: a. remain constant. b. increase. c. decrease. d. behave unpredictably. ANSWER: c 204. How might changes in marginal tax rates on married couples affect labor force participation rates? a. Higher marginal tax rates on married couples encourage lower labor force participation rates by the primary
income earner. b. Lower marginal tax rates on married couples encourage higher labor force participation rates by the secondary income earner. c. Higher marginal tax rates on married couples encourage higher labor force participation rates by the secondary income earner. d. Lower marginal tax rates on married couples encourage lower labor force participation rates by the secondary income earner.
ANSWER: b 205. What decade brought an exceptionally large number of women into the labor force? a. 1950s Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 11 b. 1960s c. 1970s d. 1990s ANSWER: c 206. Since 1950, the female labor force participation rate in the United States has: a. first fallen and then risen. b. remained relatively constant. c. risen. d. fallen. ANSWER: c 207. According to the textbook, one major reason for the increase in the female labor force participation rate after World War II was a(n): a. increase in income taxes. b. increase in the overall population because of the baby boom. c. increase in the incentive to work. d. decrease in the male labor force participation rate. ANSWER: c 208. Which one of these represents the Goldin-Katz explanation for why women in the United States increased their labor force participation after 1970? a. The invention of the birth control pill gave women a new way to stop having babies. b. The lowering of marginal tax rates for married couples gave women a bigger incentive to work. c. The birth control pill effectively lowered the cost of obtaining a professional degree by giving women more control over the consequences of sex. d. The birth control pill could then be sold to married couples for the very first time and thus more women could work.
ANSWER: c 209. One reason for an increased female labor force participation rate is that the birth control pill has: a. raised the cost of living. b. reduced the adult population. c. reduced women's opportunity cost of working. d. reduced the number of male workers relative to female workers. ANSWER: c 210. During the 1980s, a reduction in the marginal tax rate (the tax on additional income) was found to: a. raise the female labor force participation rate. b. lower the female labor force participation rate. c. raise the amount of structural unemployment. d. lower the amount of structural unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 11 ANSWER: a 211. Government can influence a person's choice to work or not through: a. taxes on nonworkers and benefits paid to workers. b. taxes on workers and benefits paid to nonworkers. c. taxes on both workers and nonworkers. d. benefits paid to both workers and nonworkers. ANSWER: b 212. Policies that encourage early retirement will MOST likely lead to: a. higher tax rates for younger workers. b. higher GDP. c. lower unemployment rates. d. lower wages for younger workers. ANSWER: a 213. The implicit tax on working is less than 1% in the United States and over 2% in Belgium. Given this fact, we would expect higher: a. labor force participation in Belgium. b. labor force participation in the United States. c. unemployment in Belgium. d. unemployment in the United States. ANSWER: b 214. Females started entering the labor force, and particularly professional schools, in increasing numbers beginning around: a. 1940. b. 1950. c. 1960. d. 1970. ANSWER: d 215. Suppose a country has a population of 5,000,000 people, which includes 2,000,000 children and 3,000,000 adults. The adults consist of 70,000 institutionalized persons, 330,000 full-time students and retirees, 2,500,000 employed people, and 100,000 people seeking work. What is the labor force participation rate in this country? a. 88.7% b. 100.0% c. 86.7% d. 60.0% ANSWER: a 216. When a country's population includes large numbers of people born within a short period of time, the Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 11 country's _____ may be impacted as that group of people move through _____. a. unemployment benefits; their lifecycle b. labor force participation rate; a savings crisis c. unemployment benefits; a business cycle d. labor force participation rate; their lifecycle ANSWER: d 217. People's willingness to join the labor force is determined by _____ and _____. a. the availability of jobs; job benefits b. the need for income; the availability of jobs c. the net benefits of working; the net benefits of leisure d. wages; skills ANSWER: c 218. Two influences on the rise in the female labor force participation rate in the United States are _____ and _____. a. rising implicit tax burdens on income; the availability of birth control b. the falling proportion of services in national output; falling implicit tax burdens on income c. the rising proportion of services in national output; the availability of birth control d. falling implicit tax burdens on income; the rising proportion of services in national output ANSWER: c 219. Since the mid-1960s, the male labor force participation rate in the United States has _____ and the female labor force participation rate has _____. a. increased; increased b. increased; decreased c. decreased; increased d. decreased; decreased ANSWER: c 220. The labor force participation rate responds to: a. incentives to work. b. real GDP growth. c. job opportunities. d. business cycles. ANSWER: a 221. Which is NOT a factor that has caused changes in the U.S. labor force participation rate in the past 60 years? a. changing technology b. changing weather patterns Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 11 c. changing demographics d. changing cultural attitudes ANSWER: b 222. Suppose a country has a population of 10,000,000 people, which includes 3,500,000 children and 6,500,000 adults. The 6,500,000 adults consist of 2,000,000 full-time students, homemakers, and retirees, 100,000 institutionalized persons, 400,000 people looking for work, and 4,000,000 people working. What is the size of the labor force? a. 4,000,000 b. 4,400,000 c. 6,400,000 d. 6,500,000 ANSWER: b 223. Suppose a country has a population of 10,000,000 people, which includes 3,500,000 children and 6,500,000 adults. The 6,500,000 adults consist of 2,000,000 full-time students, homemakers, and retirees, 100,000 institutionalized persons, 400,000 people looking for work, and 4,000,000 people working. What is the unemployment rate? a. 4.0% b. 6.2% c. 9.1% d. 10.1% ANSWER: c 224. Suppose a country has a population of 10,000,000 people, which includes 3,500,000 children and 6,500,000 adults. The 6,500,000 adults consist of 2,000,000 full-time students, homemakers, and retirees, 100,000 institutionalized persons, 400,000 people looking for work, and 4,000,000 people working. What is the labor force participation rate? a. 65.0% b. 68.8% c. 67.7% d. 61.5% ANSWER: b 225. All individuals who do not have a job are counted as unemployed. a. True b. False ANSWER: b 226. The labor force consists of all adult, noninstitutionalized civilians in a nation. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 11 ANSWER: b 227. The unemployment rate is defined as the percentage of the adult population without a job. a. True b. False ANSWER: b 228. A taxi driver with a PhD in chemistry counts as fully employed. a. True b. False ANSWER: a 229. A part-time worker who wishes to have a full-time job counts as fully employed. a. True b. False ANSWER: a 230. A part-time worker who wishes to have a full-time job counts as unemployed. a. True b. False ANSWER: b 231. The level of labor force participation will be higher as the number of unemployed workers is lower. a. True b. False ANSWER: b 232. Other things being equal, an increase in the number of discouraged workers raises the unemployment rate. a. True b. False ANSWER: b 233. In the United States, the underemployment rate is typically higher than the unemployment rate. a. True b. False ANSWER: a 234. An increase in the number of underemployed workers leads to an increase in the unemployment rate. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 11 235. The labor force consists of the number of employed plus the number of unemployed workers. a. True b. False ANSWER: a 236. When information about jobs becomes scarcer, frictional unemployment tends to decrease. a. True b. False ANSWER: b 237. Frictional unemployment is the result of economy-wide shocks that force workers to restructure their skills. a. True b. False ANSWER: b 238. In 2010, over 43% of the unemployed had been unemployed for at least six months. a. True b. False ANSWER: a 239. Both highly specialized workers and highly specialized jobs might increase frictional unemployment. a. True b. False ANSWER: a 240. Structural unemployment is a more serious problem in Western Europe than in the United States, primarily because of more generous unemployment benefits, a stronger union presence, and employment protection laws in Western Europe. a. True b. False ANSWER: a 241. Labor unions tend to decrease unemployment. a. True b. False ANSWER: b 242. If every date required marriage, there would be many more dates than there are now. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 11 243. Employment-at-will tends to raise the unemployment rate. a. True b. False ANSWER: b 244. The persistently higher unemployment rates among European countries compared to the United States reflect higher structural unemployment in Europe. a. True b. False ANSWER: a 245. Both structural and frictional unemployment occur in the absence of cyclical unemployment. a. True b. False ANSWER: a 246. A nation that has experienced long-term unemployment for over 50 years has only frictional unemployment. a. True b. False ANSWER: b 247. Individuals who are structurally unemployed tend to be unemployed for long periods of time. a. True b. False ANSWER: a 248. More labor regulations are likely to raise structural unemployment. a. True b. False ANSWER: a 249. Structural unemployment has been more of a problem in the United States than in Europe. a. True b. False ANSWER: b 250. Recently, the unemployment rate in the United States has typically been higher than the unemployment rate in Europe. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 11 251. The median wage is half the wage that the worker earns in a single hour. a. True b. False ANSWER: b 252. When unions exert a great deal of influence, the effect on labor markets is similar to that of a minimum wage. a. True b. False ANSWER: a 253. The employment-at-will doctrine allows a firm in the United States to fire a worker whenever it pleases and for whatever (nondiscriminatory) reason it pleases. a. True b. False ANSWER: a 254. The rigidity of employment index summarizes the difficulty of training new workers in a specific industry. a. True b. False ANSWER: b 255. The United States has more extensive employment protection laws than Western Europe. a. True b. False ANSWER: b 256. High rates of long-term unemployment correlate with high costs of hiring and firing. a. True b. False ANSWER: a 257. Historical data support the idea that long-term unemployment increases with the higher costs of hiring and firing employees. a. True b. False ANSWER: a 258. The minimum wage lowers the price of labor from the market wage to the minimum wage, and as labor becomes less expensive, firms increase employment. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 11 ANSWER: b 259. Increases in the minimum wage are an effective way to increase employment and living standards for lowincome households. a. True b. False ANSWER: b 260. The employment-at-will doctrine makes labor markets more flexible and more dynamic. a. True b. False ANSWER: a 261. Active labor market policies protect workers who have jobs. a. True b. False ANSWER: b 262. The natural unemployment rate is defined as frictional unemployment plus cyclical unemployment. a. True b. False ANSWER: b 263. The natural unemployment rate is likely to be lower when the economy is growing more rapidly. a. True b. False ANSWER: b 264. In a recession, the actual rate of unemployment in an economy is equal to its natural rate of unemployment. a. True b. False ANSWER: b 265. The natural unemployment rate is the sum of the structural and frictional unemployment rates. a. True b. False ANSWER: a 266. The natural unemployment rate fluctuates very little over time. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 11 267. Over time, the actual unemployment rate varies around the natural rate. a. True b. False ANSWER: a 268. The unemployment rate tends to move inversely with real GDP growth in an economy. a. True b. False ANSWER: a 269. The natural unemployment rate tends to move inversely with real GDP growth in an economy. a. True b. False ANSWER: b 270. When the unemployment rate is equal to the natural rate, cyclical unemployment is zero. a. True b. False ANSWER: a 271. When the unemployment rate is equal to the natural rate, frictional and structural unemployment are zero. a. True b. False ANSWER: b 272. The aging of the population typically results in a lower labor force participation rate as well as higher taxes for younger workers. a. True b. False ANSWER: a 273. When the baby boomers began to retire in 2011, the labor force participation rate increased. a. True b. False ANSWER: b 274. The widespread use of contraceptive pills is one of the major reasons for the increased female labor force participation rate after World War II. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 11 275. Firms would be more hesitant to hire workers and unemployment would rise if: a. Congress passed a law requiring firms to pay severance to laid-off workers. b. the employment-at-will doctrine became more widespread. c. the retirement age rose. d. the manufacturing sector returned to dominance as the service sector declined. ANSWER: a 276. In Europe, firms would become more willing to hire workers and the unemployment rate would fall if: a. new workers had a probationary period during which employment would be at-will. b. unions developed more strict membership rules. c. severance pay rose. d. lay-offs were determined by seniority. ANSWER: a 277. Which is(are) costs of unemployment? I. lost income for the unemployed worker II. lost output for the economy III. structural changes in the economy a. I b. I and II c. II and III d. II ANSWER: b 278. If, in an economy currently experiencing only structural and frictional unemployment, the government imposed a minimum wage higher than the market wage, the result would be: a. an increase in structural unemployment. b. an increase in cyclical unemployment. c. a decrease in unemployment as the quantity of labor supplied rose. d. no change in the unemployment rate. ANSWER: a 279. If a government voted to repeal its minimum wage law, the result would be: a. lower wages and lower unemployment. b. a decrease in the quantity of labor demanded and supplied. c. lower frictional unemployment. d. higher structural unemployment. ANSWER: a 280. Ruritania has a labor force of 10,000,000, of whom 500,000 are unemployed. Of these, 300,000 either left their job to find a better one or are new college graduates, and 200,000 no longer have skills needed in the current economy. What is the natural rate of unemployment in Ruritania? Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 11 a. 5% b. 3% c. 2% d. 0% ANSWER: a 281. Ruritania has a labor force of 10,000,000, of whom 500,000 are unemployed. Of these, 300,000 either left their job to find a better one or are new college graduates, and 200,000 no longer have skills needed in the current economy. What is cyclical unemployment in Ruritania? a. 5% b. 3% c. 2% d. 0% ANSWER: d 282. What are the benefits of forming a union for non-members? a. None; non-members are more likely harmed by unions when the contractual wage goes up, along with unemployment. b. They receive the same benefits as members if they work in the same industry.
c. Because of the union's negotiating power, non-members would also be protected from layoffs. d. Since they are non-members, the existence of the union does not affect them. ANSWER: a 283. What are the MOST likely results when workers in an industry unionize? a. Wages rise and employment falls if the union negotiates a higher wage. b. Employment rises because of the bargaining power the union has, but the impact on the wage is indeterminate. c. Employment and the wage both fall because of the higher costs to the employer.
d. The wage rises but the impact on employment is indeterminate. ANSWER: a 284. What type of unemployment do unions cause? a. structural b. frictional c. cyclical d. natural ANSWER: a 285. If the number of unemployed workers is 9.5 million and the number of employed workers is 146 million, what is the unemployment rate? ANSWER: The labor force is employed + unemployed: 9.5 million + 146 million = 155.5 million. The unemployment rate is unemployed ÷ labor force = 9.5 million ÷ 155.5 million = 6.1%. Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 11 286. If the adult population is 200 million, and 100 million are working and 10 million are actively looking for a job but not working, what is the unemployment rate? What is the labor force participation rate? ANSWER: The labor force is employed + unemployed: 10 million + 100 million = 110 million. The unemployment rate is (unemployed ÷ labor force) × 100 = (10 million ÷ 110 million) × 100 = 9.1%. The labor force participation rate is (labor force ÷ adult population) × 100 = (110 million ÷ 200 million) × 100 = 55%.
287. Table: Statistics for a Small Economy Type of Statistic Number (millions) Population under the age of 16 16.0 Population over the age of 16 54.0 Retirees 14.0 Discouraged workers 3.0 Frictionally unemployed 1.5 Structurally unemployed 2.5 Cyclically unemployed 6.0 Refer to the table to answer the questions. Assume that none of the adult population serves in the military or is institutionalized. a. How many people are in the country's labor force? b. What is the labor force participation rate? c. What is the unemployment rate? d. What is the natural unemployment rate? e. What is the rate of cyclical unemployment? ANSWER: a. The labor force is employed + unemployed. There are 27 million employed workers: adult population – retirees – discouraged workers – unemployed = employed = 54 million – 14 million – 3 million – 1.5 million – 2.5 million – 6 million = 27 million. Labor force = employed + unemployed = 27 million + 10 million = 37 million. b. The labor force participation rate is (labor force ÷ adult population) × 100 = (37 million ÷ 54 million) × 100 = 68.5%. c. The unemployment rate is (unemployed ÷ labor force) × 100 = (10 million ÷ 37 million) × 100 = 27%. d. The natural unemployment rate is the sum of the frictional and structural unemployment rates: [(1.5 million + 2.5 million) ÷ 37 million] × 100 = 10.8%. e. (Cyclical unemployment ÷ labor force) × 100 = (6 million ÷ 37 million) × 100 = 16.2%.
288. Table: Demographic Data Overall population 600 million Population 65 years or older 82 million Population younger than 16 years 71 million Unemployed persons 20 million Employed persons 330 million Discouraged workers 25 million Assume that no one serves in the military or is institutionalized. Use these data to calculate the total labor force, the labor force participation rate, and the unemployment rate. ANSWER: The labor force is the sum of employed and unemployed people, 350 million. The labor force participation rate is the labor force divided by the adult population: 350 million ÷ (600 million − 71 million) × 100 = 66.2%. The unemployment rate is the percentage of the labor force unemployed: (20 million ÷ 350 million) × 100 = 5.7%.
289. Explain the impact of discouraged workers on the official unemployment rate. ANSWER: Unemployed workers may stop searching for a job, at which point they remove themselves from the labor force and become discouraged workers. This reduces the official unemployment rate by reducing both the numerator and denominator of the unemployment rate calculation. In practice, the number of discouraged workers is small relative to Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 11 the number of unemployed workers, so the impact of including discouraged workers as unemployed people in the labor force would change the unemployment rate very little.
290. Identify both the factors that can increase structural unemployment and the policies that can decrease it. ANSWER: Any large, economy-wide shock can cause structural unemployment. Policies designed to help workers such as unemployment benefits, minimum wages, unions, and employment protection laws can exacerbate the problem. Active labor market policies are designed to get unemployed workers back to work, and thus decrease structural unemployment. These include job retraining, job-search assistance, work tests, and early employment bonuses.
291. Why would the unemployment rate likely understate the overall decline in an economy's performance, especially in a recession? ANSWER: If unemployed workers conclude looking for a job is futile, they may leave the labor force, which would reduce the unemployment rate. Furthermore, workers may take jobs below their skill level just to have some income. Other workers may stay in jobs they no longer want for the same reason. The official unemployment rate does not take into account these discouraged and underemployed workers.
292. Explain the impact of unemployment benefits on the unemployment rate. ANSWER: Unemployment benefits reduce the incentive for workers to search for and take new jobs. The longer benefits last, or the more generous they are, the less incentive there is for unemployed workers to look for a new job. Typically, unemployment benefits in Europe are more generous than in the United States, and long-term unemployment is much more common in Europe than in the United States.
293. How do wage and employment regulations in Western Europe regarding unemployment benefits, minimum wages, and labor unions differ from those in the United States? How do those differences impact the rigidity of employment index? ANSWER: In Europe unemployment benefits, minimum wages, and employment protection laws are all more generous than they are in the United States. There is also more union membership in European countries. The result is higher—that is, worse—scores on the rigidity of employment index for European countries.
294. Identify the effects of employment protection laws. ANSWER: Employment protection laws, in many ways the opposite of the employment-at-will doctrine in place in the United States, make it much more difficult and expensive to fire workers. In Western Europe, strict laws are in place governing the length of the workweek, overtime pay, paid leave, temporary employment, notice periods, severance pay, and more. As a result, European firms are more cautious to hire workers because of the difficulty and expense of firing them if necessary. The rigidity of employment index is much higher for the largest European economies than for the United States.
295. What factors might increase structural unemployment, and what factors might decrease structural unemployment in a given country? ANSWER: Policies designed to help workers such as unemployment benefits, minimum wages, unions, and employment protection laws can exacerbate structural unemployment. Active labor market policies are designed to get unemployed workers back to work. These include job retraining, jobsearch assistance, work tests, and early employment bonuses.
296. Most economists argue against increases in the minimum wage as a way to help the poor. Explain why most economists do not favor increases in the minimum wage to raise the living standards of low-income households. ANSWER: Because a higher wage will reduce the quantity of labor demanded, some workers will lose their jobs under a minimum wage. The workers who keep their jobs are better off, but those losing their jobs are obviously worse off. Furthermore, the higher wage also increases the quantity of labor supplied, drawing more workers into the labor force and increasing the unemployment rate. New entrants may not suffer the financial losses of the previously employed, but the time they Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 11 waste looking for jobs that do not exist is a cost to them.
297. If Congress passes legislation making it more difficult for firms to fire workers, how will this legislation affect the nation's level of unemployment? (An example might be a law requiring severance pay for fired workers.) Explain. ANSWER: Firms will be wary of exposing themselves to the now higher costs of firing a worker, so they will be more careful about hiring workers in the first place. This will increase the unemployment rate as structural unemployment rises.
298. Explain how unions affect unemployment. ANSWER: Much like a minimum wage, a union-negotiated contractual wage creates a price floor in the labor market. More workers will be willing to work at the higher wage, but the quantity of labor demanded will fall, creating more unemployment.
299. What are the different types of unemployment? Which type of unemployment is MOST likely to be higher during a recession? Explain your answers briefly. ANSWER: There are three distinct types of unemployment: frictional, structural, and cyclical. Frictional unemployment is shortterm unemployment caused by the ordinary difficulties of matching employee to employer. Structural unemployment is persistent, long-term unemployment caused by long-lasting shocks or permanent features of an economy that make it more difficult for some workers to find jobs. Cyclical unemployment is unemployment correlated with the business cycle. In a recession, firms lay off workers, which in turn idles capital. An economy with idle labor and idle capital cannot be maximizing growth, and that will hurt the ability of that economy to create more jobs. As cyclical unemployment is directly correlated with the health of the business cycle, this type of unemployment would have the largest effect on overall unemployment levels during recessions.
300. Indicate what type of unemployment, if any, is illustrated by each of these cases. a. Jim lost his job as a stockbroker when the recession hit. b. Omar left his job as a corporate lawyer to look for a less stressful position. c. Nancy lost her job in a furniture plant when it was outsourced to China. d. John lost his job at the local hamburger joint when the city passed a minimum wage law. e. Mary lost her job as a bank teller because of increased ATM usage for routine banking transactions. f. Sally lost her job at a restaurant during a recession and decided to go back to school full time (without looking for a job) to become a teacher. g. Raquel was working at the local mill, but soon after it closed during a recession, she got discouraged and quit looking for a job. h. Julio's hours at a fast-food restaurant were cut to part time during a recession, but he hopes to return to fulltime work soon. i. Juanita lost her job as a paint department manager at a local hardware store when the store shut down due to competition from "big-box" stores. She has applications in at several of the big-box stores in town but is still waiting for an opening in the paint department. ANSWER: a. cyclical b. frictional c. structural d. structural e. structural f. Sally is not unemployed. g. Raquel is a discouraged worker. h. Julio is underemployed. i. structural
301. The natural unemployment rates are higher in European countries than in the United States. Briefly discuss Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 11 some of the major reasons. ANSWER: Natural unemployment is the sum of frictional and structural unemployment. Differences in the natural unemployment rates are mostly explained by structural factors. Unemployment benefits in Europe are more generous and last longer than those in the United States, lowering the incentive for unemployed Europeans to return to work quickly. In Western Europe, minimum wages have been higher and unions stronger than in the United States, reducing the quantity of labor demanded. Europe also has employment protection laws as opposed to the employment-at-will doctrine in the United States, providing further disincentives for European firms to hire. These factors all add to structural unemployment and push the natural unemployment rates apart.
302. What would you expect to happen to the unemployment rate during a recession? How about the natural rate of unemployment? ANSWER: The unemployment rate is correlated with the business cycle, with unemployment rising during recessions. Economists generally call this increase in unemployment cyclical unemployment. There are differing opinions, however, regarding cyclical unemployment. Some economists think that business cycles are mostly a response to real shocks that require a reallocation of labor across industries. Other economists think that cyclical unemployment is caused by deficiencies in aggregate demand. The natural rate of unemployment changes slowly so we would expect it not to change in a recession. There may be, however, some upward pressure on frictional unemployment as jobs are in short supply and it will be harder to find one. Depending on the length and severity of the recession, structural unemployment may increase as well if some of the cyclically unemployed become structurally unemployed.
303. What are the three main types of unemployment? Provide an example of each type in your answer. ANSWER: Frictional unemployment: it takes a new college graduate some time to find a job. Structural unemployment: coal miners lose their jobs as the industry declines and cleaner energy technologies spread. Cyclical unemployment: workers across the country lost their jobs after the outbreak of the COVID-19 pandemic.
304. A nation has an adult, noninstitutionalized, civilian population of 30 million people. There are 20 million employed people and 5 million people looking for work. What is the unemployment rate? What is the labor force participation rate? ANSWER: The unemployment rate is [unemployed ÷ (employed + unemployed)] × 100 = (5 ÷ 25) × 100 = 20%. The labor force participation rate is the proportion of the population in the labor force, (25 ÷ 30) × 100 = 83%.
305. Discuss the major economic factors that explain the rising labor force participation rate of women after World War II. ANSWER: Cultural factors such as the rise of feminism and the growing acceptance of equality for women certainly played a role in rising female labor force participation. Changes in the economy such as the move from a manufacturing to a service economy also brought more women to work. As the manufacturing sector declined and the service sector rose, there was less demand for traditionally male-dominated roles and more demand for jobs for which women had a comparative advantage. Finally, women who wanted a professional degree before the advent of the pill had either to bear the costs of abstinence or risk pregnancy. The pill lowered these costs and increased the incentive for women to invest in a longterm education.
306. If the government wanted to encourage workers over age 60 to retire in order to free up jobs for younger workers, what are two examples of policies that could help encourage early retirement? Would encouraging older workers to retire be beneficial to the younger workers? Explain. ANSWER: More generous retirement benefits would entice more people to retire, as would introducing tax penalties for people who work past the retirement age. Either type of policy would impose costs on younger workers, since the retirees would not be contributing to GDP, or tax revenues, so younger people would have to pay higher taxes.
307. Explain how the age distribution in a population affects the labor force when there is an unusually large or small age group in the population. Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 11 ANSWER: A particularly large age group has different impacts at different times. When they come of working age, there are plenty of taxpayers to support the relatively small group of retirees. As they move into retirement, however, the subsequent smaller next generation will be burdened with supporting the large group of retirees. For example, the retirement of baby boomers will put pressure on programs like Social Security and Medicare.
Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 12 1. When the government of Zimbabwe ran out of money, President Robert Mugabe: a. raised taxes. b. printed more money. c. slashed spending. d. collapsed. ANSWER: b 2. _____ occurs when the amount of money in an economy increases more rapidly than output. a. Savings b. Human capital investment c. Unemployment d. Inflation ANSWER: d 3. Inflation occurs when the growth in _____ exceeds the growth in _____. a. output; the money supply b. the money supply; output c. employment; output d. output; employment ANSWER: b 4. If the average price level rises from 120 in year 1 to 130 in year 2, the inflation rate in year 2 is: a. 7.69%. b. 8.33%. c. 9.23%. d. 10.00%. ANSWER: b 5. Which measure of the average price level MOST closely corresponds to a student's daily economic activities? a. consumer price index b. producer price index c. GDP deflator d. household price index ANSWER: a 6. As a result of the changing variety and quality of goods that the typical consumer purchases each year, many economists argue that the consumer price index might: a. have to be abandoned in favor of a better measure of inflation. b. not be as good a measure of inflation as the GDP deflator is. c. understate inflation. d. overstate inflation. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 12 ANSWER: d 7. Inflation is: a. the average number of times people spend a dollar on final goods and services in a year. b. when people mistake changes in nominal prices for changes in real prices. c. a decrease in the average level of prices. d. an increase in the average level of prices. ANSWER: d 8. If the price level in 2018 is 150 and it rises to 165 in 2019, what is the rate of inflation between 2018 and 2019? a. 9% b. 10% c. 15% d. 165% ANSWER: b 9. If the price level in 2016 is 140 and it falls to 133 in 2017, what has the economy experienced between 2016 and 2017? a. 5% inflation b. 7% inflation c. 7% deflation d. 5% deflation ANSWER: d 10. The consumer price index measures the prices of: a. all final goods American consumers bought. b. a basket of goods a typical American consumer buys. c. intermediate as well as final goods. d. introductory, intermediate, and final goods. ANSWER: b 11. The basket of goods the average consumer buys: a. stays about the same throughout time. b. changes all the time. c. uniformly falls in price. d. uniformly rises in price. ANSWER: b 12. A real price is: a. an increase in the average level of the price of a good. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 12 b. a decrease in the average level of the price of a good. c. a price that has been corrected for inflation. d. the average number of times people spend a dollar on final goods and services in a year. ANSWER: c 13. From 2010 to 2020, the United States experienced average annual inflation of about: a. 0.2%. b. 1.8%. c. 2.1%. d. 2.8%. ANSWER: b 14. Inflation refers to an increase in the: a. relative prices of some goods as compared to other goods. b. average level of prices. c. standard of living. d. average level of nominal output. ANSWER: b 15. Inflation is an increase in the: a. value of the dollar. b. value of the New York Stock Exchange. c. average level of prices. d. level of nominal output. ANSWER: c 16. The inflation rate is the rate of change of the: a. value of the dollar. b. New York Stock Exchange. c. average level of prices. d. money supply. ANSWER: c 17. The price level at the end of 2011 minus the price level at the end of 2010 is the _____ for the year 2011. a. inflation rate b. change in the price level c. change in gross national product d. consumer price index ANSWER: b 18. Economists measure the average price for the basket of goods a typical U.S. consumer buys with the: Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 12 a. consumer price index. b. GDP deflator. c. producer price index. d. exchange rate. ANSWER: a 19. The ratio of the nominal value of economic output to the real value of economic output multiplied by 100 is the: a. consumer price index. b. GDP deflator. c. producer price index. d. exchange rate. ANSWER: b 20. Which measure of prices includes all the final goods and services in a nation's output? a. consumer price index b. the GDP deflator c. producer price index d. the exchange rate ANSWER: b 21. A measure of the average price suppliers receive is the: a. consumer price index. b. GDP deflator. c. producer price index. d. exchange rate. ANSWER: c 22. When computing the consumer price index, the Bureau of Labor Statistics takes into account changes in: a. the type of goods but not the quality of goods purchased by the average consumer. b. the quality of goods but not the type of goods purchased by the average consumer. c. the type of goods and the quality of goods. d. neither the price nor the quality of goods. ANSWER: c 23. Which is NOT a price index often used to measure inflation? a. consumer price index b. producer price index c. net price index d. GDP deflator ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 12 24. The consumer price index measures the: a. total price of a basket of goods and services a typical consumer buys. b. average price of a basket of goods and services a typical consumer buys. c. total price of a basket of goods and services all families in the country buy. d. average price of a basket of goods and services all families in the country buy. ANSWER: b 25. Table: Consumer Price Index Year CPI (end-of-year value) 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2009 to 2010? a. 3.60% b. 18.10% c. 21.81% d. 1.68% ANSWER: d 26. Table: Consumer Price Index Year CPI (end-of-year value) 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Refer to the CPI values in the table for the years 2005 to 2010. What was the approximate inflation rate over the period 2007 to 2008? a. 8.00% b. 21.53% c. 3.86% d. 3.72% ANSWER: c 27. Table: Consumer Price Index Year CPI (end-of-year value) 2005 195.3 2006 201.6 Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 12 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Refer to the CPI values in the table for the years 2005 to 2010. In which year was the inflation rate the highest? a. 2006 b. 2007 c. 2008 d. 2009 ANSWER: c 28. Table: Consumer Price Index Year CPI (end-of-year value) 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience disinflation? a. 2007 b. 2009 c. both 2007 and 2009 d. neither 2007 nor 2009 ANSWER: c 29. Table: Consumer Price Index Year CPI (end-of-year value) 2005 195.3 2006 201.6 2007 207.3 2008 215.3 2009 214.5 2010 218.1 Refer to the CPI values in the table for the years 2005 to 2010. In which year(s) did the country experience deflation? a. 2007 b. 2009 c. both 2007 and 2009 d. neither 2007 nor 2009 ANSWER: b 30. What do we call an increase in the average level of prices in an economy? Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 12 a. recession b. disinflation c. deflation d. inflation ANSWER: d 31. The percentage increase in a price index from one year to the next is the: a. real GDP growth rate. b. inflation rate. c. GDP inflator. d. nominal GDP growth rate. ANSWER: b 32. If the price level in the year 2000 is 100, and the price level in the year 2001 is 110, what is the inflation rate in 2001? a. 100% b. 110% c. 10% d. 9% ANSWER: c 33. The best definition of inflation is an increase in: a. the real price of a good or service. b. the price of one product relative to the price of another product. c. all prices in an economy. d. the average price level. ANSWER: d 34. If a price index increased from 400 to 440 over the course of a year, then the inflation rate was: a. 4%. b. 9%. c. 10%. d. 40%. ANSWER: c 35. Suppose that a nation's CPI is 150 in year 1 and 180 in year 2. What is the rate of inflation? a. 17% b. 15% c. 20% d. 25% ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 12 36. Suppose that a nation's inflation rate is 5.8% from year 1 to year 2. If the CPI in year 2 is 200, what was the CPI in year 1? a. 180 b. 189 c. 190 d. 208 ANSWER: b 37. Which statement highlights the difference between the consumer price index (CPI) and the GDP deflator? a. The CPI measures the average prices of inputs in the production process, whereas the GDP deflator measures the average prices of goods and services consumers purchase. b. The CPI measures the average prices of retail goods and services, whereas the GDP deflator measures the average prices of wholesale goods. c. The CPI measures the average prices of goods and services consumed by typical consumers, whereas the GDP deflator measures the average prices of all goods and services in the economy. d. The CPI measures the average prices of all final goods and services purchased by consumers, whereas the GDP deflator measures the average prices of all inputs used in the economy.
ANSWER: c 38. Which price index measures the average price level of the largest total number of goods? a. the consumer price index b. the GDP deflator c. the producer price index d. the wholesale price index ANSWER: b 39. Which is NOT a price index economists use to measure inflation? a. consumer price index (CPI) b. commodity consumption indicator (CCI) c. GDP deflator d. producer price index (PPI) ANSWER: b 40. Approximately how many prices of goods and services does the CPI measure? a. 800,000 b. 80,000 c. 800 d. 80 ANSWER: b 41. Which index measures price increases that typical American consumers face when shopping? a. CPI Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 12 b. PPI c. GDP deflator d. GDP inflator ANSWER: a 42. Which price index measures prices of both intermediate and final goods? a. consumer price index b. producer price index c. GDP deflator d. GDP inflator ANSWER: b 43. Which price index measures the average price for the basket of goods a typical American consumer purchases? a. consumer price index b. household price index c. GDP deflator d. producer price index ANSWER: a 44. Which price index reflects the prices of all final goods and services produced within the economy? a. the consumer price index b. the GDP inflator c. the GDP deflator d. the producer price index ANSWER: c 45. Which price index measures the average price suppliers receive? a. the consumer price index b. the GDP deflator c. the producer price index d. the wholesale price index ANSWER: c 46. Which measure of inflation focusses on a market basket of goods and services for a typical household? a. the index of household expenditures b. the producer price index c. the GDP deflator d. the consumer price index ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 12 47. The consumer price index measures the: a. average price of all goods and services included in GDP. b. average price producers receive. c. cost of living for a typical consumer. d. price of the most popular household item. ANSWER: c 48. The GDP deflator: a. measures the average price for the basket of goods an average consumer buys. b. measures the average price producers receive. c. is the ratio of nominal GDP to real GDP multiplied by 100. d. is the price index associated with changes in the cost of living to consumers. ANSWER: c 49. The GDP deflator: a. measures the average price for the basket of goods an average consumer buys. b. measures the average price producers receive. c. measures the average price of all final goods and services. d. is the price index adjusted with changes in GDP. ANSWER: c 50. Two of the challenges the U.S. Bureau of Labor Statistics faces when computing the consumer price index are: a. new goods and better-quality goods. b. new goods and inferior goods. c. used goods and better-quality goods. d. used goods and inferior goods. ANSWER: a 51. To compare the $1-an-hour your grandfather earned in 1950 with the $8-an-hour you earn today, you would need to: a. simply compare $1-an-hour to $8-an-hour. b. add the inflation rates in each year since 1950 until today and add this to your grandfather's wage. c. calculate real wages in both 1950 and today. d. calculate your grandfather's nominal wage in 1950 and compare it to your wage today. ANSWER: c 52. The average rate of inflation in the United States over the past 10 years has been around 1.8%. If this trend continues, prices in the United States will double in about _____ years. a. 10 b. 18 Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 12 c. 33 d. 39 ANSWER: d 53. In 2021, _____ had the highest inflation rate at about 2,700%. a. Japan b. Greece c. Zimbabwe d. Venezuela ANSWER: d 54. If the CPI was 100 in 2000 and 120 in 2010 and the price of a gallon of milk was $4.00 in 2000 and $4.80 in 2010, then in relative terms, the real price of milk between 2000 and 2010: a. increased by 20%. b. decreased by 20%. c. remained the same. d. cannot be determined without knowing the base year. ANSWER: c 55. If you earned $10 an hour in 2005 when the CPI was 100, and you earn $11 an hour today when the CPI is 120, then your real wage rate has _____ since 2005. a. increased 20% b. remained the same c. decreased d. increased 10% ANSWER: c 56. A real price is the price: a. that consumers really pay. b. after adjusting for any discounts. c. after adding any additional finance charges. d. that has been corrected for inflation. ANSWER: d 57. If the CPI was 125 last year and is now 135, then the inflation rate last year was: a. 6%. b. 7%. c. 8%. d. 10%. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 12 58. If the inflation rate falls from 4% in 2005 to 2% in 2006, then: a. disinflation has occurred. b. deflation has occurred. c. the average price level has declined. d. the value of money has increased. ANSWER: a 59. Why do we use the real prices of goods to measure how expensive things have become? a. to find out what the current prices of goods and services are b. to estimate the periods when hyperinflation has occurred c. to find out what the inflation rate has been d. to see whether there have been any changes in our purchasing power ANSWER: d 60. Which answer best explains why prices of some popular goods have fallen over time? a. Consumers have increased their demand for these products over time. b. Consumer demand has become more inelastic. c. Technological advances have reduced production costs. d. Supply of the good has decreased. ANSWER: c 61. Table: Inflation in Poland Year Inflation Rate (annual % change) 1985 15.1% 1990 585.8 1999 7.3 2002 1.9 2003 0.8 Source: International Monetary Fund (www.imf.org) This table shows actual inflation data for different periods in Poland. Which year was hyperinflationary? a. 1985 b. 1990 c. 1999 d. 2003 ANSWER: b 62. Table: Inflation in Poland Year Inflation Rate (annual % change) 1985 15.1% 1990 585.8 1999 7.3 2002 1.9 2003 0.8 Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 12 Source: International Monetary Fund (www.imf.org) This table shows actual inflation data for different periods in Poland. Which year was deflationary? a. 1990 b. 1999 c. 2003 d. No year was deflationary. ANSWER: d 63. What is the best explanation for the fact that the dollars spent on food have risen since the early 1980s but that food costs less now than it did then? a. Real food prices decreased over the period. b. Available food per capita decreased over the period. c. The PPI decreased over the period. d. The CPI decreased over the period. ANSWER: a 64. Which country had the highest inflation rate in 2021? a. Angola b. China c. Japan d. Venezuela ANSWER: d 65. When the typical price of a good or service in Russia increases from 20 rubles to 20 million rubles in a single year, the nation is experiencing: a. deflation. b. falling GDP per capita. c. hyperinflation. d. high disinflation. ANSWER: c 66. Hyperinflation refers to the case in which inflation: a. remains relatively constant. b. is extremely high. c. is extremely low. d. is extremely unpredictable. ANSWER: b 67. An increase in the average level of prices is: a. economic growth. b. a cause of unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 12 c. inflation. d. a benefit to residents of a certain country. ANSWER: c 68. Inflation: a. is an increase in the price of a good or service. b. occurs when any good or service increases in price. c. cannot occur when prices are decreasing. d. is an increase in the average price level. ANSWER: d 69. Which is NOT a standard price index economists use in the United States? a. producer price index b. national inflation index c. consumer price index d. GDP deflator ANSWER: b 70. Suppose that the CPI was 206 in 2018, 210 in 2019, and 217 in 2020. What was the inflation rate in 2019? a. 1.90% b. 1.94% c. 3.18% d. 3.33% ANSWER: b 71. Suppose that the CPI was 144 in 2016, 150 in 2017, 157 in 2018, and 166 in 2019. What was the inflation rate in 2018? a. 4.45% b. 4.67% c. 5.73% d. 6.00% ANSWER: b 72. Suppose that the CPI was 144 in 2016, 150 in 2017, 157 in 2018, and 166 in 2019. What was the inflation rate in 2017? a. 4.00% b. 4.17% c. 4.46% d. 4.66% ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 12 73. Which price index includes the prices of intermediate goods? a. producer price index b. national inflation deflator c. consumer price index d. GDP deflator ANSWER: a 74. Two problems with the average price level the CPI estimates are changes in both the _____ of goods purchased and the _____. a. prices; quantity of goods produced b. quality; quantity of goods produced c. mix; prices of goods purchased d. mix; quality of goods purchased ANSWER: d 75. Suppose that a certain country's CPI was 217 in 2017 and was 225 in 2019. If the same group of groceries cost $30 in 2017 and $34 in 2019, the real price of groceries changed by how much in 2019 when measured in 2017 prices? a. The real price of groceries did not change. b. The real price of groceries went up by 9.3%. c. The real price of groceries went up by 13.5%. d. The real price of groceries went up by 2.9%. ANSWER: b 76. The quantity theory of money describes the relationship between: a. prices, employment, money supply, and production. b. the velocity of money, money supply, real output, and prices. c. GDP, money supply, consumption, and savings. d. the money supply and real GDP. ANSWER: b 77. The average number of times a dollar buys final goods and services during a year is the: a. velocity of money. b. money supply. c. consumption rate. d. quantity theory of money. ANSWER: a 78. According to the quantity theory of money, an increase in the money supply causes an increase in _____ over the long run. a. production b. the velocity of money Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 12 c. real GDP d. prices ANSWER: d 79. What two components of the quantity theory of money do economists assume to be stable over time? a. the velocity of money and the price level b. real GDP and price level c. real GDP and the velocity of money d. the money supply and the velocity of money ANSWER: c 80. In a small economy, the quantity of money circulating in the economy is $2.5 million. Real GDP for the current year is $5 million, and the average price level is 2. What is the velocity of money? a. 4.0 b. 2.0 c. 2.5 d. 5.0 ANSWER: a 81. In a small economy, the money supply is $400,000, and the velocity of money is 3. The current average price level in the economy is 1. What is the level of real GDP in this economy? a. $1.2 million b. $1.6 million c. $400,000 d. $133,333 ANSWER: a 82. In a small economy, the rate of money growth for the current year is 2%. Velocity of money circulation is stable. Inflation is expected to be about 1.5% over the current year. What is the short-run economic growth rate? a. 3.5% b. 1.5% c. 0.5% d. 2.0% ANSWER: c 83. The velocity of money is: a. how fast the price level is rising. b. how fast the inflation rate is rising. c. the rate at which money can be printed. d. the average number of times people spend a dollar on final goods and services. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 12 84. An assumption of the quantity theory of money is that the velocity of money: a. remains relatively constant. b. rises with increases in the money supply. c. rises with increases in real GDP. d. rises with increases in the price level. ANSWER: a 85. An assumption of the quantity theory of money is that real GDP growth: a. remains relatively constant. b. rises with increases in the money supply. c. rises with increases in the velocity of money. d. rises with increases in the price level. ANSWER: a 86. Suppose the money supply equals $100 million, the average price level equals 40, and real GDP equals $50 million. Given this information, the velocity of money equals: a. 20. b. 80. c. 100. d. 125. ANSWER: a 87. If the velocity of money and real GDP are fixed, then the quantity theory of money implies that the price level will: a. increase at a lower rate than the growth in the money supply. b. increase at the same rate as the growth in the money supply. c. increase at a higher rate than the growth in the money supply. d. be unrelated to the growth in the money supply. ANSWER: b 88. Which identity represents the quantity theory of money? a. MP = Yv b. Mv = PYR c. P = M d. Mv = YR ANSWER: b 89. If the average level of prices in an economy equals 100, the money supply equals $100,000, and the level of real output equals $5,000, then the velocity of money is: a. 5. b. 20. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 12 c. 100. d. 1,000. ANSWER: a 90. When using the quantity theory of money to analyze the relationship among inflation, money, real output, and prices, we typically assume that: a. real output and the money supply are constant. b. real output and the velocity of money are constant. c. the velocity of money is equal to the inflation rate. d. the growth rate of the money supply is constant. ANSWER: b 91. The velocity of money is: a. the average number of times people spend a dollar on final goods and services in a year. b. a price that economists have corrected for inflation. c. when people mistake changes in nominal prices for changes in real prices. d. an increase in the average level of prices. ANSWER: a 92. In the equation Mv = PYR, M stands for: a. the multiplier. b. inflation. c. the money supply. d. median. ANSWER: c 93. If the money supply is $1 million, the velocity of money is 10, and the price level is 100, what is real GDP? a. $1,000 b. $10,000 c. $100,000 d. $1 million ANSWER: c 94. If the money supply is $375 million, the velocity of money is 5, and real GDP is $12.5 million, what is the average price level? a. 50.0 b. 100.0 c. 150.0 d. 12.5 ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 12 95. When the velocity of money and real GDP are fixed, increases in the money supply: a. result in lower velocity. b. are impossible because the money supply must also be fixed. c. must cause decreases in the price level. d. must cause increases in the price level. ANSWER: d 96. In the equation Mv = PYR, P represents: a. average productivity. b. the average price level. c. inflation. d. corporate profits. ANSWER: b 97. In the long run, the quantity theory of money says that the growth rate of the money supply will be approximately equal to the: a. velocity of money. b. inflation rate. c. price level. d. growth rate of real GDP. ANSWER: b 98. Nobel Prize-winning economist Milton Friedman said, "Inflation is always and everywhere a _____ phenomenon." a. monetary b. risky c. velocity d. growth ANSWER: a 99. If the money supply and the velocity of money are fixed, then increases in real GDP: a. are impossible because real GDP must also be fixed. b. cause increases in the price level. c. cause decreases in the price level. d. occur without changes in the price level. ANSWER: c 100. If the money supply, the velocity of money, and the price level are fixed, then increases in real GDP: a. are impossible because real GDP must also be fixed. b. cause the money supply, the velocity of money, and the price level to increase together. c. cause the money supply, the velocity of money, and the price level to decrease together. Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 12 d. occur without changes in the other variables. ANSWER: a 101. Deflation is: a. the average number of times people spend a dollar on final goods and services in a year. b. mistaking changes in nominal prices for changes in real prices. c. a decrease in the average level of prices. d. an increase in the average level of prices. ANSWER: c 102. With respect to real output, in the long run, money is: a. expansionary. b. velocity. c. temporary. d. neutral. ANSWER: d 103. The identity that expresses the quantity theory of money is: a. money supply × money velocity = average price × quantity of goods and services. b. money supply + money velocity = average price – quantity of goods and services. c. money supply – money velocity = average price – quantity of goods and services. d. money supply ÷ money velocity = average price ÷ quantity of goods and services. ANSWER: a 104. The quantity theory of money implies that the money supply times the velocity of money equals: a. real GDP. b. the quantity of goods and services. c. the price level. d. nominal GDP. ANSWER: d 105. According to the quantity theory of money, if the money supply is $1,000 million, the overall price level is 200, and real GDP is 50 million, then the velocity of money is equal to: a. 10. b. 20. c. 50. d. 100. ANSWER: a 106. Assuming that the velocity of money and real GDP are fixed, the quantity theory of money predicts that a 2% increase in the money supply causes a 2%: Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 12 a. increase in inflation. b. decrease in inflation. c. increase in the average price level. d. decrease in the average price level. ANSWER: c 107. The quantity theory of money assumes that the velocity of money: a. increases with the quantity of money in the economy. b. decreases with the quantity of money in the economy. c. is relatively stable. d. is difficult to predict. ANSWER: c 108. The quantity theory of money assumes that real GDP: a. increases with the quantity of money in the economy. b. decreases with the quantity of money in the economy. c. is relatively stable. d. is difficult to predict. ANSWER: c 109. The quantity theory of money predicts that the price level: a. increases with the quantity of money in the economy. b. decreases with the quantity of money in the economy. c. is relatively constant. d. is difficult to predict. ANSWER: a 110. The quantity theory of money: a. describes the general relationship between money, velocity, real output, and prices. b. presents the critical role of money demand in regulating the level of prices. c. derives the optimal quantity of inflation. d. explains the equilibrium between money supply and money demand. ANSWER: a 111. Suppose the nominal GDP of a country is $500 billion. If the velocity of money in the country is 10, then the country's money supply will equal: a. $5,000 billion. b. $510 billion. c. $490 billion. d. $50 billion. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 12 112. If the money supply in a country is $200 million, the velocity of money is 5, and real GDP is 250 million, the price level of the country must be: a. 1.25. b. 4.00. c. 6.25. d. 8.00. ANSWER: b 113. The quantity theory of money predicts that the main cause of inflation is increases in: a. prices. b. real output. c. consumption. d. the money supply. ANSWER: d 114. Between 1960 and 1990, Argentina's money supply grew at approximately 80%. According to the quantity theory of money, inflation rates in Argentina should have been approximately _____% during this period. a. 20 b. 40 c. 80 d. 160 ANSWER: c 115. According to the quantity theory of money, the primary cause of inflation is: a. the growth rate of the money supply. b. the growth rate of real GDP. c. productivity growth. d. the number of real economic shocks. ANSWER: a 116. According to the quantity theory, what causes inflation in the long run? a. unemployment b. unexpected inflation c. money supply growth d. aggregate demand shocks ANSWER: c 117. Disinflation occurs when the overall price level: a. falls. b. rises at a decreasing rate. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 12 c. rises at an exponential rate. d. falls at an increasing rate. ANSWER: b 118. What would the quantity theory of money predict if the growth rate of the money supply decreases from 10% to 5%? a. disinflation b. deflation c. hyperinflation d. money illusion ANSWER: a 119. According to the quantity theory of money, money growth in the long run: a. affects both real GDP growth and inflation. b. affects real GDP growth only. c. affects inflation only. d. has no effect on either real GDP growth or inflation. ANSWER: c 120. When economists state that "money is neutral," they mean that the: a. overall price level has no effect on consumers; only relative prices do. b. overall price level has no effect on people's inflation expectations. c. money supply does not affect inflation or nominal GDP. d. money supply does not affect real GDP or unemployment. ANSWER: d 121. According to the quantity theory of money, a change in the money supply affects: a. real GDP in the short run but not in the long run. b. real GDP in the long run but not in the short run. c. nominal GDP in the short run but not in the long run. d. nominal GDP in the long run but not in the short run. ANSWER: a 122. The quantity theory states that money is neutral: a. in both the short run and the long run. b. only in the short run. c. only in the long run. d. neither in the short run nor in the long run. ANSWER: c 123. In times of financial panic, we expect the velocity of money to: Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 12 a. increase. b. decrease. c. remain relatively constant. d. first increase and then decrease. ANSWER: b 124. Deflation is a decrease in the: a. exchange rate. b. average level of prices. c. inflation rate. d. velocity of money. ANSWER: b 125. Disinflation is a decrease in the: a. exchange rate. b. average level of prices. c. inflation rate. d. velocity of money. ANSWER: c 126. In the long run, an increase in the money supply will cause _____ in real GDP. a. an increase b. a decrease c. no change d. volatile and unpredictable changes ANSWER: c 127. Suppose that real GDP and the velocity of money remain constant. If the money supply doubles, then the inflation rate will be: a. 10%. b. 50%. c. 100%. d. 200%. ANSWER: c 128. According to Nobel laureate Milton Friedman, "inflation is _____." a. a good thing b. found everywhere c. always present d. always and everywhere a monetary phenomenon ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 12 129. _____ is a decrease in the average level of prices, whereas _____ is a reduction in the inflation rate. a. Deflation; disinflation b. Disinflation; deflation c. Stagflation; disinflation d. Deflation; stagflation ANSWER: a 130. When an increase in the money supply is unexpected by firms and workers, real GDP: a. increases in the short run. b. decreases in the short run. c. increases in the long run. d. decreases in the long run. ANSWER: a 131. The inflation parable in the text suggests a: a. short-run relationship between unexpected inflation and output. b. short-run relationship between expected inflation and output. c. long-run relationship between unexpected inflation and output. d. long-run relationship between expected inflation and output. ANSWER: a 132. Why could very high rates of inflation cause velocity to increase? a. The more people earn, the faster they spend it. b. The more money loses its value, the faster people try to spend it. c. The more people earn, the faster prices rise. d. The more inflation there is, the more there is to buy. ANSWER: b 133. The quantity theory of money is a theory of: a. money growth in the United States. b. inflation. c. economic growth. d. the growth of tax burdens. ANSWER: b 134. Table: CPI Year CPI (end-of-year value) 1999 110 2000 115 2001 117 2002 115 Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 12 According to the table, in which year did this country experience disinflation? a. 2001 b. 2002 c. both 2001 and 2002 d. neither 2001 nor 2002 ANSWER: a 135. Table: CPI Year CPI (end-of-year value) 1999 110 2000 115 2001 117 2002 115 According to the table, in which year did this country experience deflation? a. 2001 b. 2002 c. both 2001 and 2002 d. neither 2001 nor 2002 ANSWER: b 136. In the quantity theory of money, growth of _____ is the cause of inflation. a. the money supply b. velocity c. real GDP d. the CPI ANSWER: a 137. According to the quantity theory of money, a nation that increases its money supply by 30% should expect its price level to increase by approximately: a. 15%. b. 30%. c. 45%. d. 60%. ANSWER: b 138. According to the quantity theory, which could cause the price level to decrease? a. The population spends less money. b. The population spends money faster. c. Nominal GDP rises. d. The government spends more. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 12 139. In the long run, money: a. always increases real GDP. b. will not affect prices. c. will lift the standard of living for everyone in a nation. d. is neutral with respect to quantity produced. ANSWER: d 140. According to the quantity theory of money, an increase in the money supply will cause the price level to: a. remain relatively constant since money is neutral. b. increase by about the same percentage as the money supply. c. increase by a greater percentage than the money supply. d. increase by a smaller percentage than the money supply. ANSWER: b 141. All else being equal, according to the quantity theory of money, an increase in the velocity of money will cause: a. deflation. b. disinflation. c. hyperinflation. d. higher inflation. ANSWER: d 142. When we examine data from different countries, higher money growth has consistently been associated with: a. deflation. b. disinflation. c. hyperinflation. d. higher inflation. ANSWER: d 143. If, in an economic panic, people decide to hold their money rather than spend it, the velocity of money will: a. remain relatively constant. b. increase. c. decrease. d. become unpredictable. ANSWER: c 144. According to the quantity theory of money, the major cause of inflation in the long run is an increase in the: a. standard of living. b. velocity of money. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 12 c. growth rate of real GDP. d. growth rate of the money supply. ANSWER: d 145. The argument that "inflation is always and everywhere a monetary phenomenon" is consistent with the: a. theory of price confusion. b. quantity theory of money. c. theory of money illusion. d. Fisher effect. ANSWER: b 146. Suppose that the average level of prices increased from 100 to 110 between 2007 and 2008, and from 110 to 115 between 2008 and 2009. Between 2008 and 2009, there was: a. deflation. b. hyperinflation. c. disinflation. d. inflation in the real price of everything. ANSWER: c 147. The argument that "money is neutral in the long run" means that an increase in the money supply can: a. increase real GDP only temporarily. b. decrease real GDP only temporarily. c. increase real GDP permanently. d. decrease real GDP permanently. ANSWER: a 148. How might changes in the money supply be non-neutral in the short run? a. As the amount of money circulating in the economy changes before prices respond, the purchases of
consumers change accordingly, which leads producers to change production levels. b. When money supply changes in the short run, it will affect nominal, but not real, variables in the short run.
c. As money growth increases at a faster rate, it will cause real GDP to grow at an even faster rate. d. If producers expect inflation to increase, they will increase supply to sell before the arrival of inflation. ANSWER: a 149. The inflation parable in the text refers to the fact that an unexpected change in the money supply affects: a. real GDP only in the long run. b. real GDP only in the short run. c. real GDP in both the short run and the long run. d. only inflation in the short run. ANSWER: b 150. The causes of episodes of hyperinflation are: Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 12 a. severe recessions. b. extreme economic booms. c. extremely high rates of money growth. d. moderately high rates of real GDP growth. ANSWER: c 151. Suppose that a man spends a dollar on an ice cream cone. The dollar he spends becomes income to the ice cream store owner, who spends it on paper. The dollar the ice cream store owner spends then becomes income to a worker at the paper factory, who uses it to help pay for gas. This process of the dollar being spent, becoming income, and then being spent repeatedly on final goods and services is the basis of the concept of: a. revolving spending. b. quantity spending. c. inflationary money. d. the velocity of money. ANSWER: d 152. The meaning of the quantity theory of money equation, Mv = PYR, is that _____ equals _____. a. the value of money; the price level per year b. the value of money; real output c. total expenditures; nominal GDP d. total expenditures; the price level per year ANSWER: c 153. Which is NOT correct in the quantity theory of money equation, Mv = PYR? a. M = money supply b. v = velocity of money c. P = production level d. YR = real GDP ANSWER: c 154. What will happen in the equation Mv = PYR if M increases? a. P or YR will rise to maintain the balance in the equation. b. P or YR will fall to maintain the balance in the equation. c. The "less than" sign will replace the equal sign. d. The "greater than" sign will replace the equal sign. ANSWER: a 155. Which two components in the equation Mv = PYR are more stable? a. M and P b. v and YR c. v and P Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 12 d. M and YR ANSWER: b 156. According to the quantity theory of money, what happens in the economy if the money supply increases more rapidly than output? a. P rises. b. v falls. c. YR falls. d. v rises. ANSWER: a 157. According to the quantity theory of money, the main cause of inflation is an excessive: a. increase in velocity. b. decrease in real GDP. c. increase in the money supply. d. decrease in velocity. ANSWER: c 158. Table: CPI Data Year 1 Year 2 Year 3 Year 4 Year 5 CPI 100 108 105 112 115 The table provides CPI data for a certain country over five years. In which year did deflation occur? a. year 2 b. year 3 c. year 4 d. year 5 ANSWER: b 159. Table: CPI Data Year 1 Year 2 Year 3 Year 4 Year 5 CPI 100 108 105 112 115 The table provides CPI data for a certain country over five years. In which year did disinflation occur? a. year 2 b. year 3 c. year 4 d. year 5 ANSWER: d 160. Table: CPI Data Year 1 Year 2 Year 3 Year 4 Year 5 CPI 100 108 105 112 115 The table provides CPI data for a certain country over five years. In which years did inflation occur? Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 12 a. year 2 and year 4 b. year 3 and year 5 c. year 2 and year 5 d. year 3 and year 4 ANSWER: a 161. What is meant by the phrase, "In the long run, money is neutral"? a. Over long periods of time, the purchasing power of the currencies of different countries will equalize. b. Over long periods of time, money cannot be used for political gain. c. Over long periods of time, inflation is determined by other factors but not the quantity of money. d. Over long periods of time, output is constrained by the factors of production but not the quantity of money. ANSWER: d 162. Which statement is NOT correct? a. If your nominal wages rise at a rate higher than the inflation rate, you have received a real pay raise. b. If your nominal wages rise at exactly the rate of inflation, your purchasing power over time remains constant. c. If your nominal wages rise at 4% while inflation rises at 5%, you have essentially received a pay cut. d. If deflation occurs, you will receive a real pay raise regardless of what happens to your nominal wage. ANSWER: d 163. Which one is NOT a cost of inflation? a. wasted resources associated with price confusion b. higher tax burdens if tax brackets are not adjusted for inflation c. wealth redistribution from private citizens to the government d. an automatic decrease in nominal wages throughout the period of inflation ANSWER: d 164. Money illusion is: a. the average number of times a dollar is spent on final goods and services in a year. b. mistaking changes in nominal prices for changes in real prices. c. a decrease in the average level of prices. d. an increase in the average level of prices. ANSWER: b 165. If people expect an inflation rate of 3% and later it turns out to be 5%, then the real rate of return will be: a. less than people expected. b. greater than people expected. c. 3%. d. 5%. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 12 166. When the expected rate of inflation is higher than the actual rate of inflation, wealth is: a. redistributed at random. b. not redistributed at all. c. redistributed from borrowers to lenders. d. redistributed from lenders to borrowers. ANSWER: c 167. When an economy experiences volatile and unpredictable hyperinflation: a. people will decrease their borrowing. b. people will increase their lending. c. there will be no impact on borrowing and lending. d. it causes a breakdown of financial intermediation. ANSWER: d 168. Inflation hurts the economy because: a. it raises all prices in the economy. b. it affects the ability of market prices to send signals about the value of resources. c. everyone can perfectly see the increases in prices. d. higher prices reduce real output. ANSWER: b 169. Inflation tends to cause nominal wages to: a. increase. b. decrease. c. remain constant. d. become more difficult to predict. ANSWER: a 170. High and volatile inflation: a. causes the price of goods and services to deviate from the market price. b. increases the purchasing power of money and income. c. creates a high supply of goods and services. d. destroys the ability of market prices to send signals about the value of resources and opportunities. ANSWER: d 171. Which is NOT a cost of inflation? a. price confusion b. declining nominal wages c. money illusion d. inflation tax ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 12 172. The primary reason that we think of inflation as bad even when nominal wages rise with it is that it: a. makes things more expensive for consumers. b. leads to lower real wages. c. distorts the information delivered by prices. d. increases the velocity of money. ANSWER: c 173. Which is a problem with deflation? a. It raises the real cost of debt repayment. b. Stopping it will cause a recession. c. It causes people to pay more taxes. d. There is no problem with deflation; falling prices are good for the economy. ANSWER: a 174. Suppose your employer cuts your pay 5% when the economy is experiencing overall deflation of 5%. If in response to your pay cut you also reduce your consumption by 5%, then economists would say that: a. you made a rational decision. b. you are exhibiting money illusion. c. your real wage decreased by 5%. d. the quantity theory of money held. ANSWER: b 175. Money illusion occurs when people: a. become irrational about money use. b. become rationally ignorant about money. c. mistake changes in prices for changes in quality. d. mistake changes in nominal prices for changes in real prices. ANSWER: d 176. High volatility in the inflation rate can result in: a. improper allocation of resources. b. sudden changes in output. c. low volatility in the consumer price index. d. deflation. ANSWER: a 177. When the money supply and the demand for goods increase at the same time: a. producers understand how to react, but consumers are confused. b. consumers act rationally, but producers cannot read the market signals. c. the government is able to clarify how the markets will be affected. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 12 d. both consumers and producers can often become confused. ANSWER: d 178. When changes in nominal prices are confused with changes in real prices, people experience: a. consumer bias. b. inflationary delusion. c. cyclical price confusion. d. money illusion. ANSWER: d 179. Which is an example of money illusion, assuming that inflation is 5%? a. You receive a 5% raise at your part-time job and start spending extra money on entertainment every weekend. b. You receive a 5% raise at your part-time job but do not change what or how much you buy.
c. You do not receive a raise at your part-time job but cut out some expenses as you notice some prices rising. d. You receive a 10% raise at your part-time job and start spending extra money on entertainment every weekend.
ANSWER: a 180. Because of money illusion, inflation often confuses: a. consumers only. b. workers only. c. firms only. d. consumers, workers, and firms. ANSWER: d 181. When people suffer from money illusion, an increase in the money supply: a. raises real GDP in the short run. b. lowers real GDP in the short run. c. has no effect on real GDP in the short run but raises real GDP in the long run. d. lowers real GDP in the long run. ANSWER: a 182. Jordan loaned Taylor $1,200 on March 15, 2009. Taylor returned $1,260 on March 14, 2010. Inflation was 2% over the one-year period. What is the real interest rate that Taylor paid? a. 2% b. 3% c. 5% d. 7% ANSWER: b 183. Lonnie loaned Burt $15,000 in 2009. Burt repaid Lonnie $150 in real interest for the one-year loan. Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 12 Inflation that year was 1.5%. What nominal interest rate did Lonnie charge Burt? a. 0.5% b. 2.0% c. 2.5% d. –0.5% ANSWER: c 184. Lillian loaned A.J. $10,000 and increased her purchasing power by $200 when A.J. repaid the loan a year later. Deflation of 2% also occurred that year. What nominal interest rate did Lillian charge A.J.? a. 0% b. 2.0% c. 4.0% d. 2.5% ANSWER: a 185. Table: Anticipating Inflation Year Predicted Inflation Rate Actual Inflation Rate 2000 3% 3% 2001 3 2 2002 7 9 2003 5 4 2004 4 7 Using the inflation data in the table, assume that all loan contracts have fixed nominal interest rates of 10% and mature after one year. In which year did lenders gain relative to borrowers? a. 2000 b. 2002 c. 2003 d. 2004 ANSWER: c 186. Table: Anticipating Inflation Year Predicted Inflation Rate Actual Inflation Rate 2000 3% 3% 2001 3 2 2002 7 9 2003 5 4 2004 4 7 Using the inflation data in the table, assume that all loan contracts have fixed nominal interest rates of 10% and mature after one year. In which year did lenders receive exactly the amount of real interest they expected? a. 2000 b. 2002 c. 2003 d. 2004 Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 12 ANSWER: a 187. Table: Anticipating Inflation Year Predicted Inflation Rate Actual Inflation Rate 2000 3% 3% 2001 3 2 2002 7 9 2003 5 4 2004 4 7 Using the inflation data in the table, assume that all loan contracts have fixed nominal interest rates of 10% and mature after one year. In which year did borrowers gain relative to lenders? a. 2000 b. 2001 c. 2002 d. 2003 ANSWER: c 188. Current forecasts say that mild inflation is expected next year. If, however, deflation occurs instead: a. lenders on existing fixed-rate loans will gain whereas borrowers will lose. b. borrowers on existing fixed-rate loans will gain whereas lenders will lose. c. both lenders and borrowers on existing fixed-rate loans will lose. d. both lenders and borrowers on existing fixed-rate loans will gain. ANSWER: a 189. Which correctly represents unexpected disinflation? a. Eπ > π b. Eπ < π c. Eπ = π d. Eπ > i ANSWER: a 190. Which correctly represents deflation? a. Eπ > π b. Eπ < π c. Eπ = π d. π < 0 ANSWER: d 191. Unanticipated high inflation always means a: a. loss in purchasing power for lenders of fixed-rate loans. b. decrease in the amount of real taxes paid by citizens and firms. c. redistribution of wealth from the rich to the poor. Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 12 d. loss in purchasing power for both lenders and borrowers. ANSWER: a 192. The realized real rate of return for lenders is equal to the nominal rate of return: a. plus the inflation rate. b. minus the inflation rate. c. times the inflation rate. d. divided by the inflation rate times 100. ANSWER: b 193. A bank lends money for a year at an interest rate of 7%, and the inflation rate for that year turns out to be 5%. What is the bank's real rate of return for that year? a. 2.0% b. 3.5% c. 6.0% d. 12.0% ANSWER: a 194. What is the Fisher effect? a. the tendency of nominal interest rates to fall with higher expected inflation rates b. the tendency of nominal interest rates to rise with higher expected inflation rates c. the tendency of real interest rates to fall with higher expected inflation rates d. the tendency of real interest rates to rise with higher expected inflation rates ANSWER: b 195. When actual inflation is equal to expected inflation: a. borrowers are harmed and lenders benefit. b. lenders are harmed and borrowers benefit. c. both borrowers and lenders are harmed. d. neither borrowers nor lenders are harmed. ANSWER: d 196. Inflation tends to benefit: a. lenders. b. the government. c. taxpayers. d. families with fixed incomes. ANSWER: b 197. For a given nominal interest rate, an increase in the inflation rate will cause real interest rates to: a. remain relatively constant. Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 12 b. increase. c. decrease. d. become unpredictable. ANSWER: c 198. For a given nominal interest rate, an increase in deflation will cause the real rate of interest to: a. remain relatively constant. b. increase. c. decrease. d. become unpredictable. ANSWER: b 199. The Fisher effect indicates that an increase in the expected inflation rate will cause the nominal rate of interest to: a. remain relatively constant. b. increase by the same amount. c. decrease by the same amount. d. become unpredictable. ANSWER: b 200. The Fisher effect indicates that an increase in the expected inflation rate will cause the real rate of interest to: a. remain relatively constant. b. increase by the same amount. c. decrease by the same amount. d. become unpredictable. ANSWER: a 201. The situation in which the government pays off its debts by printing money is called: a. a money illusion. b. monetizing the debt. c. disinflation. d. the quantity theory of money. ANSWER: b 202. If expected inflation is higher than actual inflation, then: a. wealth will be redistributed from lenders to borrowers. b. wealth will be redistributed from borrowers to lenders. c. both borrowers and lenders will gain wealth. d. both borrowers and lenders will lose wealth. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 12 203. If the nominal interest rate is 8% and the inflation rate is 10%, then the real rate of return for lenders is: a. 18%. b. 10%. c. 2%. d. −2%. ANSWER: d 204. According to the Fisher equation, the nominal interest rate equals the expected inflation rate: a. less the equilibrium real interest rate. b. plus the equilibrium real interest rate. c. multiplied by the equilibrium real interest rate. d. divided by the equilibrium real interest rate. ANSWER: b 205. According to the Fisher effect, a 5% decrease in the expected inflation rate results in a: a. 5% decrease in the nominal interest rate. b. more than 5% increase in the nominal interest rate. c. 5% decrease in the real interest rate. d. more than 5% increase in the real interest rate. ANSWER: a 206. According to the Fisher equation, if the expected inflation rate is less than the actual inflation rate, then the actual rate of return will be: a. lower than the equilibrium interest rate. b. higher than the equilibrium interest rate. c. the same as the equilibrium interest rate. d. higher or lower than the equilibrium interest rate, depending on the degree of money illusion. ANSWER: a 207. When the government monetizes its debt, the results are: a. higher inflation and benefits for holders of government bonds. b. lower inflation and benefits for holders of government bonds. c. higher inflation and losses for holders of government bonds. d. lower inflation and losses for holders of government bonds. ANSWER: c 208. Debt monetization means that a government pays off its debt by: a. lowering inflation. b. raising tax revenues. c. borrowing from foreigners. Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 12 d. increasing the money supply. ANSWER: d 209. Volatile hyperinflation causes financial intermediation to: a. become more efficient. b. favor long-term lending. c. favor first-time borrowers. d. break down. ANSWER: d 210. In times when prices rise unexpectedly: a. producers benefit at the expense of consumers. b. consumers benefit at the expense of producers. c. lenders benefit at the expense of borrowers. d. borrowers benefit at the expense of lenders. ANSWER: d 211. An investment of $1,000 in the bank at an annual interest rate of 4% while prices rise by 2.5% generates a real return of: a. 1.5%. b. 2.5%. c. 4.0%. d. 6.5%. ANSWER: a 212. The text states that "inflation is a type of tax." This tax refers to _____ when inflation occurs. a. the lower purchasing power of money b. a higher tax rate that the government must impose c. a higher nominal interest rate of a typical loan d. a special tax on taxpayers for the government to balance its budget ANSWER: a 213. Suppose the nominal interest rate is 4% and the inflation rate is 5%. The real interest rate is: a. 9%. b. 0%. c. 1%. d. –1%. ANSWER: d 214. The Fisher effect predicts that the nominal interest rate: a. rises as the expected inflation rate rises. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 12 b. falls as the expected inflation rate rises. c. remains the same as the expected inflation rate changes. d. changes only if the unexpected inflation rate changes, but not with the expected inflation rate. ANSWER: a 215. The Fisher equation implies that if expected inflation is higher than actual inflation, then: a. the actual rate of return will be equal to the equilibrium interest rate. b. the actual rate of return will be greater than the equilibrium interest rate. c. the actual rate of return will be less than the equilibrium interest rate. d. both the actual rate of return and the equilibrium interest rate will become undetermined. ANSWER: b 216. If the economy experiences unexpected inflation, then the actual rate of return will be _____ than its equilibrium rate, and wealth will be distributed from _____. a. greater; lenders to borrowers b. less; lenders to borrowers c. greater; borrowers to lenders d. less; borrowers to lenders ANSWER: b 217. The case of hyperinflation in Zimbabwe in the late 2000s was an example of the effects of: a. the government monetizing its debt. b. large rainfall shocks. c. amplification mechanisms. d. a lack of foreign aid. ANSWER: a 218. Negative real rates of interest tend to: a. increase economic growth. b. reduce economic growth. c. have no impact on economic growth. d. exist only in poor countries. ANSWER: b 219. If a lender expects an inflation rate of 5% and asks for a nominal interest rate of 10%, then the lender expects to earn a real interest rate of: a. 2%. b. 5%. c. 10%. d. 15%. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 12 220. If a lender expects an inflation rate of 5% but the inflation rate unexpectedly increases to 7%, and if the nominal interest rate was 10%, what is the real rate of interest earned? a. 2% b. 3% c. 4% d. 5% ANSWER: b 221. The Fisher effect is the tendency of: a. real interest rates to rise with expected inflation rates. b. real interest rates to rise with unexpected inflation rates. c. nominal interest rates to rise with expected inflation rates. d. nominal interest rates to rise with unexpected inflation rates. ANSWER: c 222. According to the Fisher effect, the nominal interest rate will: a. rise as unexpected inflation increases. b. fall as unexpected inflation increases. c. rise as expected inflation increases. d. fall as expected inflation increases. ANSWER: c 223. When inflation functions as a type of tax, which group of people will be hurt the MOST? a. people or businesses with deposits in a savings account that pays an interest rate higher than the rate of inflation b. people or businesses that invest in gold, silver, platinum, or other metals
c. people who hold currency and coins in their wallet, purse, or at home d. people who invest their money in mutual funds ANSWER: c 224. Monetizing the debt occurs when a government: a. raises taxes to pay off the debt. b. issues more debt to finance its budget deficit. c. decreases the money supply to pay off the debts. d. pays off its debts by printing money. ANSWER: d 225. When disinflation arises unexpectedly, the actual rate of return will _____ the equilibrium rate, which will benefit _____. a. exceed; lenders and harm borrowers b. exceed; borrowers and harm lenders Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 12 c. fall short of; lenders and harm borrowers d. fall short of; borrowers and harm lenders ANSWER: a 226. When inflation rises unexpectedly the actual rate of return will: a. exceed the equilibrium rate, which will benefit lenders and harm borrowers. b. exceed the equilibrium rate, which will benefit borrowers and harm lenders. c. fall short of the equilibrium rate, which will benefit lenders and harm borrowers. d. fall short of the equilibrium rate, which will benefit borrowers and harm lenders. ANSWER: d 227. Even expected inflation typically: a. increases real prices. b. increases the amount of taxes that people pay over time. c. decreases average household consumption. d. decreases the number of long-term contracts signed. ANSWER: b 228. Inflation generally causes the taxes that individuals and business firms pay to: a. remain relatively constant. b. increase. c. decrease. d. become less of a burden. ANSWER: b 229. For a tax system in which higher-income earners pay a larger share of their incomes in taxes, a higher inflation rate: a. lowers the tax burden of taxpayers. b. raises the tax burden of taxpayers. c. does not affect the tax burden of taxpayers. d. can raise or lower the tax burden of taxpayers, depending on their income levels. ANSWER: b 230. What happens to workers who contract for cost-of-living allowances of 10% a year when the inflation rate falls to 4%? a. They lose purchasing power. b. They are paying an inflation tax. c. They become more costly to employ and may lose their jobs. d. They must be suffering from money illusion. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 12 231. What effect did reducing U.S. inflation from 13.5% in 1980 to 3% in 1983 have? a. Wealth was shifted from lenders to borrowers. b. The unemployment rate fell to 4%. c. The country experienced a recession. d. Per capita income increased by 18% in 3 years. ANSWER: c 232. A major problem with inflation is that after it starts, it: a. always stops quickly because the economy always corrects itself naturally. b. is easy to stop as long as it is fully expected. c. is difficult to stop without experiencing high unemployment. d. can never be stopped with a government policy. ANSWER: c 233. Inflation is painful to stop because stopping it: a. is virtually impossible. b. involves decreasing people's real wages. c. requires decreasing the growth rate of the money supply, which typically leads to lower growth overall in the short run. d. requires lowering interest rates, which hurts lenders but benefits borrowers.
ANSWER: c 234. Which is an example of someone who is fooled by money illusion in a certain country with a 4% inflation rate? a. A saver thinks he is earning a 1% real return on savings that earns 5% interest. b. A saver thinks she is losing purchasing power on savings that earns 3% interest. c. An employee thinks he can buy 7% more goods and services after receiving a 7% raise. d. An employee thinks she can buy 2% more goods and services after receiving a 6% raise. ANSWER: c 235. If a certain country's inflation rate is 3% and savings accounts are earning 2% interest, then the: a. nominal value of funds in savings accounts is rising by 1% per year. b. nominal value of funds in savings accounts is rising by 3% per year. c. purchasing power of savings accounts is falling by 3% per year. d. purchasing power of savings accounts is falling by 1% per year. ANSWER: d 236. If a certain country's inflation rate is 4% and savings accounts are earning 5% interest, then the: a. nominal value of funds in savings accounts is rising by 4% per year. b. nominal value of funds in savings accounts is rising by 5% per year. c. purchasing power of savings accounts is falling by 4% per year. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 12 d. purchasing power of savings accounts is falling by 1% per year. ANSWER: b 237. If a certain country's inflation rate is 3% and savings accounts are earning 2% interest, then the: a. nominal value of funds in savings accounts is rising by 1% per year. b. nominal value of funds in savings accounts is rising by 2% per year. c. purchasing power of savings accounts is falling by 3% per year. d. purchasing power of savings accounts is falling by 2% per year. ANSWER: b 238. Suppose the inflation rate is 3% when a 15-year mortgage loan is given at a fixed rate of 4.5%. Five years later, the inflation rate rises to 4%. What impact does this change have on the nominal interest rate and the real interest rate on the mortgage loan? a. The nominal interest rate and the real interest rate both decrease. b. The nominal interest rate and the real interest rate both increase. c. The nominal interest rate remains the same and the real interest rate decreases. d. The nominal interest rate decreases and the real interest rate increases. ANSWER: c 239. Which accurately describes who gains and who loses from unexpected inflation that occurs after the interest rate is set? a. Borrowers gain and lenders lose. b. Borrowers gain and lenders gain. c. Borrowers lose and lenders gain. d. Borrowers lose and lenders lose. ANSWER: a 240. Suppose the nominal interest rate is 4% and the inflation rate is 3%. What is the real interest rate? a. 1% b. 3% c. 4% d. 7% ANSWER: a 241. Suppose the nominal interest rate is 4% and the real interest rate is 1%. What is the inflation rate? a. 1% b. 3% c. 4% d. 7% ANSWER: b 242. Suppose the real interest rate is 1% and the inflation rate is 3%. What is the nominal interest rate? Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 12 a. 1% b. 3% c. 4% d. 7% ANSWER: c 243. What do economists mean when they claim that inflation redistributes wealth? a. Everyone's wealth is reduced from inflation. b. Inflation takes assets away and then gives them back to the same people afterward. c. Some people gain and some people lose from inflation. d. Everyone faces both a nominal and a real distribution of wealth. ANSWER: c 244. According to the Fisher effect, what will happen if the expected inflation rate falls? a. The nominal interest rate will rise. b. The nominal interest rate will fall. c. The real interest rate will rise. d. The real interest rate will fall. ANSWER: b 245. According to the Fisher effect, what will happen if the expected inflation rate rises? a. The nominal interest rate will rise. b. The nominal interest rate will fall. c. The real interest rate will rise. d. The real interest rate will fall. ANSWER: a 246. Suppose a 30-year fixed-rate mortgage loan was issued at a 5% interest rate when the expected inflation rate was 3%. Ten years later, the actual inflation rate was 4%. What was the real rate of return to the lender on this loan after 10 years? a. –1% b. 1% c. 4% d. 5% ANSWER: b 247. Suppose a 30-year fixed-rate mortgage loan was issued at a 7% interest rate when the expected inflation rate was 4%. Ten years later, the actual inflation rate was 2%. What was the real rate of return to the lender on this loan after 10 years? a. 1% b. 2% Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 12 c. 4% d. 5% ANSWER: d 248. Suppose a 30-year fixed-rate mortgage loan was issued at a nominal interest rate of 5.5% when the expected inflation rate was 2.5%. Eight years later, the actual inflation rate was 4%. After eight years, the real interest rate was _____% and _____ benefited from the actual inflation rate being higher than expected. a. 5.5; borrowers b. 2.5; lenders c. 3.0; lenders d. 1.5; borrowers ANSWER: d 249. Which does NOT result from negative real interest rates? a. the acceleration of economic growth b. a fall in the supply of loanable funds c. a reduction in savings in the banking system d. less efficient financial intermediation ANSWER: a 250. When inflation is highly variable and unpredictable, it becomes very difficult to: a. compute a price index. b. estimate the desired real interest rate. c. negotiate long-term contracts that involve payments. d. negotiate short-term contracts that involve payments. ANSWER: c 251. When taxes are assessed on nominal measures of incomes and capital gains, then inflation: a. has no impact on taxes paid. b. places a higher tax burden on taxpayers. c. places a lower tax burden on taxpayers. d. has an unpredictable impact on taxpayers. ANSWER: b 252. When the government takes action to reduce expected inflation, a _____ often results in the short run. a. simultaneous reduction in inflation and employment b. reduction in inflation with no change in employment c. reduction in inflation with an increase in employment d. simultaneous increase in inflation and employment ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 12 253. According to the Fisher effect, what harms lenders and benefits borrowers? a. when expected inflation > actual inflation b. when expected inflation < actual inflation c. when expected inflation = actual inflation d. when expected inflation is unpredictable compared to actual inflation ANSWER: b 254. According to the Fisher effect, what harms borrowers and benefits lenders? a. when expected inflation > actual inflation b. when expected inflation < actual inflation c. when expected inflation = actual inflation d. when expected inflation is unpredictable compared to actual inflation ANSWER: a 255. Generally, inflation is assumed to be bad for an economy EXCEPT when: a. interest rates are high. b. incomes are rising. c. the unemployment rate is high. d. it is mild and sustained. ANSWER: d 256. Economists convert nominal prices into real prices by adjusting: a. for changes in output. b. with a multiple of inflation. c. for the national product. d. with a price index. ANSWER: d 257. Workers and firms adjust to predictable inflation by: a. assuming it will fall over time. b. ignoring it. c. including adjustments for it in contracts. d. assuming high inflation to prevent underestimation. ANSWER: c 258. The inflation rate is equal to the rate of change in the average price level. a. True b. False ANSWER: a 259. Inflation increases if the average level of prices increases. Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 12 a. True b. False ANSWER: b 260. If the average price level rises from 205 to 210, then the inflation rate is 5%. a. True b. False ANSWER: b 261. The price of phone calls has risen over time because of inflation. a. True b. False ANSWER: b 262. The bundle of goods economists use to calculate the consumer price index remains constant over time. a. True b. False ANSWER: b 263. The bundle of goods economists use to calculate the consumer price index is always changing. a. True b. False ANSWER: a 264. The GDP deflator measures the average price for the basket of goods and services a typical consumer buys. a. True b. False ANSWER: b 265. The consumer price index measures the average price for the basket of goods and services a typical American consumer buys. a. True b. False ANSWER: a 266. The consumer price index measures the average price of all final goods and services. a. True b. False ANSWER: b 267. To compare the price of automobiles in 1950 and in 2010 accurately, we would need to calculate the real price of automobiles in 1950 and in 2010. Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 12 a. True b. False ANSWER: a 268. If the price of gasoline increased from $2.50 per gallon in 2006 to $3.50 per gallon in 2010, during which time the consumer price index increased from 203.1 to 220.2, then we can conclude that the real price of gasoline declined from 2006 to 2010. a. True b. False ANSWER: b 269. A decrease in the inflation rate from 10% to 3% implies that deflation has occurred. a. True b. False ANSWER: b 270. A decrease in the inflation rate from 10% to 3% implies that disinflation has occurred. a. True b. False ANSWER: a 271. A decrease in the inflation rate from 10% to 3% implies that the average price level has declined. a. True b. False ANSWER: b 272. The quantity theory of money shows the general relationship between inflation, money, real output, and wages. a. True b. False ANSWER: b 273. The quantity theory of money predicts that if the money supply doubles, the price level will also double. a. True b. False ANSWER: a 274. In the short run, money is neutral. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 12 275. When a nation has a money supply of 4,000, a money velocity of 2, and a real GDP of 800, the price level is 100. a. True b. False ANSWER: b 276. In hyperinflationary situations, one might expect the velocity of money to increase. a. True b. False ANSWER: a 277. According to the quantity theory of money, the velocity of money equals the amount of money people spend divided by the product of the price level and the quantity of goods and services they purchase. a. True b. False ANSWER: b 278. Nobel laureate Milton Friedman said, "Inflation is always and everywhere an unemployment phenomenon." a. True b. False ANSWER: b 279. Changes in money velocity and GDP are the main determinants of the inflation rate. a. True b. False ANSWER: b 280. In the long run, money is neutral. a. True b. False ANSWER: a 281. The terms deflation and disinflation have the same meaning. a. True b. False ANSWER: b 282. If the consumer price index (CPI) for this year is lower than the CPI for last year, disinflation must have occurred. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 12 ANSWER: b 283. Deflation always implies that the inflation rate is negative. a. True b. False ANSWER: a 284. According to the quantity theory of money, the primary cause of inflation is an increase in real GDP. a. True b. False ANSWER: b 285. The quantity theory of money is consistent with economist Milton Friedman's argument that "inflation is always and everywhere a monetary phenomenon." a. True b. False ANSWER: a 286. Money is neutral in the long run but not in the short run. a. True b. False ANSWER: a 287. Although money is neutral in the short run, it is possible that changes in money supply can change real GDP in the long run. a. True b. False ANSWER: b 288. The Fisher effect is the tendency of nominal interest rates to rise with expected inflation rates. a. True b. False ANSWER: a 289. Monetizing the debt occurs when the government pays off its debts by printing money. a. True b. False ANSWER: a 290. Sustained inflation tends to increase nominal wages. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 12 ANSWER: a 291. Inflation has no economic costs if it is fully expected. a. True b. False ANSWER: b 292. When expected inflation is less than actual inflation, inflation causes wealth redistribution from lenders to borrowers. a. True b. False ANSWER: a 293. Government debt monetization generally leads to inflation. a. True b. False ANSWER: a 294. Most cases of national hyperinflation are caused by governments attempting to redistribute wealth to poorer citizens. a. True b. False ANSWER: b 295. When actual inflation is less than expected, wealth is transferred from the borrower to the lender. a. True b. False ANSWER: a 296. Expected inflation that is less than actual inflation redistributes wealth from borrowers to lenders. a. True b. False ANSWER: b 297. In times of rising prices, lenders will always benefit at the expense of borrowers. a. True b. False ANSWER: b 298. An unexpected disinflation benefits lenders and harms borrowers. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 12 ANSWER: a 299. Negative real interest rates among developing countries result when they print too little money. a. True b. False ANSWER: b 300. Inflation can reduce the real return that lenders receive on their loans, in effect transferring wealth from borrowers to lenders. a. True b. False ANSWER: b 301. Unexpected disinflation will cause the actual rate of return to be greater than the equilibrium rate, which will benefit lenders and harm borrowers. a. True b. False ANSWER: a 302. One of the major problems associated with hyperinflation is the increased uncertainty associated with longterm contracts. a. True b. False ANSWER: a 303. One of the major costs of deflation is the decreased real purchasing power of wages that accompanies it. a. True b. False ANSWER: b 304. If the average prices level rises from 146 in year 1 to 182 in year 2, the inflation rate in year 2 is: a. 19.78% b. 24.66% c. 36.00% d. 82.00% ANSWER: b 305. If the average price level rises from 85 in year 1 to 115 in year 2, the inflation rate in year 2 is: a. 26.09% b. 30.00% c. 35.29% d. 85.00% Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 12 ANSWER: c 306. Suppose the money supply equals $500,000, the average price level equals 20, and real GDP equals $1,000,000. Given this information, the velocity of money equals: a. 2 b. 4 c. 20 d. 40 ANSWER: d 307. Suppose the money supply equals $4,000,000, the average price level equals 120, and real GDP equals $2,000,000. Given this information, the velocity of money equals: a. 2 b. 6 c. 20 d. 60 ANSWER: d 308. A bank lends money for a year at an interest rate of 10%, and the inflation rate for that year turns out to be 4%. What is the bank's real rate of return for that year? a. 4% b. 6% c. 10% d. 14% ANSWER: b 309. A bank lends money for a year at an interest rate of 2%, and the inflation rate for that year turns out to be 3%. What is the bank's real rate of return for that year? a. -1% b. 1% c. 2% d. 3% ANSWER: a 310. If expected inflation is less than actual inflation, then a. there is a transfer from borrowers to lenders. b. there is a transfer from lenders to borrowers. c. both lenders and borrowers suffer harm. d. both lenders and borrowers benefit. ANSWER: b 311. If expected inflation is greater than actual inflation, then Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 12 a. lenders benefit and borrowers suffer harm. b. lenders are harmed and borrowers benefit. c. both lenders and borrowers suffer harm. d. both lenders and borrowers benefit. ANSWER: a 312. Which do economists typically NOT consider bad for an economy: a. high inflation with high interest rates b. high inflation with high unemployment c. mild and sustained inflation d. unpredictable inflation ANSWER: c 313. When does inflation place a higher tax burden on taxpayers? a. when taxes are assessed on real measures of incomes and capital gains b. when taxes are assessed on nominal measures of incomes and capital gains c. Never. Inflation has to impact taxpayers. d. Always. Inflation is always very bad for taxpayers. ANSWER: b 314. Discuss the reasons for Zimbabwe's high inflation rate. ANSWER: Much of Zimbabwe's farmers and entrepreneurs had already been driven out of the country by unfavorable policy. Foreign investors were also driven away. The president of Zimbabwe, Robert Mugabe, still needed money, so he turned to printing money – a lot of money. The economy was not able to produce more goods and services, however, so the influx of money led to high inflation.
315. Suppose the consumer price index in 1987 was 428 with a base year of 1967. What does this tell us about prices in 1987? ANSWER: This tells us that the nominal price for a basket of goods and services a typical American consumer bought was over four times higher in 1987 than it was in 1967.
316. Explain the difference between the price level and the rate of inflation. ANSWER: The price level is a measure of the average level of prices. The rate of inflation is the percentage change in the average level of prices, as measured by the price index, over a period of time.
317. If the price level was 134 in 2008 and 149 in 2009, what was the inflation rate over this period? ANSWER: Inflation = ((149 − 134) ÷ 134) × 100% = 11.19%. 318. If your older brother paid $27,000 for college tuition in 1999, what was the real price of his college tuition in 2009 dollars? The consumer price index was 164.7 in 1999 and 212.174 in 2009. ANSWER: Tuition in 2009 dollars = Tuition in 1999 dollars × (CPI in 2009 ÷ CPI in 1999) Tuition in 2009 dollars = $27,000 × (212.174 ÷ 164.7) = $34,782.623.
319. Suppose a worker earns twice as much income this year as 5 years ago. Is that worker necessarily better off in terms of the goods and services that they can purchase with that income today? How can you tell? Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 12 ANSWER: It depends on the rate of inflation. If prices are less than twice as high as they were 5 years ago, then the worker is better off in terms of the goods and services that can be purchased today. If prices are exactly twice as high as they were 5 years ago, then they are equally well off, and if prices are more than twice as high, they are worse off.
320. List three nations that have experienced hyperinflation. What is the cause of hyperinflation, and how do hyperinflation and velocity interact? ANSWER: Zimbabwe, Peru, Argentina The cause of hyperinflation is printing large quantities of money. Changes in the velocity of money can have modest influences on inflation rates. In times of hyperinflation, though, velocity will rise because people will spend cash as quickly as they can, before it loses its value.
321. Suppose nominal GDP for a country in year 1 is $5 billion, but it increases to $10 billion in year 2. If the GDP deflator was 60 in year 1 and rose to 100 in year 2, in which year did this country produce more goods and services overall? ANSWER: GDP deflator = (Nominal GDP ÷ Real GDP) × 100 For year 1, 60 = ($5 billion ÷ Real GDP in year 1) × 100, and so Real GDP in year 1 = $8.33 billion. For year 2, 100 = ($10 billion ÷ Real GDP in year 2) × 100, and so Real GDP in year 2 = $10 billion. The country produced more goods and services in year 2.
322. In a small economy, the level of nominal GDP is $4,000,000. The current money supply (M) is $500,000. Velocity (v) is stable, and the growth rate of real GDP is expected to be 2% over the next year. Money is expected to grow at 3%. Use this information to answer the following questions: a. What is the velocity of money circulation in this economy? b. What is the expected inflation rate in this economy? ANSWER: a. v = (P × YR) ÷ M = ($4,000,000 ÷ $500,00) = 8. b. Expected inflation is about 1%.
323. Use the quantity theory of money to explain how an increase in the money supply leads to an increase in the price level. ANSWER: Since Mv = PYR, when v and YR are relatively fixed, increases in M must cause increases in P. 324. If velocity is constant and the economy's real growth rate is 3%, what rate of money growth will achieve price stability? ANSWER: Money growth of 3% will achieve price stability if the economy's real growth is 3% and velocity is constant. 325. What is the equation for the quantity theory of money? What does this theory imply about the cause of inflation in the long run? ANSWER: Mv = PYR Since v and YR are relatively fixed, increases in M must cause increases in P.
326. Briefly explain this statement: "In the long run, money is neutral." Does this statement mean the money supply has no effect at all on real economic activity? Explain. ANSWER: In the long run, changes in the money supply affect nominal variables, but not real variables. Although a change in the money supply can have an impact on real output in the short run, in the long run real GDP will return to its fullemployment level, determined by the factors of production and technology available.
327. Clarify the differences between inflation, deflation, and disinflation. Provide examples of what might happen to the price of a market basket of goods and services in each situation during year 3 if a market basket of goods and services costs $100 in year 1 and $110 in year 2. Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 12 ANSWER: Inflation is an increase in the average level of price. A price of a market basket in year 3 greater than 110 will indicate inflation in year 3. Deflation is a decrease in the average level of prices. A price of a market basket in year 3 less than 110 will indicate deflation in year 3. Disinflation is a reduction in the inflation rate. Prices of a market basket in year 3 between 110 and 121 will indicate disinflation in year 3.
328. Briefly discuss the three major costs of inflation. How does inflation benefit governments? ANSWER: 1. Price confusion and money illusion: when people mistake changes in nominal prices for changes in real prices.
2. Redistribution of wealth – Inflation transfers real resources from citizens to the government (inflation is a type of tax). It also redistributes wealth among the public, especially between lenders and borrowers. 3. Inflation is painful to stop, with higher unemployment rates a consequence of efforts to stop inflation. Also, (hyper)inflation can cause a breakdown of financial intermediation – when inflation is volatile and unpredictable, long-term loans become riskier and may not be signed at all. Inflation benefits the government because it transfers wealth to the government. If progressive tax systems are not indexed, bracket creep occurs. Money-strapped governments in danger of collapsing typically resort to the inflation tax.
329. Table: Interest Rates and Inflation Year Expected Actual Nominal Interest Rate Realized Real Interest Rate 2006 2% 3% 3% 2007 1 3 2 2008 2 3 4 2009 7 5 9 This table shows inflation and interest rate data on loan contracts in different years. a. Fill in the "Realized Real Interest Rate" column in the table. b. In which year(s) were the actual real interest rates on loan contracts negative? c. In which year(s) did lenders gain at the expense of borrowers? d. In which year(s) did borrowers gain at the expense of lenders? ANSWER: a. Realized real interest rates- 2006: 0%; 2007: -1%; 2008: 1%; 2009: 4%. b. 2007 c. 2009 d. 2006, 2007, 2008
330. Why does volatility in the inflation rate make it harder for businesses to get loans? ANSWER: When inflation is volatile and unpredictable, long-term loans become riskier. Borrowers and lenders will both fear that unexpected inflation or deflation could redistribute their wealth.
331. Explain why higher unexpected inflation helps borrowers and hurts lenders. ANSWER: If expected inflation is less than actual inflation, then the real rate of return will be less than the equilibrium rate. Wealth will be redistributed from lenders to borrowers.
332. Suppose that you are buying your first home. Current interest rates on a 30-year fixed-rate mortgage are 5%. Lenders expect an inflation rate of 2% over the next 30 years, which would give them an expected real return of 3%. If actual inflation over the next 30 years is 4% because of a continued rapid expansion of the money supply, would you be better off or worse off by taking out a 30-year fixed-rate mortgage? ANSWER: Expected inflation is 2%. Actual inflation is 4%. When expected inflation is less than actual inflation, then the real rate of return will be less than the equilibrium rate. Wealth will be redistributed from lenders to borrowers. You will be better off.
333. Why does a government with massive debt not always inflate its debt away despite the incentive to Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 12 increase the money supply? ANSWER: One reason is the Fisher effect. If lenders expect that the government will inflate its debt away, they will only lend at a high nominal rate of interest. To avoid this, the government may try to make a credible promise to keep the inflation rate low. Another reason is that people who buy government bonds are typically voters who would be upset if their real returns shrank to zero or even less.
334. Using the Fisher effect equation, explain how inflation causes wealth redistribution between lenders and borrowers. Demonstrate with the Fisher effect equation how differences in expected and actual inflation impact actual, or realized, real rates. ANSWER: Fisher effect: or If
, then the real rate of return will be less than the equilibrium rate. Wealth will be redistributed from lenders
to borrowers. If , then the real rate of return will be higher than the equilibrium rate. Wealth will be redistributed from borrowers to lenders.
335. Explain why periods of high inflation but low growth in output are so difficult for policymakers to deal with. ANSWER: One strategy to fight inflation is to slow money growth and raise interest rates. One strategy to increase growth is to increase the money supply and lower interest rates. Obviously, policy makers cannot pursue both strategies at once.
336. Explain how inflation destroys the ability of market prices to send signals about the value of resources and opportunities. ANSWER: Inflation usually confuses consumers, workers, firms, and entrepreneurs. When price signals are difficult to interpret, the market economy does not work as well – resources are wasted in activities that appear profitable but aren't, entrepreneurs are less quick to respond to real opportunities, and resources flow more slowly to profitable uses.
337. Explain how inflation redistributes wealth. ANSWER: Inflation is a type of tax. It transfers real resources from citizens to the government. It also redistributes wealth among the public, especially among lenders and borrowers. If expected inflation is less than actual inflation, then the real rate of return will be less than the equilibrium rate. Wealth will be redistributed from lenders to borrowers. If expected inflation is greater than actual inflation, then the real rate of return will be higher than the equilibrium rate. Wealth will be redistributed from borrowers to lenders.
Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 13 1. The average annual rate of growth of real gross domestic product in the United States has fluctuated around _____% for the last 60 years. a. 1.2 b. 3.1 c. 5.0 d. −1.0 ANSWER: b 2. Variations in real gross domestic product around its "normal" growth rate are called: a. business fluctuations. b. recessions. c. inflation variations. d. Solow growth rates. ANSWER: a 3. Politicians and especially the general public worry about recessions because of: a. high interest rates. b. high inflation. c. high unemployment. d. lower wages. ANSWER: c 4. The term "business fluctuations" refers to: a. the different stages of a product cycle. b. changes in the prices of goods and services over time. c. movement in real gross domestic product around its long-term trend. d. the trend in real gross domestic product over a long period of time. ANSWER: c 5. A recession is defined as a widespread decline in: a. real income (gross domestic product). b. inflation. c. unemployment. d. mortgage defaults. ANSWER: a 6. Business fluctuations are variations in: a. real income (gross domestic product) around its "normal" growth rate. b. inflation around its normal growth rate. c. the unemployment rate around its normal growth rate. d. mortgage defaults around their normal growth rate. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 13 ANSWER: a 7. During a recession: a. labor is not fully utilized. b. capital is not fully utilized. c. land is not fully utilized. d. land, labor, and capital are not fully utilized. ANSWER: d 8. The aggregate demand and aggregate supply (AD–AS) model consists of the: a. aggregate demand curve. b. short-run aggregate supply curve. c. long-run aggregate supply curve. d. aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. ANSWER: d 9. Economic growth is smooth in: a. developed countries only. b. both developed and developing countries. c. developing countries only. d. neither developed nor developing countries. ANSWER: d 10. The unemployment rate is expected to _____ during a recession. a. decrease b. remain the same c. increase d. change indeterminately ANSWER: c 11. A significant, widespread decline in real income and employment is called a(n): a. recession. b. boom. c. aggregate demand fluctuation. d. business fluctuation. ANSWER: a 12. Business fluctuations are fluctuations in the: a. level of real gross domestic product around its long-term trend. b. savings rate around its long-term trend. c. growth rate of real gross domestic product around its long-term trend. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 13 d. growth rate of nominal gross domestic product around its normal growth rate. ANSWER: c 13. The AD–AS model is most useful for explaining what causes: a. the economy's long-run growth rate. b. inflation. c. stock market fluctuations. d. fluctuations in gross domestic product growth around its "normal" rate. ANSWER: d 14. If gross domestic product (GDP) follows an upward trend over the long term, quarterly GDP data will: a. mimic this trend exactly. b. be above the trend line, pulling the trend upward. c. be below the trend line, pulling the trend downward. d. vary above, below, and sometimes on the trend line. ANSWER: d 15. Which is NOT true during a recession? a. Output is low. b. Some resources are idle. c. Employment is high. d. The unemployment rate exceeds the natural rate. ANSWER: c 16. An unexpected economic disturbance is referred to as a: a. shock. b. surprise. c. depression. d. shift. ANSWER: a 17. In the graph of the AD–AS model, what is measured on the vertical axis? a. the average price level b. real gross domestic product c. the inflation rate d. real gross domestic product growth ANSWER: c 18. In the graph of the AD–AS model, what is measured on the horizontal axis? a. the average price level b. real gross domestic product Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 13 c. the inflation rate d. real gross domestic product growth ANSWER: d 19. If the growth rate of money is 3% and the growth rate of velocity is 1%, the growth rate of nominal gross domestic product is: a. 0%. b. 1%. c. 2%. d. 4%. ANSWER: d 20. If spending in an economy increases by 3% and real gross domestic product increases by 1%, the result will be: a. a recession. b. inflation. c. a positive supply shock. d. war. ANSWER: b 21. If spending growth is 3% and real gross domestic product growth is 2%, what is the inflation rate? a. 3% b. 5% c. 1% d. 2% ANSWER: c 22. If spending growth is 6% and inflation is also 6%, this means that: a. real gross domestic product did not increase. b. economic growth was 12%. c. more money is chasing an increased number of goods. d. a positive supply shock occurred. ANSWER: a 23. Figure: Aggregate Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 13
Point A on this aggregate demand curve represents a real gross domestic product growth rate of: a. 2%. b. 3%. c. 5%. d. 7%. ANSWER: c 24. Figure: Aggregate Demand
Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 13
Point B on this aggregate demand curve represents an inflation rate of: a. 3%. b. 4%. c. 5%. d. 7%. ANSWER: b 25. Figure: Three Aggregate Demand Curves
Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 13
Consider the three aggregate demand curves shown in the graph. Movement from point A to point D represents an increase in: a. spending growth from 2% to 3%. b. spending growth from 4% to 6%. c. real gross domestic product growth, but not spending growth. d. inflation, but not spending growth. ANSWER: b 26. The aggregate demand curve shows all the combinations of _____ that are consistent with a specified rate of spending growth. a. employment rates and price levels b. inflation and real gross domestic product growth rates c. nominal gross domestic product and real gross domestic product d. money velocity and money supply ANSWER: b 27. Which of these combinations would be on an aggregate demand curve with a spending growth rate of 6%? a. inflation rate of 3%, real growth rate of 6% b. inflation rate of 6%, real growth rate of 3% c. inflation rate of 2%, real growth rate of 8% d. inflation rate of 8%, real growth rate of −2% ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 13 28. All the combinations of inflation and real growth consistent with a specific rate of spending growth are called the: a. aggregate demand curve. b. short-run aggregate supply curve. c. long-run aggregate supply curve. d. endowment curve. ANSWER: a 29. According to the quantity theory of money, if both the growth rate of the money supply and the velocity of money are fixed, then a higher inflation rate means: a. a higher real growth rate. b. no change in the real growth rate. c. a lower real growth rate. d. a higher or lower real growth rate, depending on the specific growth rate of the money supply. ANSWER: c 30. If both the growth rate of the money supply and the velocity of money are fixed, then a higher inflation rate will cause a(n): a. upward movement along the aggregate demand curve. b. downward movement along the aggregate demand curve. c. shift of the aggregate demand curve to the left. d. shift of the aggregate demand curve to the right. ANSWER: a 31. The aggregate demand curve shows the relationship between real gross domestic product growth and the: a. actual inflation rate. b. expected inflation rate. c. long-run inflation rate. d. interest rate. ANSWER: a 32. The aggregate demand curve is: a. upward sloping. b. downward sloping. c. a vertical line. d. a horizontal line. ANSWER: b 33. When inflation is 4% and the real gross domestic product growth rate is 2%, what is the spending growth rate? a. −2% b. 2% Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 13 c. 6% d. 8% ANSWER: c 34. Holding everything else constant, an increase in the growth rate of the money supply will cause the aggregate demand curve to: a. shift to the left. b. shift to the right. c. not shift at all. d. shift randomly. ANSWER: b 35. Other things held constant, an increase in the velocity of money will cause the aggregate demand curve to: a. shift to the left. b. shift to the right. c. not shift at all. d. shift randomly. ANSWER: b 36. An increase in spending growth will cause the aggregate demand curve to: a. shift to the left. b. shift to the right. c. not shift at all. d. shift randomly. ANSWER: b 37. The aggregate demand curve shows all the combinations of _____ and _____ that are consistent with a specified rate of _____. a. prices; real gross domestic product; spending b. prices; gross national product; money supply c. inflation; nominal growth; money supply d. inflation; real gross domestic product growth; spending growth ANSWER: d 38. If the growth rate of the money supply in an economy is 5%, the growth rate of output is 2%, and the velocity of money is constant, what will the inflation rate in this economy be? a. 2% b. 3% c. 5% d. 7% ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 13 39. The aggregate demand curve shows the relationship between the: a. growth rate of real output and the inflation rate. b. inflation rate and the growth rate of the money supply. c. growth rate of real output and the growth rate of the money supply. d. growth rate of consumption and the inflation rate. ANSWER: a 40. If the growth rate of spending increases from 3% to 5%, then the: a. inflation rate will rise 2%. b. growth rate of real output will rise 2%. c. aggregate demand curve will shift to the right. d. slope of the aggregate demand curve will increase. ANSWER: c 41. Which of these would cause the aggregate demand curve to shift to the right? a. an increase in the growth rate of output b. a decrease in the inflation rate c. a decrease in the velocity of money d. an increase in the growth rate of the money supply ANSWER: d 42. If spending grows by 3% while real growth is 1% and velocity is stable, then prices will be _____ at a rate of _____ according to the aggregate demand curve. a. falling; 3% b. falling; 2% c. rising; 3% d. rising; 2% ANSWER: d 43. If spending grows by 3%, real gross domestic product grows by 5%, and velocity is stable, then prices will be _____ at a rate of _____% according to the aggregate demand curve. a. falling; 3 b. falling; 2 c. rising; 3 d. rising; 2 ANSWER: b 44. If spending grows by 2%, real gross domestic product growth is 5%, and velocity is stable, then prices will be _____ at a rate of _____% according to the aggregate demand curve. a. falling; 3 b. falling; 2 Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 13 c. rising; 3 d. rising; 2 ANSWER: a 45. If spending grows by 3%, real gross domestic product growth is 0%, and velocity is stable, then prices will be _____ at a rate of _____% according to the aggregate demand curve. a. falling; 3 b. falling; 2 c. rising; 3 d. rising 2 ANSWER: c 46. The aggregate demand curve is a straight line with a slope of: a. 0. b. 1. c. −1. d. −10. ANSWER: c 47. A 1% increase in real growth, ceteris paribus, _____ inflation by _____%. a. increases; 1 b. increases; 2 c. decreases; 1 d. decreases; 2 ANSWER: c 48. A 2% increase in real growth, ceteris paribus, _____ inflation by _____%. a. increases; 1 b. increases; 2 c. decreases; 1 d. decreases; 2 ANSWER: d 49. An increase in the rate of spending growth must correlate into higher inflation and/or: a. higher deflation. b. lower inflation. c. higher growth. d. lower growth. ANSWER: c 50. The primary purpose of the AD–AS model is to explain: Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 13 a. the steady-state output. b. trends in output. c. business fluctuations. d. long-term economic growth. ANSWER: c 51. The aggregate demand curve indicates that at a given spending growth rate, a higher inflation is related to a: a. lower real gross domestic product growth rate. b. higher money supply growth rate. c. lower velocity growth rate. d. higher unemployment rate. ANSWER: a 52. If velocity is constant, the growth rate of the money supply is 2%, and inflation is 3%, then real output growth will be: a. −5%. b. −1%. c. 1%. d. 5%. ANSWER: b 53. An increase in spending growth causes a(n): a. upward movement along the AD curve. b. downward movement along the AD curve. c. rightward shift of the AD curve. d. leftward shift of the AD curve. ANSWER: c 54. The economy's aggregate demand curve shows all combinations of _____ that are consistent with a specified rate of spending growth. a. inflation and the unemployment rate b. inflation and the real gross domestic product growth rate c. economic growth and the unemployment rate d. the price level and real gross domestic product ANSWER: b 55. For a given aggregate demand curve, the specified rate of spending growth is the growth rate of money: a. supply plus the growth in velocity. b. demand plus the growth in velocity. c. supply minus the rate of growth in velocity. d. demand minus the rate of growth in velocity. Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 13 ANSWER: a 56. On a given aggregate demand curve, if the rate of spending growth is 10% and the growth rate of the money supply is 2%, then the velocity of money must be growing at: a. 5%. b. 8%. c. 12%. d. 20%. ANSWER: b 57. An increase in spending growth will cause the economy's aggregate demand curve to: a. shift to the right. b. shift to the left. c. become steeper. d. become flatter. ANSWER: a 58. A decrease in spending growth will cause the economy's aggregate demand curve to: a. shift to the right. b. shift to the left. c. become steeper. d. become flatter. ANSWER: b 59. An increase in spending growth causes a _____ the aggregate demand curve. a. rightward shift of b. leftward shift of c. movement up along d. movement down along ANSWER: a 60. Suppose a country's real growth rate is 2.2%, the rate of change in velocity of money is 0.1%, and the rate of growth of the money supply is 3.2%. What is the country's inflation rate? a. −1.88% b. 1.10% c. 3.30% d. 5.40% ANSWER: b 61. Suppose a country's real growth rate is 3.0%, the rate of change in velocity of money is 0.5%, and the rate of growth of the money supply is 4.5%. What is the country's inflation rate? a. 2.0% Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 13 b. 3.5% c. 5.0% d. 6.5% ANSWER: a 62. Suppose a country's inflation rate is 4.0%, the rate of change in velocity of money is 0.5%, and the rate of growth of the money supply is 6.0%. What is the country's real gross domestic product growth rate? a. −2.5% b. 1.5% c. 2.5% d. 4.5% ANSWER: c 63. Suppose a country's inflation rate is 5.0%, the rate of increase in velocity of money is 0.5%, and the rate of growth of the money supply is 6.0%. What is the country's real gross domestic product growth rate? a. −2.5% b. 1.5% c. 2.5% d. 4.5% ANSWER: b 64. The aggregate demand curve shows a _____ relationship between _____ and _____ at a given spending growth. a. positive; the price level; employment output b. positive; the price level; money balances c. negative; money supply; money demand d. negative; the inflation rate; the real growth rate ANSWER: d 65. If velocity is steady, what combination of inflation rate and the output growth rate would NOT be associated with a spending growth rate of 6%? a. inflation rate = 3.2%; output growth rate = 2.8% b. inflation rate = 2.5%; output growth rate = 4.5% c. inflation rate = 4.3%; output growth rate = 1.7% d. inflation rate = 6.5%; output growth rate = −0.5% ANSWER: b 66. What shifts the aggregate demand curve? a. a change the inflation rate b. a change in spending growth c. a change in the unemployment rate Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 13 d. a change in output ANSWER: b 67. An increase in aggregate demand is depicted by a: a. movement up the aggregate demand curve to a higher real growth rate. b. movement down the aggregate demand curve to a larger real growth rate. c. shift of the aggregate demand curve to the left. d. shift of the aggregate demand curve to the right. ANSWER: d 68. A decrease in aggregate demand is depicted by a: a. movement up the aggregate demand curve to a higher real growth rate. b. movement down the aggregate demand curve to a lower real growth rate. c. shift of the aggregate demand curve to the left. d. shift of the aggregate demand curve to the right. ANSWER: c 69. Figure: Long-Run Aggregate Supply Curves
Which of these can explain the shift of the long-run aggregate supply curve from A to B in the figure? a. development of new technology b. war c. negative supply shock d. oil crisis ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 13 70. Figure: Long-Run Aggregate Supply Curves
Which of these can explain the shift of the long-run aggregate supply curve from A to C in the figure? a. development of new technology b. increase in the nation's factors of production c. negative supply shock d. increase in oil supply ANSWER: c 71. A real shock causes a: a. shift of the aggregate demand curve. b. shift of both the long-run aggregate supply curve and the aggregate demand curve. c. shift of the long-run aggregate supply curve. d. movement along the long-run aggregate supply curve. ANSWER: c 72. The long-run aggregate supply curve is represented by a vertical line at the Solow growth rate because: a. growth depends on the rate of inflation in the long run. b. there is an underlying assumption of long-run money neutrality. c. growth is affected by changes in the money supply in the long run. d. growth is not affected by the factors of production. ANSWER: b 73. The Solow growth rate is the rate of economic growth that occurs when: Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 13 a. inflation is moderate. b. prices and wages are sticky. c. prices and wages are flexible. d. the money supply is growing. ANSWER: c 74. The position of the long-run aggregate supply curve shows the economy's: a. potential growth rate given by the real factors of production. b. long-run inflation rate. c. expected inflation rate. d. rate of money growth plus velocity growth. ANSWER: a 75. In a diagram with the inflation rate on the vertical axis and the real growth rate on the horizontal axis, the long-run aggregate supply curve is: a. upward sloping. b. downward sloping. c. a vertical line at the Solow growth rate. d. a horizontal line at the expected inflation rate. ANSWER: c 76. If prices are perfectly flexible, the economy will always be growing: a. at its potential rate. b. above its potential rate. c. below its potential rate. d. near its potential rate. ANSWER: a 77. The Solow growth rate is the economy's: a. actual growth rate. b. potential growth rate. c. expansionary growth rate. d. recessionary growth rate. ANSWER: b 78. The long-run aggregate supply curve is: a. upward sloping. b. downward sloping. c. a vertical line. d. a horizontal line. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 13 79. An increase in inflation will cause the long-run aggregate supply curve to: a. shift inward. b. shift outward. c. not shift. d. shift randomly. ANSWER: c 80. A major hurricane hitting the East Coast of the United States is an example of a: a. real shock. b. geographic distress. c. gross domestic product deflator. d. productivity neutralizing event. ANSWER: a 81. Which of these MOST likely causes the long-run aggregate supply curve to shift to the right? a. an increase in the money supply b. a decrease in tax revenues c. an increase in crop production due to more rainfall d. an increase in oil prices due to a fire in a major oil refinery ANSWER: c 82. Which of these would NOT shift the long-run aggregate supply curve? a. wars b. increases in technology c. strikes d. an increase in the money supply ANSWER: d 83. A negative real shock causes the long-run aggregate supply curve to shift: a. up. b. down. c. left. d. right. ANSWER: c 84. A negative real shock causes a: a. lower inflation rate and a lower real growth rate. b. lower inflation rate and a higher real growth rate. c. higher inflation rate and a lower real growth rate. d. higher inflation rate and a higher real growth rate. Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 13 ANSWER: c 85. Using a graph of the aggregate demand and long-run aggregate supply curves, the Internet revolution of the 1990s caused: a. both real growth and inflation to increase. b. both real growth and inflation to decrease. c. real growth to increase and inflation to decrease. d. real growth to decrease and inflation to increase. ANSWER: c 86. Which of these does NOT contribute to an economy's long-run potential growth rate? a. the average rate of inflation b. the level of technology c. the number of workers d. the level of investment ANSWER: a 87. The Solow growth rate represents an economy's _____ growth rate. a. average b. minimum c. potential d. projected ANSWER: c 88. The slope of the long-run aggregate supply curve is: a. −1. b. 0. c. 1. d. infinity. ANSWER: d 89. The long-run aggregate supply curve shows that long-run economic growth: a. depends on the rate of inflation. b. does not depend on the rate of inflation. c. is neutral. d. does not depend on factors such as capital, labor, and ideas. ANSWER: b 90. In the basic model with aggregate demand and long-run aggregate supply curves only, if spending growth is 10% and the Solow growth rate falls from 5% to 3%, then inflation will: a. decrease from 7% to 5%. Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 13 b. increase from 5% to 7%. c. decrease from 13% to 8%. d. increase from 8% to 13%. ANSWER: b 91. In the basic model with aggregate demand and long-run aggregate supply curves only, if spending growth is 7% and the Solow growth rate rises from 0% to 3%, then inflation will: a. decrease from 7% to 4%. b. increase from 4% to 7%. c. decrease from 10% to 3%. d. increase from 3% to 10%. ANSWER: a 92. Which of these is NOT consistent with points along the long-run aggregate supply curve? a. Real gross domestic product is growing at its long-run potential growth rate. b. All prices are fully flexible. c. All real factors of production are being fully utilized. d. Real output growth is negatively related to inflation. ANSWER: d 93. The Solow growth rate is the rate of economic growth given existing: a. capital. b. labor. c. technology. d. capital, labor, and technology. ANSWER: d 94. The Solow growth rate is the rate of economic growth that would occur given: a. flexible prices and the existing real factors of production. b. flexible prices and the expected real factors of production. c. sticky prices and the existing real factors of production. d. sticky prices and the expected real factors of production. ANSWER: a 95. Figure: Potential Long-Run Aggregate Supply Curves
Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 13
Which of these diagrams depicts the long-run aggregate supply curve? a. figure A b. figure B c. figure C d. figure D ANSWER: a 96. Which of these would shift the long-run aggregate supply curve to the right? a. a decrease in the rate of inflation b. the invention of a new computer chip that makes assembly production twice as fast c. a severe drought that decreases crop production and as a result raises prices d. an increase in the growth rate of spending ANSWER: b 97. Which of these would result from a positive productivity shock? a. an increase in the rate of inflation b. a shift to the right of the aggregate demand curve c. a shift to the left of the long-run aggregate supply curve d. an increase in the economy's long-run potential growth rate ANSWER: d 98. We would expect a negative real shock, such as a severe countrywide drought, to result in a(n): a. decrease in the inflation rate and an increase in the growth rate of output. b. decrease in the inflation rate and a decrease in the growth rate of output. Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 13 c. increase in the inflation rate and an increase in the growth rate of output. d. increase in the inflation rate and a decrease in the growth rate of output. ANSWER: d 99. The real business cycle model implies that: a. business cycles are driven by real shocks to the economy. b. real output fluctuates as a result of demand shocks only. c. the rate of inflation is closely linked to the long-run rate of output growth. d. business cycles are the result of fluctuations in the money supply. ANSWER: a 100. Graphically, a positive real shock causes a shift of the: a. aggregate demand curve to the right. b. aggregate demand curve to the left. c. long-run aggregate supply curve to the right. d. long-run aggregate supply curve to the left. ANSWER: c 101. A negative real shock leads to a(n): a. increase in the inflation rate but a decrease in the real gross domestic product growth rate. b. increase in both the inflation rate and the real gross domestic product growth rate. c. decrease in the inflation rate but an increase in the real gross domestic product growth rate. d. decrease in both the inflation rate and the real gross domestic product growth rate. ANSWER: a 102. A negative real shock causes the long-run aggregate supply curve to: a. shift to the right. b. shift to the left. c. become steeper. d. become flatter. ANSWER: b 103. A positive real shock causes the aggregate demand curve to: a. shift outward. b. shift inward. c. not shift at all. d. shift outward and become flatter. ANSWER: c 104. A reduction in oil supply will cause the long-run aggregate supply curve to: a. shift to the right. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 13 b. shift to the left. c. become steeper. d. become flatter. ANSWER: b 105. The "long run" is a period of time: a. long enough that prices and wages are sticky. b. long enough that prices and wages are fully flexible. c. longer than one year. d. longer than three years. ANSWER: b 106. During the Internet revolution in the late 1990s, a positive real shock shifted the long-run aggregate supply curve to the right, which led to a(n): a. decrease in both the real growth rate and the inflation rate. b. increase in both the real growth rate and the inflation rate. c. decrease in the real growth rate and an increase in the inflation rate. d. increase in the real growth rate and a decrease in the inflation rate. ANSWER: d 107. A negative shock to the long-run aggregate supply curve will cause: a. both real growth and inflation to fall. b. both real growth and inflation to rise. c. real growth to fall, but the inflation rate will rise. d. real growth to rise, but the inflation rate will fall. ANSWER: c 108. The long-run aggregate supply curve: a. has a positive slope. b. is a horizontal line. c. has a negative slope. d. is a vertical line. ANSWER: d 109. The placement of the long-run aggregate supply curve is determined by the: a. Friedman growth rate. b. Solow growth rate. c. inflation rate. d. nominal money growth rate. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 13 110. Which phrase best explains the slope of the long-run aggregate supply curve? a. Higher prices mean higher profits and production. b. Production creates demand. c. In the long run, money is neutral. d. An increase in the inflation rate will increase production. ANSWER: c 111. Which is NOT correct regarding an economy's Solow growth rate? a. The Solow growth rate is based on prices that are flexible. b. The Solow growth rate is set at the average growth rate excluding recessions. c. The Solow growth rate is based on the use of existing real factors of production. d. The Solow growth rate is the economy's potential growth rate. ANSWER: b 112. A real shock to the economy does NOT: a. also go by the name of a productivity shock. b. impact the money supply. c. affect the economy's basic ability to produce goods and services. d. increase or decrease the potential growth rate in the economy. ANSWER: b 113. Considering aggregate demand and long-run aggregate supply, what is the impact of a negative real shock to the economy? a. higher inflation and a higher real gross domestic product growth rate b. higher inflation and a lower real gross domestic product growth rate c. lower inflation and a higher real gross domestic product growth rate d. lower inflation and a lower real gross domestic product growth rate ANSWER: b 114. Considering aggregate demand and long-run aggregate supply, what is the impact of a positive real shock to the economy? a. higher inflation and a higher real gross domestic product growth rate b. higher inflation and a lower real gross domestic product growth rate c. lower inflation and a higher real gross domestic product growth rate d. lower inflation and a lower real gross domestic product growth rate ANSWER: c 115. Considering the aggregate demand curve and the long-run aggregate supply curve, what change will result in a higher inflation rate and a lower real growth rate? a. an increase in aggregate demand b. a decrease in aggregate demand Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 13 c. an increase in long-run aggregate supply d. a decrease in long-run aggregate supply ANSWER: d 116. Considering the aggregate demand curve and the long-run aggregate supply curve, what change will result in a lower inflation rate and a higher real growth rate? 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: c 117. A real shock is any shock that increases or decreases the growth rate of: a. nominal gross domestic product. b. real gross domestic product. c. potential gross domestic product. d. prices. ANSWER: c 118. A decrease in oil prices is an example of a _____ productivity shock. a. negative b. positive c. neutral d. deflationary ANSWER: b 119. Which of these is NOT a shock that could shift the long-run aggregate supply curve? a. productivity shock b. negative supply shock c. real shock d. demand shock ANSWER: d 120. The economy's potential or "Solow" growth rate fluctuates over time because of: a. real shocks. b. changes in the rate of inflation. c. monetary shocks. d. demand shocks. ANSWER: a 121. Since 1980, rainfall shocks are becoming less economically important for India's gross domestic product. Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 13 Which of these explains why this is the case? a. Agriculture is becoming a smaller part of India's gross domestic product. b. India no longer produces agricultural items but has shifted all those resources to producing Bollywood movies. c. Rainfall patterns have changed, causing fewer disruptions. d. India learned to grow crops without water. ANSWER: a 122. Historically, rainfall shocks in India correlate well with India's: a. agricultural output and real gross domestic product. b. inflation and employment. c. prices and aggregate demand. d. money velocity and money supply. ANSWER: a 123. How has the role of agricultural production changed in the Indian economy? a. It has become a greater part of gross domestic product, due to technological advances. b. It has remained about 40% of gross domestic product, but has doubled in yield. c. It has fallen to about 20% of gross domestic product due to economic diversification. d. It is now only 1% of gross domestic product. ANSWER: c 124. What portion of gross domestic product does agriculture in the United States currently generate? a. around 1% b. 10% c. 20% d. over 40% ANSWER: a 125. A hurricane that damages buildings and roadways along the Gulf Coast is considered a: a. positive real shock. b. negative real shock. c. negative demand shock. d. positive demand shock. ANSWER: b 126. A positive real shock causes a shift of the: a. long-run aggregate supply curve to the right. b. long-run aggregate supply curve to the left. c. aggregate demand curve to the right. d. aggregate demand curve to the left. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 13 127. Figure: Real Shocks
From point X in the accompanying graph, a negative real shock could cause the economy to move to point: a. W. b. X. c. Y. d. Z. ANSWER: c 128. Figure: Real Shocks
Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 13 From point X in the accompanying graph, a negative supply shock could change the inflation rate to: a. 3%. b. 7%. c. 5%. d. 13%. ANSWER: b 129. Which of these is NOT an example of a real shock? a. an increase in sales tax revenues due to population growth b. a major decline in the price of oil due to the discovery of new oil reserves in Alaska c. a drought in California that reduces the supply of crops d. a strike in the airline industry ANSWER: a 130. Productivity in an agricultural economy is MOST likely to be significantly affected by a(n): a. war. b. weather shock. c. oil shock. d. demand shock. ANSWER: b 131. An economy can overcome a large negative oil shock faster if: a. a technological advancement occurs. b. additional rainfall occurs. c. the money supply increases. d. gasoline taxes are increased. ANSWER: a 132. Which statement best describes one of the profound effects of the 1973 oil crisis on the U.S. economy? a. Consumer preferences moved away from big cars and toward smaller cars. b. Employment in car manufacturing firms increased significantly. c. Gasoline prices fell significantly. d. Real gross domestic product growth increased. ANSWER: a 133. In 1970, 1.3 barrels of oil were used to produce $1,000 of gross domestic product. In 2004, it took only 0.64 barrel of oil to do the same. What implications does this have for economic fluctuations in the United States today? a. American producers are now producing the same goods and services today by using half the amount of oil that they did in 1970. b. Oil consumption has stayed steady, but gross domestic product has more than doubled since 1970.
c. Spikes in oil prices will not have as severe an impact on the U.S. economy today as they did in the 1970s. Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 13 d. America is still purchasing 1.3 barrels of oil per $1,000 of gross domestic product and saving the remainder for the future.
ANSWER: c 134. Why have oil shocks become less economically important for the United States in recent years? a. American oil producers increased production of oil inside the United States. b. Negative oil shocks have been tempered by other positive productivity shocks. c. New pipelines allow more oil to be imported. d. Pipelines increased the distribution of oil within the United States. ANSWER: b 135. Figure: Oil Market Diagrams
Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 13
Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts what happened in the market for oil during the 1973 OPEC oil crisis? a. panel A b. panel B c. panel C Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 13 d. panel D ANSWER: b 136. Figure: Oil Market Diagrams
Consider the world oil market diagrams presented in the figure. Which of the panels correctly depicts the cause of rises in the price of oil in the early 2000s? Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 13 a. panel A b. panel B c. panel C d. panel D ANSWER: d 137. Figure: Real Output Shock
This figure shows how real output growth reacts to a shock of a 10% increase in the price of oil. How long does it take for the economy to return to normal? a. 5 quarters b. 5 years c. 10 years d. 2.5 years ANSWER: d 138. When did the first oil shock to have a large impact on the U.S. economy occur? a. 1946 b. 1970 c. 1973 d. 1981 ANSWER: c 139. When a war breaks out in the Middle East and causes an oil shock, what makes the shock so costly to deal with? a. There is uncertainty on how long the war will last. b. The shock is unexpected. c. Many countries experience the shock at the same time. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 13 d. Agricultural productivity plummets. ANSWER: b 140. How has the price of oil generally been related to recessions in the United States? a. Falling oil prices have produced a recession either in the next quarter or at the same time as the price fall. b. Rising oil prices for at least two years have produced a recession. c. If oil prices rise and fall within a year, there will be a recession. d. Rising oil prices have produced a recession either concurrently or quickly thereafter. ANSWER: d 141. A reduction in the supply of oil is a real shock because it: a. makes gasoline more expensive for consumers. b. raises the profits of oil producers. c. makes labor and capital less productive. d. reduces the amount of oil consumption. ANSWER: c 142. High oil prices tend to: a. increase the demand for some products and reduce the demand for others. b. increase the demand for all products. c. reduce the demand for all products. d. shift the economy's aggregate demand curve outward. ANSWER: a 143. In response to a negative oil price shock, real gross domestic product growth: a. rises and never returns to its initial level. b. falls and never returns to its initial level. c. first rises and then falls back to its initial level. d. first falls and then rises back to its initial level. ANSWER: d 144. The increase in oil prices that took place during the mid-2000s was driven mainly by: a. decreases in supply. b. increases in demand. c. increases in both supply and demand. d. increases in supply and decreases in demand. ANSWER: b 145. Figure: Real Shocks
Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 13
From point X in the accompanying graph, an increase in the supply of oil could cause the economy to move to point: a. W. b. X. c. Y. d. Z. ANSWER: a 146. Which of these does NOT represent a real shock that can affect gross domestic product? a. productivity shocks b. weather shocks c. changes in the portion of income that consumers save as a whole d. oil shocks ANSWER: c 147. Which of these is an example of a negative shock to an economy? a. decreases in oil prices b. tax cuts c. new technology d. terrorist attacks ANSWER: d 148. What type of shock could be responsible for an increase in growth and a decrease in the inflation rate? Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 13 a. a positive real shock b. a positive demand shock c. a negative real shock d. a negative demand shock ANSWER: a 149. In recent years, negative oil price shocks have typically been accompanied by: a. no productivity shocks. b. negative productivity shocks. c. positive productivity shocks. d. both positive and negative productivity shocks. ANSWER: c 150. Which of these real shocks would likely have the largest impact on U.S. gross domestic product? a. a severe drought in the Midwest b. a major hurricane that hits the Gulf Coast c. a reduction in the overall supply of oil d. a decrease in the price of grain ANSWER: c 151. In India, shocks to the weather: a. do not affect economic output. b. shift the aggregate demand curve. c. change the rate of growth in the money supply. d. are becoming less economically important over time. ANSWER: d 152. After the first oil shock in 1973, the U.S. auto industry had a difficult time adjusting because: a. demand for large automobiles was very high. b. the price of oil was too low. c. much of the physical capital in an auto factory is specialized. d. none of the physical capital in an auto factory is specialized. ANSWER: c 153. If a productive new technology arrives, the long-run aggregate supply curve will move: a. to the left. b. to the right. c. up. d. down. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 13 154. If an earthquake strikes, destroying a large number of factories, the long-run aggregate supply curve will move: a. to the left. b. to the right. c. up. d. down. ANSWER: a 155. Which of these is an example of a shock that shifts the long-run aggregate supply curve to the right? a. bad weather b. an increase in government spending c. a decrease in government regulation d. a sudden increase in oil prices ANSWER: c 156. In 2011, a major earthquake and tsunami destroyed much of the capital infrastructure in Japan. Those natural disasters were examples of a: a. negative shock to the long-run aggregate supply curve. b. positive shock to the long-run aggregate supply curve. c. negative shock to the aggregate demand curve. d. positive shock to the aggregate demand curve. ANSWER: a 157. Real shocks to the economy: a. influence gross domestic product and economic conditions. b. have a large, gradual impact on the economy. c. affect prices but not employment. d. affect production but not the productivity of capital or labor. ANSWER: a 158. As India's economy has become more diversified over the past 50 years, _____ has had less of an impact on its gross domestic product. a. human capital b. capital c. labor d. rainfall ANSWER: d 159. What impact does an unexpected and permanent 10% increase in the price of oil have on the economy? a. It triggers higher inflation, which reduces investment, leading to a long-term drop in output of 3.4%. b. Higher oil profits stimulate stock markets and investment in capital, triggering growth. Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 13 c. It triggers a drop in production that takes over two years to recover from, reducing gross domestic product by about 1.4%. d. Higher oil profits offset the impact in other industries, leading to consistent growth.
ANSWER: c 160. Real shocks to the economy shift the long-run aggregate supply curve to the: a. right by a lot. b. left by a little. c. left by a lot. d. left or the right by a little or a lot. ANSWER: d 161. Which is true about the direction, size, and timing of real shocks that hit the economy? a. Shocks are negative, can vary in size, and hit only during recessions. b. Shocks can vary in direction, are large in size, and hit during boom periods. c. Shocks are negative, can vary in size, and hit only during boom periods. d. Shocks can vary in direction and size and can hit at any time. ANSWER: d 162. Which would cause a positive real shock to the economy? a. pandemic b. war c. lower regulation d. higher oil prices ANSWER: c 163. A real shock shifts the: a. aggregate demand curve. b. long-run aggregate supply curve. c. short-run aggregate supply curve. d. short-run aggregate demand curve. ANSWER: b 164. From an initial equilibrium in the basic model that includes only the aggregate demand and long-run aggregate supply curves, shocks to aggregate demand always cause changes in: a. real gross domestic product growth only. b. inflation only. c. both real gross domestic product growth and inflation. d. neither real gross domestic product growth nor inflation. ANSWER: b 165. From an initial equilibrium in the basic model that includes only the aggregate demand and long-run Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 13 aggregate supply curves, aggregate demand shocks caused by changes in the growth of money supply are neutral in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: c 166. From an initial equilibrium in the basic model that includes only the aggregate demand and long-run aggregate supply curves, an increase in aggregate demand: a. increases the inflation rate and the growth rate. b. increases the inflation rate, but not the growth rate. c. decreases the inflation rate and increases the growth rate. d. decreases the inflation rate, but not the growth rate. ANSWER: b 167. From an initial equilibrium in the basic model that includes only the aggregate demand and long-run aggregate supply curves, increased spending growth causes a: a. lower inflation rate, but no change in the real growth rate. b. higher inflation rate, but no change in the real growth rate. c. lower real growth rate, but no change in the inflation rate. d. higher real growth rate, but no change in the inflation rate. ANSWER: b 168. From an initial equilibrium in the basic model that includes only the aggregate demand and long-run aggregate supply curves, a shock that reduces the velocity of money by 2 percentage points causes a(n): a. decrease of the inflation rate by 2 percentage points. b. decrease of the inflation rate by less than 2 percentage points. c. increase of the inflation rate by 2 percentage points. d. increase of the inflation rate by less than 2 percentage points. ANSWER: a 169. From an initial equilibrium in the basic model that includes only the aggregate demand and long-run aggregate supply curves, an increase in money supply growth will cause inflation: a. and real growth to increase. b. to increase and real growth to decrease. c. to increase and real growth to remain unchanged. d. and real growth to remain unchanged. ANSWER: c 170. If wages are not as flexible as prices in the AD–AS model, an increase in money growth will lead to: a. an increase in inflation and a rise in real long-run gross domestic product growth. Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 13 b. an increase in inflation, but no rise in real short-run gross domestic product growth. c. an increase in inflation and in the profits of firms. d. no change in inflation, but a fall in the profits of firms. ANSWER: c 171. Sticky wages amplify negative shocks if: a. wages do not fall quickly when there are declines in economic activity. b. the initial shock occurs on the supply side of the economy. c. the initial shock occurs on the demand side of the economy. d. countries utilize the employment-at-will doctrine. ANSWER: a 172. If nominal spending growth equals 6% and the real growth rate equals 4%, what is the inflation rate? a. 2/3% b. 2% c. 4% d. 10% ANSWER: b 173. If nominal spending growth is 5% and the economy is in recession at a −1% real growth rate, what is the inflation rate? a. −1/5% b. 4% c. 5% d. 6% ANSWER: d 174. When the economy grows slowly: a. prices must remain the same. b. wages must grow slowly. c. wages must remain the same. d. demand must grow slowly. ANSWER: b 175. The effect of a shock on the economy is larger when: a. wages and prices are sticky. b. wages and prices are more flexible. c. labor adjustment costs are lower. d. investments are more easily reversed. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 13 176. Sticky wages and prices: a. reduce the impact of negative shocks. b. increase the impact of positive shocks. c. have no effect on the impact of negative shocks. d. offset the impact of positive shocks. ANSWER: b 177. Wages are sticky when: a. labor unions set wage contracts for a certain period of time. b. prices are sticky. c. they are set according to inflation expectations that end up being correct. d. prices are flexible. ANSWER: a 178. If π > πe: a. firms' profits will increase. b. money growth will cause the short-run aggregate supply curve to shift. c. firms' profits will decrease. d. there will be no change in real gross domestic product growth, because it is determined by real factors. ANSWER: a 179. If π < πe: a. firms' profits will increase. b. money growth will cause the short-run aggregate supply curve to shift. c. firms will reduce their output. d. there will be no change in real gross domestic product growth, because it is determined by real factors. ANSWER: c 180. Figure: Two Short-Run Aggregate Supply (SRAS) Curves
Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 13
The figure shows the AD–AS model with two SRAS curves. Which of these is true of point A? a. The actual inflation rate is 5%, and the expected inflation rate is 3%. b. The actual inflation rate is 3%, and the expected inflation rate is 5%. c. The actual inflation rate and the expected inflation rate are both 3%. d. The actual inflation rate and the expected inflation rate are both 5%. ANSWER: d 181. Figure: Two Short-Run Aggregate Supply (SRAS) Curves
The figure shows the AD–AS model with two SRAS curves. If the economy is initially at point A and the expected inflation rate remains unchanged, the economy can achieve a real gross domestic product growth rate Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 13 of 9% only by: a. moving along SRAS1 to point B. b. moving directly to point C. c. first moving to point D and then moving along SRAS2 to point C. d. first moving to point C and then to point B. ANSWER: a 182. Wages that do not respond quickly to changes in the inflation rate are: a. real wages. b. flexible wages. c. decreasing wages. d. sticky wages. ANSWER: d 183. For any given expected inflation rate, the short-run aggregate supply curve shows the relationship between: a. the money supply and the growth rate of output. b. inflation and the growth rate of output. c. production factors and wages. d. inflation and wages. ANSWER: b 184. The short-run aggregate supply curve shows the relationship between the real growth rate and the: a. actual inflation rate. b. expected inflation rate. c. long-run inflation rate. d. real interest rate. ANSWER: a 185. The short-run aggregate supply curve is: a. upward sloping. b. downward sloping. c. a vertical line. d. a horizontal line. ANSWER: a 186. The main reason for the slope of short-run aggregate supply is: a. sticky prices. b. sticky wages. c. both sticky prices and sticky wages. d. neither sticky prices nor sticky wages. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 13 187. Sticky wages and prices are incorporated in the AD–AS model by the: a. long-run aggregate supply curve. b. short-run aggregate supply curve. c. aggregate demand curve. d. both the aggregate demand and short-run aggregate supply curves. ANSWER: b 188. An increase in _____inflation will shift the short-run aggregate supply curve. a. actual inflation, but not expected b. expected inflation, but not actual c. both actual inflation and expected d. neither actual inflation nor expected ANSWER: b 189. The short-run aggregate supply curve is upward sloping because: a. labor markets quickly adjust to equilibrium. b. wages and prices are fully flexible in the short run. c. wages and prices are sticky in the short run. d. wages and prices are sticky in the long run. ANSWER: c 190. An increase in the rate of expected inflation causes: a. the short-run aggregate supply curve to shift right. b. the short-run aggregate supply curve to shift left. c. an upward movement along the short-run aggregate supply curve. d. a downward movement along the short-run aggregate supply curve. ANSWER: b 191. Why is the short-run aggregate supply curve steeper above its intersection with the long-run aggregate supply curve? a. Wages are stickier in the upward direction. b. Wages are less sticky in the upward direction. c. Lower inflation will lead to faster growth. d. Employees become less motivated to work during times of unexpected inflation. ANSWER: b 192. Workers are most familiar with the movement of: a. prices. b. expected prices. c. real wages. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 13 d. nominal wages. ANSWER: d 193. The cost a business faces when changing prices in response to an economic shock is called: a. the velocity of money cost. b. the inflation choice expenditure cost. c. a menu cost. d. the sticky price dilemma cost. ANSWER: c 194. According to the quantity theory of money, in the long run, an increase in money supply causes an increase in: a. production. b. velocity of money. c. real gross domestic product. d. prices. ANSWER: d 195. Menu costs are the costs associated with changing: a. wages. b. jobs. c. prices. d. waiters. ANSWER: c 196. Figure: Three Aggregate Demand Curves
Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 13
Beginning at point A in the accompanying diagram, a positive money shock could result in a short-run growth rate of: a. 1.2%. b. 2.0%. c. 3.0%. d. 6.0%. ANSWER: c 197. Figure: Three Aggregate Demand Curves
Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 13
Beginning at point A in the accompanying diagram, a negative money shock could result in a short-run growth rate of: a. 1.2%. b. 1.8%. c. 2.0%. d. 3.0%. ANSWER: a 198. Figure: Three Aggregate Demand Curves
Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 13
In the accompanying diagram, the economy's long-run growth rate following a positive money shock would be: a. 2%. b. 3%. c. 4%. d. 6%. ANSWER: a 199. In the AD–AS model, money is not neutral in the short run if: a. unexpected inflation turns into expected inflation. b. wages and prices are sticky. c. wages and prices are flexible. d. the change in the money supply is fully anticipated. ANSWER: b 200. In the AD–AS model with a long-run potential growth rate of 2%, a 6 percentage point increase in the money supply growth rate will cause the economy's growth rate to be _____ in the long run. a. 2% b. 4% c. 6% d. 8% ANSWER: a 201. Which of these scenarios could result in a recession? Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 13 a. Aggregate demand decreases, and wages are flexible. b. Aggregate demand decreases, and wages are sticky. c. Aggregate demand increases, and wages are flexible. d. Aggregate demand increases, and wages are sticky. ANSWER: b 202. In the AD–AS model, an unexpected increase in the growth rate of the money supply: a. decreases both the inflation and real growth rates in the short run. b. increases both the inflation and real growth rates in the short run. c. decreases both the inflation and real growth rates in the long run. d. increases both the inflation and real growth rates in the long run. ANSWER: b 203. In the AD–AS model, an unexpected decrease in the growth rate of the money supply causes a: a. rightward shift of the aggregate demand curve and then a leftward shift of the short-run aggregate supply
curve. b. rightward shift of the aggregate demand curve and then a rightward shift of the short-run aggregate supply curve. c. leftward shift of the aggregate demand curve and then a leftward shift of the short-run aggregate supply curve.
d. leftward shift of the aggregate demand curve and then a rightward shift of the short-run aggregate supply curve.
ANSWER: d 204. From an initial equilibrium in the AD–AS model, an unexpected increase in money supply growth will cause inflation: a. and real growth to increase in the short run. b. to increase and real growth to decrease in the short run. c. to increase and real growth to remain unchanged in the short run. d. and real growth to remain unchanged. ANSWER: a 205. The short-run aggregate supply curve is upward sloping because: a. in the short run, an increase in spending leads to an increase in output. b. wages increase with an increase in output in the short run. c. wages and prices are sticky in the short run. d. an increase in spending only leads to an increase in prices. ANSWER: c 206. Which of these is an explanation for why prices may be sticky in the short run? a. menu costs b. price expectations c. a vertical long-run aggregate supply curve Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 13 d. money illusion ANSWER: a 207. If a baker observes an increase in demand for bread, should the baker increase output or raise prices? a. increase output b. raise prices c. neither increase output nor raise prices d. It depends on whether the change in demand is driven by inflation or by a stronger preference for bread. ANSWER: d 208. If the actual rate of inflation turns out to be higher than the expected rate of inflation, what happens to the growth rate of output before expectations are updated? a. The growth rate stays at the Solow growth rate. b. The growth rate is higher than the Solow growth rate. c. The growth rate is lower than the Solow growth rate. d. The growth rate could go up or down. ANSWER: b 209. Prices are especially sticky in the: a. upward direction. b. downward direction. c. leftward direction. d. rightward direction. ANSWER: b 210. Prices tend to be more flexible in the: a. upward direction. b. downward direction. c. leftward direction. d. rightward direction. ANSWER: a 211. The lowering of the growth rate of the money supply is represented graphically by a shift to the: a. left of the aggregate demand curve. b. right of the aggregate demand curve. c. left of the short-run aggregate supply curve. d. right of the short-run aggregate supply curve. ANSWER: a 212. As a result of an increase in expected inflation, the: a. long-run aggregate supply curve shifts to the left. Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 13 b. long-run aggregate supply curve shifts to the right. c. short-run aggregate supply curve shifts to the left. d. short-run aggregate supply curve shifts to the right. ANSWER: c 213. Which of these explains why the inflation rate is slow to adjust over time? a. People can perfectly predict the inflation rate. b. There are high menu costs of changing prices. c. Workers respond to nominal wages instead of real wages. d. Too many shocks exist in an economy. ANSWER: b 214. If prices are completely flexible, then a positive aggregate demand shock will lead to a(n): a. immediate shift of the short-run aggregate supply curve to the left. b. immediate shift of the short-run aggregate supply curve to the right. c. shift of the long-run aggregate supply curve to the right. d. shift of the long-run aggregate supply curve to the left. ANSWER: a 215. If prices are completely flexible, then an increase in spending growth will lead to an immediate: a. increase in real output growth without any change in inflation. b. decrease in real output growth without any change in inflation. c. decrease in inflation without any change in real output growth. d. increase in inflation without any change in real output growth. ANSWER: d 216. Which of these occurs in the long run? a. Prices are sticky. b. Unexpected inflation is absent. c. The short-run aggregate supply curve intersects the aggregate demand curve at an output growth rate higher than the Solow growth rate. d. Workers confuse real wages with nominal wages.
ANSWER: b 217. The costs of changing prices are called: a. short-run costs. b. long-run costs. c. menu costs. d. printing costs. ANSWER: c 218. An unexpected outward shift of the economy's aggregate demand curve will cause real gross domestic Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 13 product growth to increase in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: a 219. An increase in expected inflation will cause the economy's aggregate demand curve to: a. shift to the right. b. shift to the left. c. become steeper. d. remain unchanged. ANSWER: d 220. An increase in expected inflation will cause the economy's long-run aggregate supply curve to: a. shift to the right. b. shift to the left. c. become steeper. d. remain unchanged. ANSWER: d 221. An increase in expected inflation will cause the economy's short-run aggregate supply curve to: a. shift right. b. shift left. c. become steeper. d. become flatter. ANSWER: b 222. An unexpected increase in money growth leads to increased inflation in: a. the short run. b. the long run. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: c 223. An unexpected increase in money growth leads to increased real gross domestic product growth in: a. the short run. b. the long run. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 13 224. According to the inflation parable discussed in the text, a positive shock to spending: a. does not affect price and output at first, but in the long run, both output and price increase. b. increases both price and output at first, but neither price nor output changes in the long run. c. increases price at first but in the long run only increases output. d. increases output at first but in the long run only increases price. ANSWER: d 225. An aggregate demand shock is a: a. slow and expected shift in spending. b. slow and unexpected shift in spending. c. rapid and expected shift in spending. d. rapid and unexpected shift in spending. ANSWER: d 226. The short-run aggregate supply curve shows the _____ relationship between the inflation rate and real growth during the period when prices and wages are _____. a. positive; flexible b. positive; sticky c. negative; flexible d. negative; sticky ANSWER: b 227. Nominal wage confusion occurs when: a. workers respond to their nominal wage instead of to their real wage. b. workers respond to their real wage instead of to their nominal wage. c. the nominal wage is much greater than the real wage. d. the real wage is much greater than the nominal wage. ANSWER: a 228. Since people will always come to expect the actual inflation rate in the long run, the expected inflation rate is found graphically where the: a. aggregate demand curve intersects the short-run aggregate supply curve. b. aggregate demand curve intersects the long-run aggregate supply curve. c. short-run aggregate supply curve intersects the long-run aggregate supply curve. d. long-run aggregate supply curve intersects the horizontal axis. ANSWER: b 229. Due to an aggregate demand shock, in the short run, _____ will change; in the long run, _____ will change. a. only inflation; the real growth rate b. only the real growth rate; only the real growth rate Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 13 c. the real growth rate and/or the inflation rate; only the inflation rate d. only the inflation rate; only the inflation rate ANSWER: c 230. The long-run impact of a positive aggregate demand shock is that the real growth rate will: a. rise and the inflation rate will be at the Solow growth rate. b. be at the Solow growth rate and the inflation rate will rise. c. fall and the inflation rate will rise. d. rise and the inflation rate will fall. ANSWER: b 231. The short-run aggregate supply curve depicts a _____ relationship between the inflation rate and the real growth rate when _____. a. positive; prices and wages are sticky b. positive; output is sticky c. negative; prices and wages are flexible d. negative; output is flexible ANSWER: a 232. Each short-run aggregate supply curve is based on a certain: a. expected growth rate. b. actual inflation rate. c. real growth rate. d. expected inflation rate. ANSWER: d 233. In the short run, an increase in spending will cause: a. output to rise but not prices. b. prices to rise but not output. c. both output and prices to rise. d. neither output nor prices to rise. ANSWER: c 234. When consumers base purchase decisions on their nominal wages rather than their real wages, their actions are consistent with: a. nominal wage illusion. b. real wage illusion. c. nominal wage confusion. d. real wage confusion. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 13 235. Which is NOT a reason that firms are reluctant to increase prices following an increase in aggregate demand? a. Increasing prices mean that firms will sell fewer units than if prices are low. b. If prices rise, workers will want higher wages, which increases costs. c. Firms are unsure whether or not the increase in spending is permanent. d. There are menu costs associated with changing the prices of products. ANSWER: a 236. Nominal wage confusion leads to a short-run equilibrium _____ the Solow growth rate as _____ believe that _____. a. at; employers; nominal wages are rising faster than they actually are b. at; workers; real wages are rising faster than nominal wages c. beyond; employers; real wages have greater purchasing power than nominal wages d. beyond; workers; nominal wages represent their purchasing power ANSWER: d 237. After an increase in aggregate demand, why does the real growth rate revert to the Solow growth rate in the long run? a. The Solow growth rate changes to the new short-run equilibrium growth rate. b. The increase in aggregate demand reverts to original demand over time. c. Unexpected inflation turns into expected inflation. d. The unexpected growth rate turns into a new expected growth rate. ANSWER: c 238. What causes a shift in the short-run aggregate supply curve? a. a change in the expected real growth rate b. a change in the expected inflation rate c. a change in production d. a shift in the inflation rate ANSWER: b 239. In the short run, the inflation rate is found where the _____ curves intersect, and in the long run, the inflation rate is found where the _____ curves intersect. a. short-run aggregate demand and short-run aggregate supply; long-run aggregate demand and long-run
aggregate supply b. short-run aggregate supply and long-run aggregate supply; aggregate demand and long-run aggregate supply
c. long-run aggregate demand and short-run aggregate supply; short-run aggregate demand and short-run aggregate supply d. aggregate demand and short-run aggregate supply; aggregate demand and long-run aggregate supply
ANSWER: d 240. Imagine that a government starts out with a balanced budget. If in the next period the government temporarily runs a budget deficit to increase government spending, what would you expect to happen to Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 13 aggregate demand (AD)? a. AD would increase. b. AD would lie on the Solow growth rate. c. AD would stay the same. d. AD would decrease. ANSWER: a 241. An unexpected increase in export growth is a: a. shock that is always matched by an equal decrease in import growth. b. positive aggregate demand shock. c. negative aggregate demand shock. d. factor that has no impact on aggregate demand in the short run. ANSWER: b 242. In the AD–AS model, what happens to the economy in the short run when consumer spending decreases? a. Inflation is higher, and the real growth rate is higher. b. Inflation is higher, and the real growth rate is lower. c. Inflation is lower, and the real growth rate is higher. d. Inflation is lower, and the real growth rate is lower. ANSWER: d 243. From an initial equilibrium in the AD–AS model, an increase in consumption growth will initially cause inflation: a. and real growth to increase. b. to increase and real growth to decrease. c. to increase and real growth to remain unchanged. d. and real growth to remain unchanged. ANSWER: a 244. According to the AD–AS model, if the economy is initially at its long-run potential growth rate, then a temporary increase in the growth rate of investment spending will cause: a. an increase in the real growth rate in the long run. b. an increase in the inflation rate in the long run. c. an increase in both the inflation and real growth rates in the short run. d. no effect on the real growth rate or inflation rate in the short run. ANSWER: c 245. In the AD–AS model, changes in the growth rates of C, I, G, and NX are interpreted as changes in: a. money supply. b. velocity growth. c. price levels. Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 13 d. money supply growth. ANSWER: b 246. Which of these factors would NOT cause aggregate demand to increase? a. lower taxes b. higher government spending c. increased wealth d. an advance in technology ANSWER: d 247. Which of these causes the aggregate demand curve to shift left? a. a tax cut b. increased consumer confidence c. increased import growth d. an increase in business investment ANSWER: c 248. Which of these is NOT an example of a positive aggregate demand shock? a. a faster growth rate of the money supply b. an increase in government spending growth c. an increase in productivity growth d. an increase in export growth ANSWER: c 249. If stock prices go up and people feel richer, aggregate demand will: a. increase. b. decrease. c. stay the same because there have been no changes to the underlying assets. d. be unpredictable. ANSWER: a 250. If stock prices go down and people feel poorer, aggregate demand will: a. increase. b. decrease. c. stay the same because there have been no changes to the underlying assets. d. be unpredictable. ANSWER: b 251. A temporary positive shock to spending growth will lead to an increase in: a. output in both the short run and the long run. b. both output and prices in the short run, but only prices in the long run. Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 13 c. both prices and output in the short run, but only output in the long run. d. output and prices in the short run, but no change in either in the long run. ANSWER: d 252. Which of these causes a shift of the aggregate demand curve to the right? a. an increase in income taxes b. an increase in consumer confidence c. an increase in import growth d. an increase in interest rates ANSWER: b 253. An increase in consumer pessimism will lead to increased inflation in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: d 254. When consumers suddenly become more pessimistic about the economy, a negative aggregate demand shock shifts the: a. long-run aggregate supply curve to the left, reducing the real growth rate in the short run. b. long-run aggregate supply curve to the right, reducing the real growth rate in the short run. c. aggregate demand curve to the left, reducing the real growth rate in the short run. d. aggregate demand curve to the right, reducing the real growth rate in the short run. ANSWER: c 255. A temporary decrease in aggregate demand: a. raises the inflation rate and growth rate in the long run. b. reduces the inflation rate and growth rate in the long run. c. raises the inflation rate but reduces the growth rate in the long run. d. makes neither the inflation rate nor the growth rate change in the long run. ANSWER: d 256. Which of these would cause the aggregate demand curve to shift to the right? a. a decrease in consumer confidence b. a decrease in the inflation rate c. an increase in consumer wealth d. an increase in the short-run aggregate supply curve ANSWER: c 257. Which of these would cause the aggregate demand curve to shift to the left? Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 13 a. higher government budget deficits b. increased growth in imports c. lower growth rate of output d. lower taxes ANSWER: b 258. Which of these is NOT a positive aggregate demand shock? a. a faster money growth b. decreased import growth c. lower growth of government spending d. increased wealth ANSWER: c 259. Which of these will NOT shock aggregate demand so that it shifts to the left? a. a slower money growth rate b. higher taxes c. lower growth of government spending d. decreased import growth ANSWER: d 260. Figure: Aggregate Demand and Aggregate Supply 1
Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 13
If the money supply has increased, the long-run equilibrium in this economy will occur at intersection: a. A. b. B. c. C. d. D. ANSWER: a 261. Figure: Aggregate Demand and Aggregate Supply 2 Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 13
If consumers become nervous about job security, what will happen in the figure? a. Aggregate demand curve will shift to left. b. Short-run aggregate supply curve will shift to the left. c. Long-run aggregate supply curve will shift left and short-run aggregate supply will shift right. d. Aggregate demand curve will shift to the right and long-run aggregate supply will shift left. ANSWER: a 262. If the velocity of money changes, then a change in _____ will show up as a change in _____. Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 13 a. production; manufactured goods but not services b. the money supply; the bank balance and currency c. the spending rate; the growth rates of C, I, G, or NX d. the money supply growth rate; the rate of growth in the bank balance and currency ANSWER: c 263. What results when consumers become apprehensive about their job security and their financial security? a. The aggregate demand curve shifts to the right and a boom in production occurs. b. The aggregate demand curve shifts to the right and a recession occurs. c. The aggregate demand curve shifts to the left and a boom in production occurs. d. The aggregate demand curve shifts to the left and a recession occurs. ANSWER: d 264. Which is true about the changes in velocity? a. They are set by banking authorities. b. They occur very gradually, not quickly. c. They can be positive but not negative. d. They tend to be temporary. ANSWER: d 265. If the economy is in a long-run equilibrium, but then consumer spending falls due to fears about job security, after the long-run adjustment to the change, inflation is _____ and real growth is _____. a. higher; lower b. lower; higher c. lower; the same d. the same; the same ANSWER: d 266. In the long run, a change in aggregate demand results in: a. an increase in the inflation rate. b. a decrease in the inflation rate. c. a change in the inflation rate in the opposite direction as demand. d. no change in the inflation rate. ANSWER: d 267. A wealth shock in the economy is _____ spending suddenly changing in response to a sudden change in _____. a. investment; average profit levels b. investment; interest rates c. consumer; the value of assets d. wealth; average profit levels Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 13 ANSWER: c 268. How do taxes impact spending in the economy? a. Taxes have a negative relationship with both consumption and investment spending. b. Taxes have a negative relationship with government spending. c. Taxes have a positive relationship with consumption spending and a negative relationship with investment
spending. d. Taxes have a positive relationship with investment spending and a negative relationship with consumption spending.
ANSWER: a 269. Which would cause a positive shock to the aggregate demand curve? a. a decrease in taxes b. an increase in imports c. a decrease in the money growth rate d. a decrease in government spending ANSWER: a 270. Which would cause a negative shock to the aggregate demand curve? a. a decrease in taxes b. an increase in government spending c. an increase in the money growth rate d. an increase in imports ANSWER: d 271. Which would cause a higher growth rate in spending? a. a decrease in wealth b. an increase in taxes c. a decrease in imports d. a decrease in the money growth rate ANSWER: c 272. Which would temporarily cause a reduction in the inflation rate? a. an increase in exports b. an increase in government spending c. an increase in fear d. a decrease in taxes ANSWER: c 273. The discussion in the textbook indicates that the Great Recession was caused by: a. aggregate demand shocks. b. real shocks. Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 13 c. neither aggregate demand shocks nor real shocks. d. both aggregate demand shocks and real shocks. ANSWER: d 274. Which of these describes the process through which a major decline in the stock market leads to a change in aggregate demand? a. Banking panics lead to the removal of deposit insurance and a negative aggregate demand shock. b. Increases in net exports generate a negative aggregate demand shock. c. Reductions in consumer wealth produce a negative aggregate demand shock. d. A stock market bubble bursts, and this leads to a negative supply shock. ANSWER: c 275. The first major event of the Great Recession was a: a. run on shadow banks. b. fall in investment spending. c. stock market crash. d. decline in credit. ANSWER: a 276. The Great Recession began in what year? a. 2001 b. 2019 c. 2007 d. 1939 ANSWER: c 277. What factors triggered the Great Recession? a. falling real estate prices and securitization b. lower investment and increased inflation c. falling employment and increased money supply d. lower inflation and securitization ANSWER: a 278. Which of these is a negative real shock that occurred during the Great Recession? a. The Smoot–Hawley Tariff led to a decrease in net exports. b. Bank failures led to a decrease in the money supply. c. Widespread shadow bank failures led to a reduction in the productivity of financial intermediation. d. A stock market crash decreased consumer wealth. ANSWER: c 279. What was one of the federal government policy failures in the 1990s and 2000s that contributed to the Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 13 Great Recession? a. deregulation of the banking sector b. the declaration of a bank "holiday" c. the elimination of bank deposit insurance d. increase in income tax rates ANSWER: a 280. Which of these is a real shock that contributed to the economic contraction during the Great Recession? a. an increase in money supply growth b. tax cuts c. widespread failures in the shadow banking system d. a reduction in tariff and other trade restrictions ANSWER: c 281. During the Great Recession, the U.S. aggregate demand curve: a. shifted to the right. b. shifted to the left. c. became steeper. d. became flatter. ANSWER: b 282. The Great Recession was due primarily to the: a. excessive amount of money supply. b. extensive underutilization of resources. c. great fall in aggregate demand. d. rising labor unions. ANSWER: c 283. Which was a real shock that contributed to the Great Recession? a. the contraction of the money supply b. the stock market crash c. shadow bank failures d. reduced investment spending ANSWER: c 284. What was the main cause of the recession of 2020? a. a viral pandemic b. a slowdown in the housing market c. the Fed sharply increasing interest rates d. an oil price shock ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 13 285. All of these are reasons for a decline in productivity as a result of the COVID-19 pandemic EXCEPT: a. people are less productive when they are sick b. school shutdowns meant parents had to stay at home rather than work c. energy costs rose due to decreases in supply d. remote working and spacing out of shifts meant fewer opportunities for productive casual interactions ANSWER: c 286. To address the COVID-19 pandemic, policymakers implemented all of these EXCEPT: a. stimulus payments directly to households b. increase and extension of unemployment insurance c. expansionary monetary policy d. nationalization of failing industries ANSWER: d 287. Inflation increased in the aftermath of the COVID-19 recession for all of these reasons EXCEPT: a. higher taxes on high earners and corporations b. higher oil and food prices due to the war in Ukraine c. households spent savings from fiscal stimulus d. lower interest rates due to expansionary monetary policy ANSWER: a 288. The unemployment rate decreases during a recession. a. True b. False ANSWER: b 289. Economic growth is a smooth process. a. True b. False ANSWER: b 290. A recession is a significant, widespread decline in nominal income and employment. a. True b. False ANSWER: b 291. The slope of the aggregate demand curve is equal to 1. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 13 292. An increase in the growth rate of real output will cause the aggregate demand curve to shift to the right. a. True b. False ANSWER: b 293. A slower money growth rate causes a positive aggregate demand shock. a. True b. False ANSWER: b 294. An increase in the growth rate of velocity shifts the aggregate demand curve to the right. a. True b. False ANSWER: a 295. Increased spending growth shifts the aggregate demand curve to the left, and decreased spending growth shifts the aggregate demand curve to the right. a. True b. False ANSWER: b 296. The aggregate demand curve shows that for specified spending growth rates, inflation rates and real gross domestic product growth rates are inversely related in the short run. a. True b. False ANSWER: a 297. Each aggregate demand curve contains only one combination of inflation and real growth that leads to a distinct level of spending. a. True b. False ANSWER: b 298. The aggregate demand curve has a slope of −1, so that a 1 percentage point reduction in inflation contributes to a 1 percentage point increase in real gross domestic product growth, other things being equal. a. True b. False ANSWER: a 299. The long-run aggregate supply curve describes an economy in which wages and prices are sticky. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 13 ANSWER: b 300. In the AD–AS model with short-run aggregate supply included, prices and wages are assumed to be perfectly flexible in the short run. a. True b. False ANSWER: b 301. At all points along the long-run aggregate supply curve, prices and wages are assumed to be perfectly flexible. a. True b. False ANSWER: a 302. The long-run aggregate supply curve shows that inflation has no impact on real long-term growth. a. True b. False ANSWER: a 303. The long-run growth potential of an economy does not depend on the level of inflation. a. True b. False ANSWER: a 304. The long-run aggregate supply curve has a slope of −1. a. True b. False ANSWER: b 305. A positive real shock causes a shift to the right of the long-run aggregate supply curve. a. True b. False ANSWER: a 306. A positive real shock to the economy will result in an increase in the growth rate of output and a decrease in the rate of inflation. a. True b. False ANSWER: a 307. An increase in the money supply is an example of a real shock. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 13 b. False ANSWER: b 308. Large increases in oil prices are positive shocks to aggregate demand. a. True b. False ANSWER: b 309. A decrease in the supply of oil makes capital and labor less productive. a. True b. False ANSWER: a 310. A real shock is a rapid change in economic conditions that affects the productivity of resources. a. True b. False ANSWER: a 311. When the United States experienced its first oil shock in 1973, employment shifted from Houston, Texas, to Detroit, Michigan. a. True b. False ANSWER: b 312. Expected increases in the price of oil are the most costly to deal with. a. True b. False ANSWER: b 313. Expected shocks are more difficult to deal with than unexpected shocks. a. True b. False ANSWER: b 314. In a typical year, bad shocks outweigh good shocks, and the economy grows. a. True b. False ANSWER: b 315. In a typical year, good shocks outweigh bad shocks, and the economy grows. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 13 ANSWER: a 316. During periods of real shocks, the long-run aggregate supply curve will remain the same in the short term and the long run. a. True b. False ANSWER: b 317. In the AD–AS model, a positive real shock drives up both inflation and the growth rate. a. True b. False ANSWER: b 318. According to the AD–AS model, demand shocks affect real gross domestic product growth while real shocks do not affect real gross domestic product growth. a. True b. False ANSWER: b 319. From an initial equilibrium in the basic model that includes the aggregate demand and long-run aggregate supply only, a shock to aggregate demand has an effect on the inflation rate but no effect on the real growth rate. a. True b. False ANSWER: a 320. Money is always neutral in the short run AD–AS model. a. True b. False ANSWER: b 321. Money is always neutral in the long run in the AD–AS model. a. True b. False ANSWER: a 322. Money will not be neutral in the short run in the AD–AS model when prices and wages are sticky. a. True b. False ANSWER: a 323. Money is neutral in both the short run and long run in the AD–AS model when prices and wages are completely flexible. Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 13 a. True b. False ANSWER: a 324. An increase in the inflation rate in the long run only occurs with an increase in money growth. a. True b. False ANSWER: a 325. An unexpected increase in money growth increases both inflation and real growth in the long run. a. True b. False ANSWER: b 326. An unexpected increase in money growth increases inflation but not real growth in the long run. a. True b. False ANSWER: a 327. A temporary decrease in spending decreases both inflation and real growth in the long run. a. True b. False ANSWER: b 328. A temporary decrease in spending decreases inflation but not real growth in the long run. a. True b. False ANSWER: b 329. A temporary decrease in spending has no effect on inflation or real growth in the long run. a. True b. False ANSWER: a 330. In the AD–AS model, both real and demand shocks cause business fluctuations. a. True b. False ANSWER: a 331. In the AD–AS model, wages are sticky but prices are not. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 70
Name:
Class:
Date:
Chapter 13 ANSWER: b 332. The short-run aggregate supply curve shows that higher-than-expected-inflation will increase output and lower-than-expected-inflation will decrease output. a. True b. False ANSWER: a 333. Sticky wages minimize the effect of negative supply shocks. a. True b. False ANSWER: b 334. Sticky wages will often help end a recession sooner. a. True b. False ANSWER: b 335. A positive shock to spending will shift the aggregate demand curve to the right and increase output in the short run, but not in the long run. a. True b. False ANSWER: a 336. An increase in inflation immediately causes a rightward shift of the short-run aggregate supply curve. a. True b. False ANSWER: b 337. The short-run aggregate supply curve slopes upward because prices and wages are sticky. a. True b. False ANSWER: a 338. Decreased import growth represents a positive aggregate demand shock. a. True b. False ANSWER: a 339. Lower taxes represent a negative aggregate demand shock. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 71
Name:
Class:
Date:
Chapter 13 ANSWER: b 340. Increased wealth represents a positive aggregate demand shock. a. True b. False ANSWER: a 341. Greater growth of government spending represents a negative aggregate demand shock. a. True b. False ANSWER: b 342. The Great Recession was made worse through the Fed decreasing the money supply. a. True b. False ANSWER: b 343. The COVID-19 pandemic caused a large increase in the unemployment rate that persisted for over a year. a. True b. False ANSWER: b 344. Fiscal stimulus designed to increase aggregate demand during the COVID-19 recession began under President Joseph Biden. a. True b. False ANSWER: b 345. Why is the long-run aggregate supply curve vertical in the AD–AS model? ANSWER: The long-run aggregate supply is characterized by flexible prices and wages, as well as equality between actual inflation rate and expected inflation rate. Let us start from a long-run equilibrium at the intersection of aggregate demand and long-run aggregate supply curve, where actual and expected inflation rates are both = 3%, and the growth rate of real gross domestic product (Solow growth rate) = 4%. Suppose that the aggregate demand curve shifts rightward due to, say, an increase in the growth rate of money supply. Along the short-run aggregate supply curve, a new short-run equilibrium will be reached, with a higher inflation rate (>3%) and a higher real growth (>4%). Since the actual inflation became greater than expected inflation, both consumption and investment spendings adjust downward, shifting the short-run aggregate supply curve leftward. Along the new short-run aggregate supply curve the expected inflation becomes greater than before. This process continues until a new equilibrium is reached with a higher inflation rate (>3%) and the same original real growth rate (=4%). With the inflation rate on the vertical axis and real growth rate on the horizontal axis, we see that the original and the new long-run equilibrium points are on the same vertical line, which is the long-run aggregate supply curve.
346. With the aid of a diagram, explain how a shock that raises labor productivity affects the inflation rate and the real growth rate in the long run. ANSWER: Let us start with a long-run equilibrium where aggregate demand and long-run aggregate supply (LRAS) intersect at some inflation rate and real growth rate. An increase in labor productivity will shift the vertical LRAS curve along the Copyright Macmillan Learning. Powered by Cognero.
Page 72
Name:
Class:
Date:
Chapter 13 down sloping aggregate demand curve. Obviously, the new intersection point (long-run equilibrium) will be at a lower inflation rate and a higher real growth rate.
The graph gives you an idea, showing the economy initially at point A, where the inflation rate is 6% and the real gross domestic product growth rate is 6%, and there is a movement of the economy from point A to point B, where the inflation rate has decreased from 6% to 3% and the real gross domestic product growth rate has increased from 6% to 9%.
347. Compare two economies, one that is highly agricultural and another that is highly manufacturing-based. Discuss what types of shocks might be relevant to each of these economies. ANSWER: For the agricultural economy, the real shock can be the amount of rainfall. If it is normally higher, the productivity of land and labor will be higher. This is a positive shock that shifts the aggregate supply curve rightward, lowering inflation rate and increasing the real growth rate. For the manufacturing-based economy, the real shock can be the increase in the availability of oil at lower prices. This will have the same effects as the good rainfall for the agricultural economy.
348. Stagflation is a situation in which increased unemployment and lower output growth are accompanied by an increase in inflation. Explain how a negative real shock can lead to stagflation. ANSWER: Take the aggregate demand and short-run aggregate supply model. Let the short-run aggregate supply curve shift leftward along the same aggregate demand curve. The new short-run equilibrium will be established with lower real growth rate (higher unemployment rate) and higher inflation rate. This is stagflation.
349. The term "stagflation" describes the occurrence of a recession along with high inflation, such as occurred in the mid-1970s. What kind of shock is required to cause stagflation? ANSWER: It must be a negative shock to aggregate supply (AS), such as the oils crisis of the mid-70s. A shortage of oil supply that raised the oil prices, spread all over the economy in terms of increases in the cost of producing almost everything. The AS curve shifted leftward causing higher prices of goods and services along with lower ability to produce. Unemployment increased and inflation increased. That is stagflation.
Copyright Macmillan Learning. Powered by Cognero.
Page 73
Name:
Class:
Date:
Chapter 13 350. In economics, what is meant by the term "real shock"? What makes a shock "real"? ANSWER: A real shock, also called a productivity shock, is any shock that increases or decreases the potential growth rate. It is real because it increases or decreases an economy's fundamental ability to produce goods and services and, thus, it increases or decreases the Solow growth rate.
351. What types of shocks can be found in the AD–AS model? Why do these shocks not disappear immediately but rather tend to spread across sectors of an economy? ANSWER: Two types of shocks: shocks to aggregate demand (AD) and shocks to aggregate supply (AS) (or real shocks). Shocks to AD are changes in the growth rates of money supply and/or velocity of money. Both lead to changes in the growth rate of total spending, causing rightward or leftward shifts in AD curve. Second type refers to the real shocks that affect the productivity of the economy and cause rightward or leftward shifts in AS curve. Any of these shocks affect many sectors of the economy due to the interaction and interdependence among those sectors. This explains why the impact of a shock lasts for some time differing in length from one shock to the other.
352. What assumptions about wage and price flexibility are possible in the AD–AS model? What do these different assumptions imply about the slopes of the long-run and short-run aggregate supply curves? ANSWER: The assumption of sticky wages and prices leads to the positive slope of the aggregate supply (AS) curve. This is why we consider the short-run AS upward sloping. So, the increase (decrease) in aggregate demand (AD) would result in an increase (a decrease) in both inflation rate and real growth rate in the short run. The assumption of flexible wage and price leads a vertical AS curve. This is why we consider the long-run AS vertical. So, the increase (decrease) in AD would result in an increase (a decrease) in inflation rate while the real growth rate remains constant in the long run.
353. Explain why sticky wages tend to amplify negative productivity shocks. ANSWER: Sticky wages and prices amplify the effects of negative real shocks because when a recession occurs, salaries remain unchanged, causing prices to remain high. Employers can no longer afford to keep workers as a result. Thus, workers lose their jobs and their incomes. This makes things worse for the economy because of the decrease in total spending.
354. The following question has three parts, which are to be answered independently of each other. Graphically show your response to these shocks in the AD–AS model: a. If a new round of consumer pessimism abounds, what will happen to the economy's short-run growth rate? b. If there is a positive, but temporary, monetary shock, what will happen to the economy's short-run growth rate? c. If a country's imports temporarily increase but exports stay the same, what will happen to the economy's short-run growth rate? ANSWER: a. The graph should show the aggregate demand (AD) curve shifting to the left and the short-run growth rate falling. b. The graph should show the AD curve shifting to the right and the short-run growth rate increasing. c. The graph should show the AD curve shifting to the left and the short-run growth rate decreasing.
355. Imagine that an economy experiences a long-lasting banking crisis and that subsequently consumption growth permanently falls. Using the AD–AS model, draw a diagram and explain the effects of the permanent decline in consumption growth on the inflation rate and the real growth rate in both the short run and the long run.
Copyright Macmillan Learning. Powered by Cognero.
Page 74
Name:
Class:
Date:
Chapter 13 ANSWER:
The diagram shows the economy initially at point A, where the inflation rate is 5% and real gross domestic product growth is at the long-run potential growth rate of 6%. The decrease in consumption growth causes the AD curve to shift to the left from AD1 to AD2. As a result, the economy moves down along SRAS1 from point A to point B, where inflation has decreased from 5% to 4% and real gross domestic product growth has decreased from 6% to 3%. Since this is a permanent decrease in consumption growth, the aggregate demand curve will not return to its initial position. In the long run, the short-run aggregate supply (SRAS) curve shifts downward from SRAS1 to SRAS2 as inflation expectations adjust and wages become flexible. As a result of the shift of the SRAS curve, the economy moves to a new long-run equilibrium at point C, where real growth returns to the economy's long-run potential growth rate and inflation has decreased to 1%. A banking crisis that leads to a reduction in financial intermediation, such as would happen where bank failures rise, would cause a real shock, which would shift long-run aggregate supply to the right, reducing the economy's potential growth.
356. Using an AD–AS model, graphically depict an economy operating in a boom and explain what will happen to this economy in the long run. ANSWER: A boom is depicted as short-run growth beyond the economy's long-run potential growth rate, as seen in the figure.
Copyright Macmillan Learning. Powered by Cognero.
Page 75
Name:
Class:
Date:
Chapter 13
In the long run, however, prices and wages will both rise, shifting short-run aggregate supply to the left until it intersects with the long-run aggregate supply curve at the same level of inflation as does the aggregate demand curve. Thus, the long-run effect of a booming economy is higher inflation.
357. Using the AD–AS model, show and explain how real gross domestic product growth and inflation will change in both the short run and long run if the growth rate of the money supply increases unexpectedly. ANSWER: Increase in money supply leads to an increase in total spending, causing the aggregate demand (AD) curve to shift rightward (increase). So, along the short-run aggregate supply (SRAS) curve, there will be a new intersection with the new AD (new short-run equilibrium) at a higher inflation and real growth rates. The new inflation rate becomes higher than the expected inflation rate (in the original SRAS curve), and people will start increasing their expected inflation toward the new one. The SRAS curve starts shifting leftward along the new AD curve until the expected inflation and actual (new) inflation coincide. This occurs at a higher inflation rate and the same original real growth rate.
358. What impact does an aggregate demand shock have on inflation and growth? Why? ANSWER: I will start with an aggregate demand (AD) positive shock, that is, an increase in AD. With the scenario described in the Copyright Macmillan Learning. Powered by Cognero.
Page 76
Name:
Class:
Date:
Chapter 13 question #356 in mind, we can say that both inflation and real growth rates increase in the short run, but in the long run, inflation rate increases while real growth rate gets back to its original rate. The mechanism that causes these results to occur is the adjustment of people's expectations.
359. Why are firms reluctant to change the prices of their products when aggregate demand increases? ANSWER: The change in prices is costly to firms (menu cost), especially if they are uncertain that the new economic conditions would be temporary or permanent. To avoid the probability of loss (or less profit) in case their expectations are wrong, firms tend to keep their prices constant.
360. Briefly discuss three factors that can cause an increase in aggregate demand and three factors that can cause a decrease in aggregate demand. What is currently happening to aggregate demand in the United States? ANSWER: Some Factors That Shift the Aggregate Demand Curve Positive Shocks (Increase AD) (=Higher Growth Negative Shocks (Decrease AD) (= Lower Rate of Spending) Growth Rate of Spending) A faster money growth rate A slower money growth rate Confidence Fear Increased wealth Reduced wealth Lower taxes Higher taxes Greater growth of government spending Lower growth of government spending Increased export growth Decreased export growth Decreased import growth Increased import growth Of course, the second part of the question depends on current events at the time students are tested.
361. Suppose consumption growth suddenly falls as a result of a decline in consumer confidence. With the aid of a diagram including the aggregate demand (AD) and long-run aggregate supply curves, explain how the change in consumption growth affects the inflation rate and the real growth rate in the long run.
Copyright Macmillan Learning. Powered by Cognero.
Page 77
Name:
Class:
Date:
Chapter 13 ANSWER:
The diagram shows the economy initially at point A, where the inflation rate is 5% and the real gross domestic product growth rate is 6%. A decrease in consumption growth causes a shift to the left of the AD curve. As a result, the economy moves from point A to point B, where the inflation rate has decreased from 5% to 1% and the real gross domestic product growth rate has remained unchanged at 6%.
362. Assume that a country's money velocity remains constant and that the rate of money growth is 4%. a. What is the rate of spending growth? b. If money growth increases by 1.5 percentage points and consumption growth increases by 0.5 percentage point, what is the new rate of spending growth? c. Given your answer in part b, what is the long-run rate of real gross domestic product growth at an inflation rate of 4%? ANSWER: a. Spending growth = money growth + velocity growth = 4 + 0 = 4%. b. The increase in spending growth will equal the increase in money growth (1.5) plus the increase in consumption (or velocity) growth (0.5), so the new spending growth rate will be 4 + 1.5 + 0.5 = 6%. c. Since M⃗+v⃗=P⃗+Y⃗R, we have 5.5 + 0.5 = 4 + Y⃗R. Thus Y⃗R = 2%.
363. For an aggregate demand curve with
= 10% and
= 0%, if inflation is 6%, then real growth is:
a. −6%. b. −4%. c. 4%. d. 16%. Copyright Macmillan Learning. Powered by Cognero.
Page 78
Name:
Class:
Date:
Chapter 13 ANSWER: c 364. In the AD–AS model,
represents the:
a. money supply. b. money velocity. c. rate of money supply growth. d. rate of money velocity growth. ANSWER: c 365. In the AD–AS model,
represents the:
a. growth rate of real gross domestic product. b. level of real gross domestic product. c. reference year. d. growth rate of the money supply. ANSWER: a 366. If velocity is stable, then
equals:
a. 0%. b. 1%. c. 10%. d. 100%. ANSWER: a 367. In the equation
, what does
stand for?
, what does
stand for?
a. the money supply b. growth rate of the money supply c. money velocity d. growth rate of money velocity ANSWER: b 368. In the equation
a. the velocity of money b. growth rate of the velocity of money c. the market value of goods and services Copyright Macmillan Learning. Powered by Cognero.
Page 79
Name:
Class:
Date:
Chapter 13 d. growth rate of the market value of goods and services ANSWER: b 369. In the equation
, what does
stand for?
, what does
stand for?
a. production b. growth in production c. prices d. inflation ANSWER: d 370. In the equation
a. real gross domestic product b. nominal gross domestic product c. growth rate of real gross domestic product d. growth rate of nominal gross domestic product ANSWER: a 371. If
= 4%,
= 3%, and
= 2%, then
must equal:
= –3%, and
= 2%, then
must equal:
a. 1%. b. 2%. c. 6%. d. 7%. ANSWER: a 372. If
= 5%,
a. −3%. b. −2%. c. 0%. d. 2%. ANSWER: c 373. A temporary decrease in consumer spending causes a(n): a. decrease in the economy's long-run potential growth rate. b. upward shift of the SRAS curve. c. decrease in velocity growth (). Copyright Macmillan Learning. Powered by Cognero.
Page 80
Name:
Class:
Date:
Chapter 13 d. increase in money growth (). ANSWER: c 374. Sustained inflation: a. can occur as a result of changes in . b. can occur as a result of changes in . c. requires ongoing increases in the money supply. d. can never occur. ANSWER: c 375. As a result of a positive shock to , inflation: a. and output growth increase in the short run, but in the long run, they return to the rates before the shock. b. and output growth decrease in the short run, but in the long run, they return to the rates before the shock. c. increases and output growth decreases in the short run, but in the long run, they return to the rates before the shock. d. and output growth increase in both the short run and the long run.
ANSWER: a 376. Changes in
tend to be _____, and changes in
tend to be _____.
a. permanent; temporary b. temporary; permanent c. permanent; permanent d. temporary; temporary ANSWER: b 377. Since changes in
, ,
, or
do not change the rate of inflation in the long run, sustained inflation
requires ongoing increases in the money supply. a. True b. False ANSWER: a 378. "Animal spirits" can cause a shock to
.
a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 81
Name:
Class:
Date:
Chapter 13
Copyright Macmillan Learning. Powered by Cognero.
Page 82
Name:
Class:
Date:
Chapter 14 1. Economists call the set of economic forces that amplify shocks by spreading them across time and sectors of the economy: a. irreversible investments. b. intertemporal substitutions. c. transmission mechanisms. d. aggregate demand conveyances. ANSWER: c 2. Transmission mechanisms: a. can amplify positive shocks. b. can amplify negative shocks. c. can amplify both positive and negative shocks. d. amplify neither positive nor negative shocks. ANSWER: c 3. What is taking place when an economy experiences quick changes that have large effects on productivity? a. economic shocks b. geographic capital fluctuations c. decreases in aggregate demand d. time bunching ANSWER: a 4. Rapid changes in economic conditions that have large effects on the productivity of capital and labor are called: a. business cycles. b. recessions. c. shocks. d. transmission mechanisms. ANSWER: c 5. Economists call economic forces that can amplify shocks across time and sectors of the economy: a. business cycles. b. cyclical recessions. c. shock magnifiers. d. transmission mechanisms. ANSWER: d 6. A transmission mechanism: a. mitigates shocks by spreading them across time and through sectors of the economy. b. amplifies shocks by spreading them across time and through sectors of the economy. c. causes shocks to have an equal impact across time and sectors of the economy. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 14 d. turns negative shocks into positive shocks over time. ANSWER: b 7. Which is NOT a transmission mechanism? a. time bunching b. intertemporal substitution c. reversible investments d. labor adjustment costs ANSWER: c 8. Which is a transmission mechanism? a. intertemporal substitution b. irreversible employment c. labor bunching d. capital substitution ANSWER: a 9. Which is NOT an example of a transmission mechanism? a. time bunching b. intertemporal substitution c. labor adjustment costs d. irreversible employment ANSWER: d 10. Which is NOT a transmission mechanism? a. intertemporal substitution b. irreversible investments c. time bunching d. shifts in long-run aggregate supply ANSWER: d 11. Historical data on India's rainfall amounts and real gross domestic product growth show that: a. economic fluctuations are negatively correlated with real shocks. b. economic fluctuations are positively correlated with real shocks. c. economic fluctuations have no correlation with any shocks. d. real shocks affect only long-term economic growth, not short-run economic fluctuations. ANSWER: b 12. When a shock is amplified, a mild _____ shock is transformed into a(n) _____. a. negative; mild positive shock b. negative; economic boom Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 14 c. negative; more serious reduction in output d. positive; mild negative shock ANSWER: c 13. Which is NOT a transmission mechanism of real shocks and aggregate demand shocks? a. reversible investment b. intertemporal substitutions c. collateral damage d. time bunching ANSWER: a 14. What happens when a real or aggregate demand shock is amplified? a. It is associated with audible noise. b. It reverses course and moves the economy in the opposite direction. c. A mild shock becomes stronger and has a larger impact on the economy. d. A strong shock becomes milder in impact but more narrowly focused. ANSWER: c 15. Which is NOT a transmission mechanism through which shocks to an economy can be amplified? a. collateral damage b. time bunching and network effects c. redistribution intermediation d. intertemporal substitution ANSWER: c 16. Which is NOT a transmission mechanism through which shocks to an economy can be amplified? a. uncertainty and irreversible investments b. intermediation adjustments c. collateral damage d. labor adjustment costs ANSWER: b 17. Which is a transmission mechanism through which shocks to an economy can be amplified? a. time flow b. capital adjustment costs c. collateral bunching d. labor adjustment costs ANSWER: d 18. Which is the best example of intertemporal substitution? a. Timmy opens a lemonade stand on the weekends when he's not in school to earn money for a new bike. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 14 b. Sam works overtime to earn extra money. c. Mary studies an extra three hours the night before her economics final exam. d. Sarah decides to stay home from work today because she is feeling ill. ANSWER: c 19. Intertemporal substitution refers to the: a. tendency to work more when the returns to work are higher. b. decision on how to allocate time between work and leisure. c. preference for households to smooth their consumption over time. d. decision to substitute one television show for another during the same time slot. ANSWER: a 20. Which is NOT an example of intertemporal substitution? a. David decides to go to college after high school, since he has graduated in the middle of a big recession and jobs are hard to come by. b. Luke is an accountant who works overtime during tax season.
c. Sandy works 10-hour days as a ski instructor during the winter months but takes a 3-week vacation during the summer. d. Thomas studies economics two hours every night in order to get a good grade in the course.
ANSWER: d 21. Intertemporal substitution tends to amplify business cycles because: a. assets are typically worth more in booms than in recessions. b. the returns to work are higher in booms than in recessions, so people work more during booms and less
during recessions. c. the returns to investment are lower when others are investing as well; thus, we see less investment during booms and more during recessions. d. many people are hesitant to change jobs during recessions; thus, resources are stuck in less productive uses.
ANSWER: b 22. If a drought reduces farm output, farmers will probably: a. work harder to try to make up for the lost output. b. work less hard and devote less capital to their fields. c. work the same amount as they normally do. d. celebrate. ANSWER: b 23. Intertemporal substitution is: a. the cost of shifting workers from declining sectors of the economy to growing sectors. b. the tendency for economic activities to be coordinated at common points in time. c. the allocation of consumption, work, and leisure across time to maximize well-being. d. a reduction in the value of collateral. Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 14 ANSWER: c 24. During a recession, people are LEAST likely to: a. retire. b. shrink business operations. c. focus on homemaking. d. drop out of school. ANSWER: d 25. The supply of labor: a. increases during a boom and decreases during a recession. b. decreases during a boom and increases during a recession. c. increases during booms and recessions alike. d. decreases during booms and recessions alike. ANSWER: a 26. Intertemporal substitution: a. dampens economic shocks. b. magnifies economic shocks. c. does not affect economic shocks. d. magnifies positive economic shocks and dampens negative economic shocks. ANSWER: b 27. Tom works as an editor for a textbook company and devotes some of his time to his dream of writing a novel. Will he devote more time to writing the novel when the textbook company is busy and pays him overtime or when work is slow and no overtime pay is available? a. when work is busy b. when work is slow c. equal amounts of time under both conditions d. He will never actually write it as long as he works with the textbook publishing company. ANSWER: b 28. The term intertemporal substitution refers to the allocation of time between: a. making capital goods and making consumption goods. b. consumption and saving. c. friends and family. d. leisure and work. ANSWER: d 29. During an economic boom, the employment-to-population ratio rises because: a. inflation tends to rise at that time. Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 14 b. the opportunity cost of leisure increases. c. fewer people are available to work. d. real wages tend to fall at that time. ANSWER: b 30. Because of intertemporal substitution, the effect of a negative economic shock on real gross domestic product will: a. be larger than otherwise. b. become a positive shock in the end. c. disappear immediately. d. occur only in the long run but not during the short run. ANSWER: a 31. Intertemporal substitution causes a positive productivity shock to: a. make the long-run aggregate supply curve less steep. b. make the long-run aggregate supply curve steeper. c. shift the long-run aggregate supply curve farther to the right. d. shift the long-run aggregate supply curve farther to the left. ANSWER: c 32. The idea that a person or business is MOST likely to work hard when doing so brings the greatest return is called: a. intertemporal substitution. b. irreversible investment. c. labor adjustment cost. d. time bunching. ANSWER: a 33. Economists call the allocation of consumption, work, and leisure across time to maximize well-being: a. intertemporal substitution. b. labor adjustment cost. c. time bunching. d. collateral damage. ANSWER: a 34. During an economic boom, people are more likely to: a. retire early. b. delay retirement. c. leave retirement plans unchanged. d. take a second job. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 14 35. When gross domestic product is growing faster than trend, the employment-to-population ratio tends to grow: a. faster than trend. b. more slowly than trend. c. at its trend level. d. unpredictably. ANSWER: a 36. Intertemporal substitution tends to magnify: a. negative shocks only. b. positive shocks only. c. both negative and positive shocks. d. neither negative nor positive shocks. ANSWER: c 37. Economists call the allocation of consumption, work, and leisure across time to maximize well-being: a. cross-sectional substitution. b. cross-sectional complement. c. intertemporal substitution. d. intertemporal complement. ANSWER: c 38. If rainfall is below average, farmers may: a. work harder and devote more capital to their fields. b. work harder but devote less capital to their fields. c. devote more capital to their fields but work less hard. d. work less hard and devote less capital to their fields. ANSWER: d 39. Which statement is NOT true? a. There is a tendency for fewer people to enter college when wages are increasing. b. People are more likely to retire or take early retirement during a boom. c. Homemakers are more likely to choose to enter the workforce during boom periods. d. There will be more people investing in their education when jobs are scarce. ANSWER: b 40. Why does intertemporal substitution magnify a negative economic shock? a. When things go bad, the return to work and investment fall, and often people work less and invest less. b. When things go well, workers will tend to be less productive and invest less. c. When things go bad, people often work more and harder to maintain their return to work. Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 14 d. When things go well, the return to work and investing rise, and often people work less and invest less. ANSWER: a 41. People engage in intertemporal substitution because they: a. wish to reduce the overall number of hours they work. b. seek to maximize their well-being. c. are irrational. d. always prefer leisure to work. ANSWER: b 42. People engage in intertemporal substitution because: a. employers require them to work longer hours when economies are expanding. b. they are rational. c. they are trying to achieve consumption smoothing. d. they prefer fluctuations in their incomes. ANSWER: b 43. Which individual is practicing intertemporal substitution? a. Sharona decides to stop being a stay-at-home mother and enters the workforce to get extra money for future college expenses. b. Malika decides to stop being a stay-at-home mother and enters the workforce because the economy is booming. c. Anneliese studies continuously throughout the semester for her final exams.
d. The United States enters a recession, and Tashika loses her job. ANSWER: b 44. Figure: AS–AD Adjustment.
Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 14
Beginning at point W in the figure, suppose the government greatly increases government expenditure. If workers react by displaying intertemporal substitution and enter the workforce, the economy should move to point _____ in the short run. a. V b. X c. Y d. Z ANSWER: c 45. Figure: AS–AD
Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 14
Assume that an economy begins at point 1 in the figure. An increase in government spending accompanied by intertemporal substitution will move the economy to point: a. 2. b. 3. c. 4. d. 6. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 14 46. When a drought—a negative rainfall shock—occurs, farmers tend to put in less effort than they did before to till their farms because: a. agricultural output falls, and even though farmers put in the same level of effort, the effort per hour falls. b. extra hours of labor and capital usage do not yield much extra output. c. people work hardest when their hard work yields lower returns. d. they switch to crops that use less water. ANSWER: b 47. What economic effect has people allocating consumption across time to bring the greatest return? a. sticky wage benefits b. irreversible investment c. intertemporal substitution d. labor adjustment cost ANSWER: c 48. If students decide to stay in college until a recession is over, they are practicing: a. intertemporal substitution. b. time bunching. c. labor adjustment costs. d. replacement wages. ANSWER: a 49. An economy with a long-run potential growth rate of 1% experiences a positive real economic shock that increases the growth rate to 2%. If intertemporal substitution subsequently takes place, what could the eventual new gross domestic product growth rate be? a. 0% b. 1% c. 2% d. 3% ANSWER: d 50. Because of intertemporal substitution, a negative shock to aggregate demand could result in a(n): a. shift of the long-run aggregate supply curve to the right. b. shift of the long-run aggregate supply curve to the left. c. upward movement along the long-run aggregate supply curve. d. downward movement along the long-run aggregate supply curve. ANSWER: b 51. Because of intertemporal substitution, real gross domestic product growth tends to be: a. positively related to the employment–population ratio. b. negatively related to the employment–population ratio. Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 14 c. unrelated to the employment–population ratio. d. positively or negatively related to the employment–population ratio, depending on the stage of the business cycle.
ANSWER: a 52. Because of intertemporal substitution, the supply of labor is likely to: a. decrease when the economy grows more rapidly. b. increase when the economy grows more rapidly. c. remain constant regardless of how fast the economy grows. d. become unpredictable when a shock occurs in an economy. ANSWER: b 53. Because of intertemporal substitution, an increase in government spending results in a: a. leftward shift of both the long-run aggregate supply curve and the aggregate demand curve. b. leftward shift of the long-run aggregate supply curve but a rightward shift of the aggregate demand curve. c. rightward shift of both the long-run aggregate supply curve and the aggregate demand curve. d. rightward shift of the long-run aggregate supply curve but a leftward shift of the aggregate demand curve. ANSWER: c 54. For a given increase in government spending, intertemporal substitution is more widespread when the impact of aggregate demand growth on: a. both inflation and real gross domestic product growth is stronger. b. both inflation and real gross domestic product growth is weaker. c. inflation is stronger and the impact of aggregate demand growth on real gross domestic product growth is weaker. d. inflation is weaker and the impact of aggregate demand growth on real gross domestic product growth is stronger.
ANSWER: d 55. Labor supply tends to: a. remain constant during recessions. b. remain constant during booms. c. increase during recessions. d. increase during booms. ANSWER: d 56. Intertemporal substitution tends to: a. reduce the impact of positive shocks and increase the impact of negative shocks. b. reduce the impact of negative shocks and increase the impact of positive shocks. c. reduce the impact of positive and negative shocks. d. increase the impact of positive and negative shocks. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 14 57. If, during a recession, a two-income couple chooses to become a one-income household and then later, during an economic boom, becomes a two-income household again, their employment decisions are an example of: a. workload substitution. b. intertemporal substitution. c. labor adjustments. d. time bunching. ANSWER: b 58. When making intertemporal substitutions, individuals distribute _____ across time to maximize their wellbeing. a. leisure, work, and consumption b. savings, investment, and consumption c. capital, labor, and technology d. income, wealth, and spending ANSWER: a 59. Which is an example of intertemporal substitution amplifying a recession? a. During a recession, savings rise because people realize how fragile their economic situation is. b. During a recession, savings fall, reducing investment and shrinking production capacity. c. During a recession, more people retire early, leaving a smaller labor force with lower production capacity. d. During a recession, more people delay retirement to make up for reduced wages, increasing the labor force. ANSWER: c 60. Which is an example of intertemporal substitution that would amplify an economic boom? a. Some workers reduce work hours because wages are higher since less work yields equal pay. b. Some workers delay retirement to gain the higher income available during the economic boom. c. Workers go on longer vacations because incomes are higher, increasing the hospitality industry revenue. d. Savings fall so that unemployed workers can maintain consumption spending. ANSWER: b 61. When intertemporal substitution amplifies a positive real shock in the economy, the _____ curve shifts farther to the _____. a. aggregate demand; left b. aggregate demand; right c. long-run aggregate supply; left d. long-run aggregate supply; right ANSWER: d 62. When intertemporal substitution amplifies a negative real shock in the economy, the _____ curve shifts farther to the _____. a. aggregate demand; left Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 14 b. aggregate demand; right c. long-run aggregate supply; left d. long-run aggregate supply; right ANSWER: c 63. After 9/11, why were many investors unwilling to engage in new construction in New York City? a. Construction companies were unwilling to work in New York City. b. Uncertainty regarding future terrorist attacks left investors unsure about the demand for new offices. c. The cost of steel had skyrocketed and building new construction became very expensive. d. The mayor of New York abolished new construction for a period of six months. ANSWER: b 64. Uncertainty magnifies negative shocks by: a. keeping resources in unproductive areas. b. slowing the speed of transmission of the negative shocks. c. providing clear investment signals. d. increasing the number of irreversible investments. ANSWER: a 65. Waiting to open a factory in a country that has just had a government coup exaggerates that economic shock due to: a. uncertainty. b. labor adjustment costs. c. time bunching. d. flexible investing. ANSWER: a 66. When there is high uncertainty, investors are more likely to hold off on potential investment projects that: a. are irreversible. b. are reversible. c. have many substitutes. d. have low adjustment costs. ANSWER: a 67. Jamie has a fixed amount of savings and is planning to invest in one of two different projects with the same expected return on investment. Other things being equal, Jamie will MOST likely invest in: a. the project that is more easily reversed. b. the project that is less easily reversed. c. either of the two projects regardless of how reversible they are. d. neither of the two projects because there is always uncertainty in their returns. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 14 68. _____ have high value only under specific conditions. a. Intertemporal reserves b. Permanent assets c. Irreversible investments d. High-growth prices ANSWER: c 69. Spending on capital goods that cannot be easily moved, adjusted, or reversed is called: a. irreversible investment. b. fixed investment. c. bunched investment. d. intertemporal investment. ANSWER: a 70. Which is the best example of an irreversible investment? a. the decision to work an extra two hours per week b. starting a new automobile line c. a first date d. hiring a new employee ANSWER: b 71. Irreversible investments can be costly because they: a. are expensive. b. involve a large number of workers. c. involve sunk costs. d. are intertemporal. ANSWER: c 72. Uncertainty tends to amplify business cycles because: a. many investments are irreversible with large sunk costs; thus, investors decrease investment during bad times and wait until they are more certain about the future direction of the economy. b. fewer people tend to go to college during recessions because of the uncertainty in the job market, and thus lower education leads to lower productivity. c. investment tends to correlate with prices, and therefore both prices and investment tend to rise during booms and decrease during recessions. d. resource providers have less demand for their materials during recessions and thus less certain sales expectations.
ANSWER: a 73. Irreversible investments: a. are the costs of shifting workers from declining sectors of the economy to growing sectors. b. are valuable assets that are pledged to a lender to secure a loan. Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 14 c. are the tendency for economic activities to be coordinated at common points in time. d. have high value only under specific conditions—they cannot be easily moved, adjusted, or reversed if conditions change.
ANSWER: d 74. After the 9/11 attacks: a. people rushed to invest in New York City. b. the economy's long-run potential growth rate increased. c. people held off on business investment until it became clear that the attacks would not become regular occurrences. d. the need for information about the future went out the window.
ANSWER: c 75. The more uncertain the world appears, the: a. harder it is for investors to receive definite signals about where to invest their resources. b. easier it is for investors to receive definite signals about where to invest their resources. c. lower the expected return necessary to justify an investment. d. lower the payoff to waiting. ANSWER: a 76. Suppose that Kristi is unsure about what to do with her life. Should she go to graduate school now or wait until she decides what she wants to do? a. She should go now. b. She should wait until she decides. c. It doesn't matter. d. Each choice is equally valid. ANSWER: b 77. When an investment has a high value under a specific condition but can't be shut down when conditions change, it is said to be: a. irreversible. b. diversified. c. profitable. d. uncertain. ANSWER: a 78. Which investment project is MOST irreversible? a. the construction of an open office space that can be used for different businesses b. the construction of a bank branch location that can be later converted into an insurance company office c. the purchase of a Japanese restaurant that can be easily converted into a bistro d. the construction of a chemical plant that manufactures only a specific type of paint ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 14 79. Which is widely considered to be the MOST irreversible decision for a typical person? a. getting engaged with a loved one b. buying a house c. having a baby d. buying a car ANSWER: c 80. If investors are less certain about the economic outlook, they will: a. reduce capital investments that are less irreversible. b. reduce capital investments that are more irreversible. c. raise capital investments that are less irreversible. d. raise capital investments that are more irreversible. ANSWER: b 81. For a given economic shock, more irreversible investments in an economy will: a. moderate the effect of the shock on the economy. b. amplify the effect of the shock on the economy. c. make the transmission mechanism for the shock longer. d. make the transmission mechanism for the shock shorter. ANSWER: b 82. A negative shock reduces capital investments because: a. capital investments involve sunk costs. b. investments are always very speculative. c. capital investments are easily reversible. d. investors react only to capital investments that bring high returns. ANSWER: a 83. A capital investment is more irreversible if it involves a high: a. sunk cost. b. labor cost. c. maintenance cost. d. depreciation rate. ANSWER: a 84. Negative shocks tend to: a. increase uncertainty. b. decrease uncertainty. c. have no impact on uncertainty. d. first decrease and then increase uncertainty. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 14 ANSWER: a 85. The idea that some investments cannot be easily moved, adjusted, or reversed if conditions change is called: a. intertemporal substitution. b. irreversible investment. c. time bunching. d. collateral damage. ANSWER: b 86. Many investments are irreversible because they involve: a. labor costs. b. international costs. c. construction costs. d. sunk costs. ANSWER: d 87. Uncertainty tends to keep resources: a. in more productive uses. b. in less productive uses. c. fully employed. d. moving from country to country. ANSWER: b 88. Many investments involve _____ costs, which are a characteristic of irreversible investments. a. fixed b. opportunity c. operating d. sunk ANSWER: d 89. Which is NOT true of irreversible investments? a. When investors wait to see what happens, that means resources are sitting idle rather than being productive. b. Uncertainty usually slows investment and keeps resources in less productive uses. c. Once an investment opportunity is identified, the execution should follow immediately. d. If new information casts suspicion on a potential investment, the truth is typically sought out before proceeding.
ANSWER: c 90. Irreversible investments have high: a. value under any circumstance and can be easily moved, adjusted, or reversed with any different
circumstance. b. value only under specific conditions and cannot be easily moved, adjusted, or reversed if conditions change.
Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 14 c. cost only under specific conditions and can be easily moved, adjusted, or reversed if conditions change. d. cost under any circumstance and cannot be easily moved, adjusted, or reversed if conditions change. ANSWER: b 91. Which amplification mechanism could explain why investors were reluctant to invest in capital during the COVID-19 recession? a. Uncertainty regarding the changing economic environment increased the risk of investing. b. Intertemporal substitution by workers meant that a shortage of workers would decrease returns. c. Greater economic disparity between wealthy and poor people made networks more important. d. Increased costs of employment agencies made investing more costly. ANSWER: a 92. What is the term for an investment whose value depends on a specific set of circumstances and it is difficult to recover any of the investment's value when those circumstances are not present? a. specific investment b. constrained investment c. irreversible investment d. collateral-bounded investment ANSWER: c 93. When economic conditions are changing in ways that are less predictable than usual, investors will be particularly reluctant to make what type of investment? a. irreversible b. flexible c. intertemporal d. network ANSWER: a 94. When an investment has high sunk costs that are not easily recovered and the investment yields a return only under specific conditions, economists call the investment: a. bounded. b. one with collateral damage. c. one that requires a substitution of collateral. d. irreversible. ANSWER: d 95. Assuming that all investments cost the same amount of money, which is an example of an irreversible investment in physical capital? a. the construction of a small office building that could be converted through renovation into either a small factory space or condominiums b. the purchase of a fleet of cars to rent to individuals and firms
c. the purchase of a large number of laptop computers for employee use Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 14 d. the purchase of a specialized piece of equipment useful only in the production of space capsules ANSWER: d 96. One way that uncertainty does NOT affect investors and investments is by: a. reducing the amount of idle resources. b. making it harder for investors to receive signals about what to invest in. c. slowing or reducing investments. d. keeping resources in less productive uses. ANSWER: a 97. Labor adjustment costs refer to the costs of: a. moving workers from declining industries to growth industries. b. firing unproductive workers. c. instituting pay raises for productive workers. d. hiring and training workers. ANSWER: a 98. Workers may display irrationality in labor adjustments to shocks if: a. union actions caused their pre-layoff wages to exceed market-clearing wages. b. they practice intertemporal substitution. c. they voluntarily quit their jobs. d. they find new jobs that are higher paying. ANSWER: a 99. Labor adjustment costs tend to be higher when: a. market wages rise. b. the declining industries are unionized. c. moving costs are low. d. the unemployment rate is low. ANSWER: b 100. When a U.S. air conditioner factory relocates to Mexico, the U.S. community experiences an initial negative shock plus: a. time bunching. b. intertemporal substitutions. c. irreversible investment uncertainty. d. labor adjustment costs. ANSWER: d 101. Labor adjustment costs help amplify the initial negative shock by: a. keeping the unemployment rate high. Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 14 b. discouraging irreversible investments. c. sending inflation higher. d. blocking employment search efforts. ANSWER: a 102. A negative shock to aggregate demand will lead to a higher unemployment rate if: a. time bunching in economic activity is lower. b. intertemporal substitution in labor supply is lower. c. investments are more easily reversible. d. labor adjustment costs are higher. ANSWER: d 103. Suppose a restaurant moves to another city and its manager asks the restaurant's two cooks to move there as well. Cook A is single and has no children to support. Cook B has a family with five children in grades K–8. Which is the MOST likely outcome? a. Cook A is more likely to move because of a lower labor adjustment cost. b. Cook B is more likely to move because of a lower labor adjustment cost. c. Cook A is more likely to move because of a higher labor adjustment cost. d. Cook B is more likely to move because of a higher labor adjustment cost. ANSWER: a 104. If labor adjustment costs are higher for a negative real shock, then we can expect to see a: a. larger increase in the real gross domestic product growth rate. b. smaller increase in the real gross domestic product growth rate. c. larger decrease in the real gross domestic product growth rate. d. smaller decrease in the real gross domestic product growth rate. ANSWER: c 105. The cost of shifting workers from declining sectors of the economy to growing sectors is known as: a. irreversible employment. b. a labor adjustment cost. c. labor bunching. d. intertemporal substitution. ANSWER: b 106. Labor adjustment costs lead to: a. intertemporal substitution. b. time bunching. c. higher unemployment. d. higher employment. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 14 107. Which would create labor adjustment costs? a. a major recession b. higher gas prices that hurt SUV manufacturers but create a boom in the hybrid industry c. a cultural shift that influences more students to attend college d. an increase in the number of foreign workers entering the country ANSWER: b 108. Labor adjustment costs tend to amplify business cycles because: a. assets are typically worth more in booms than in recessions. b. the returns to work are higher in booms than in recessions, so people work more during booms and less
during recessions. c. the returns to investment are higher when others are investing as well; thus, we see more investment during booms and less during recessions. d. the uncertainty of recessions tends to increase people's job search time, whereas greater certainty decreases search time during booms.
ANSWER: d 109. Losing a job that pays especially well can result in a long period of unemployment because: a. it may take the worker a while to come to terms with the fact that they will be forced to take a pay cut. b. high-paying jobs are easy to find. c. workers are always purely rational in their employment decisions. d. there are no adjustment costs for high-salary workers. ANSWER: a 110. Employment decisions: a. are best made by flipping a coin. b. can be costly to reverse. c. do not have a big effect on people's lives. d. are easy to undo. ANSWER: b 111. Pat is unemployed and can try to find another job as a bank teller, or go back to school for two years and become a nurse. Nursing jobs are easy to find and nurses are better paid than bank tellers. Why must Pat think carefully before making this career change? a. Bank tellers are a dying profession. b. He doesn't like his current career. c. Student loans are easy to secure. d. Nursing school is an irreversible investment. ANSWER: d 112. If a real shock causes a particular sector of the economy to decline, associated labor adjustment costs will _____ the effect of the initial shock. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 14 a. amplify b. dampen c. not influence d. eliminate ANSWER: a 113. The text refers to "labor adjustment costs" as the costs of: a. making an educated workforce. b. machines and equipment that replace the use of labor in production. c. increasing a nation's workforce through bringing in migrant workers from overseas. d. shifting workers from one sector of the economy to another sector. ANSWER: d 114. For a given negative economic shock, an economy with higher labor adjustment costs will have a: a. higher economic growth rate. b. smaller effect on employment. c. higher unemployment rate. d. shorter recession. ANSWER: c 115. A laid-off autoworker does not immediately seek employment in a rapidly growing computer industry because: a. he is irrational, not considering the benefits of searching for a new job. b. changing a career is a costly decision. c. being unemployed is always the best decision for a person after a layoff. d. there are benefits to being rationally ignorant. ANSWER: b 116. Labor adjustment costs are higher if: a. workers face higher uncertainty about the permanence of changes in different industries. b. workers are more certain about the direction of the overall economy. c. producers have more accurate information about the availability of workers. d. producers can easily replace workers with machines and computers. ANSWER: a 117. If it takes people more time to make employment decisions, then a given negative economic shock will cause a decline in economic growth: a. smaller in size and shorter in duration. b. larger in size but shorter in duration. c. smaller in size but longer in duration. d. larger in size and longer in duration. Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 14 ANSWER: d 118. Which does NOT contribute to the high cost of reversing job decisions? a. unemployment b. underemployment c. full-productivity employment d. part-time or casual work ANSWER: c 119. Which would incur the highest labor adjustment costs for people just losing their jobs? a. waiting to be rehired by the same company b. finding another job in the same location c. moving to another more prosperous part of the country d. collecting unemployment checks from the government ANSWER: c 120. Labor _____ costs are the costs of transferring workers from shrinking sectors of the economy to expanding sectors of the economy. a. transfer b. adjustment c. reversible d. collateral ANSWER: b 121. The costs of shifting workers from shrinking sectors of the economy to expanding sectors of the economy do NOT include: a. the costs of moving workers who must relocate. b. changing the wage expectations of workers, who sometimes must accept lower wages. c. the added stress of making a decision that is hard to reverse. d. the lack of desire to work. ANSWER: d 122. Suppose that an industry concentrated in a small geographic area is shrinking and its workers, who have skills specific to that particular industry, are losing their jobs. Which is NOT one of the main options these workers have to face in finding new jobs? a. moving to a new area where the economy and employment opportunities are growing b. seeking employment in another industry in the local area c. waiting to see if the industry will be resuscitated by a growing population d. lobbying the government to adopt laws guaranteeing employment to workers ANSWER: d 123. When the costs of relocating or retraining for a job are high, someone who loses their job because the Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 14 industry is shrinking is likely to be unemployed _____ because _____. a. for some time; the unemployed are not able to work b. briefly; human capital investment is depreciating c. for some time; the costs of available employment options are high d. briefly; they have an incentive to search for employment diligently ANSWER: c 124. Many economic activities tend to cluster together in time because: a. of cultural norms that tell us we are supposed to work during the day. b. the returns to working are lower in the evening hours. c. the returns to coordinating with others are high. d. the opportunity cost is higher than when these activities are not clustered. ANSWER: c 125. Time bunching explains why: a. most people work between the hours of 8 am and 5 pm. b. cities develop. c. some firms pay their workers overtime. d. people choose to get married before they purchase a home together. ANSWER: a 126. Time bunching tends to amplify business cycles because: a. assets are typically worth more in booms than in recessions. b. the returns to work are higher in booms than in recessions, so people work more during booms and less
during recessions. c. the returns to investment are higher when others are investing as well; thus, we see more investment during booms and less during recessions. d. the uncertainty of recessions tends to increase people's job search time, while greater certainty decreases search time during booms.
ANSWER: c 127. Time bunching is: a. the cost of shifting workers from declining sectors of the economy to growing sectors. b. the allocation of consumption, work, and leisure across time to maximize well-being. c. the tendency for economic activities to be coordinated at common points in time. d. a reduction in the value of collateral. ANSWER: c 128. What do we call a cluster of activity in space? a. a colony b. a city c. a satellite Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 14 d. a solar system ANSWER: b 129. Every night, resources at your school—classrooms, desks, and so on—are unemployed. This is an example of: a. labor adjustment costs. b. irreversible investment. c. collateral damage. d. time bunching. ANSWER: d 130. Which quarter of the year produces the most economic output? a. first b. second c. third d. fourth ANSWER: d 131. The clustering of economic activity in time does NOT: a. make buying and selling more efficient. b. induce intertemporal substitution. c. eliminate long periods of unemployment. d. cause shocks to spread through the economy and through time. ANSWER: c 132. The fact that employment tends to be relatively high during the Christmas season and low during January is an example of: a. intertemporal substitution. b. labor adjustment costs. c. time bunching. d. irreversible investments. ANSWER: c 133. The condition of time bunching implies that: a. people tend to work and invest primarily when other people do. b. people tend to go against what other people do. c. the decisions of some people always offset the effects of other people's decisions. d. it takes a long time for people to make decisions. ANSWER: a 134. As a result of time bunching, the effect of an economic shock on the economy: Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 14 a. is smaller. b. is larger. c. becomes less certain. d. becomes more certain. ANSWER: b 135. Economic activities tend to cluster in time because: a. it pays to coordinate economic activities with those of others. b. of the vertical long-run aggregate supply curve. c. of labor unions. d. it is legally required. ANSWER: a 136. Most economic activities bunch or cluster in time because: a. that is how social activities proceed. b. most people have the same biological clock. c. it reduces the possible obstacle of coordinating things among others. d. it pays to coordinate your economic actions with those of others. ANSWER: d 137. Once some economic activity is moving in the upward or downward direction, other parts of the economy tend to: a. deviate from that momentum to alleviate the upward or downward pressure of the trend. b. follow that momentum to gain the advantages of time bunching. c. stay put to gain the next opportunities. d. jump high and reach a higher level of gains. ANSWER: b 138. When a negative shock arrives and the economy slows down in the current period: a. new technology is more likely to be invented. b. worker productivity rises. c. many people are less keen to work. d. people tend to work harder. ANSWER: c 139. What best explains the increases in economic activity that coincide with spring? a. Consumers purchase items for home improvement and landscaping projects that they will engage in over the spring. b. The resources that become unemployed over the January post-Christmas bust are being put to use again.
c. States no longer have to spend on snow removal programs. d. Many people receive a tax refund in the spring. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 14 ANSWER: a 140. A reason that fourth-quarter economic fluctuations occur is: a. holiday spending. b. spending on vacations. c. spending on renovation projects. d. post-holiday spending declines. ANSWER: a 141. Some car dealers offer to do tax returns for customers in February and March. What are they practicing? a. positive shock inertia b. sticky price clustering c. irreversible investing d. time bunching ANSWER: d 142. When people like going to Walmart right after work because it has the most employees working at the check-out counters at that time, they are contributing to the practice known as: a. time bunching. b. intertemporal substitution. c. labor adjustment. d. irreversible investment. ANSWER: a 143. When more people shop during weekends instead of weekdays, it is called: a. time bunching. b. a shock. c. intertemporal substitution. d. an irreversible investment. ANSWER: a 144. The observation of high business activity in the Christmas season and low business activity immediately after Christmas is an example of: a. irreversible investments. b. high labor adjustment costs. c. time bunching. d. intertemporal substitution. ANSWER: c 145. Time bunching results in: a. seasonal cycles of business activity. Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 14 b. a smooth trend in real gross domestic product over time. c. shocks having a smaller effect on the economy. d. people working more during recessions. ANSWER: a 146. In most advanced economies, economic activity is lowest in the _____ quarter. a. first b. second c. third d. fourth ANSWER: a 147. Tax accountants tend to work more hours in the months before individual and corporate tax returns are due than in the months right after tax returns are due. This is an example of: a. workload substitution. b. intertemporal substitution. c. labor adjustments. d. time bunching. ANSWER: d 148. Why does time bunching of economic activity occur? a. Gains are available to people who coordinate their economic activities with those of others. b. Most people have the same preferences regarding work times. c. Insisting on doing things at different times reduces popularity. d. It is the result of random choices. ANSWER: a 149. Suppose a strong hurricane causes a negative real shock to an island economy. Which is an example of a supply chain or network disruption amplifying the recession caused by this shock? a. Some unemployed workers quit seeking work when they are convinced they cannot find jobs. b. Undamaged factories are idle because the damage to docks prevents the delivery of needed inputs. c. Labor regulations make it costly to ask workers to return to work until all safety precautions are in place. d. Uncertainty about future storms hitting the island reduces the incentive for investment in capital. ANSWER: b 150. Rush-hour traffic is the result of the_____ of employment. a. intertemporal substitution b. collateral damage c. labor adjustment cost d. time bunching ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 14 151. When banks make loans to firms, which is LEAST likely to be of concern to them? a. the amount of cash on hand b. the strength of a firm's other assets c. the size of a firm's net worth d. a firm's intended use of the money ANSWER: d 152. Collateral damage occurs more frequently during: a. expansions when real assets need to be redeployed. b. recessions when discouraged workers neglect the capital stock. c. expansions when capital stock becomes outdated and useless. d. recessions when capital stock loses value through market forces. ANSWER: d 153. A homeowner's home that was purchased for $125,000 before the housing crisis is experiencing the greatest collateral damage from a recession at which of these appraisal values? a. $150,000 b. $125,000 c. $115,000 d. $90,000 ANSWER: d 154. Firms are MOST likely to experience collateral damage during a(n) _____, and their borrowing and investment activities will _____ its severity. a. expansion; amplify b. expansion; dampen c. recession; amplify d. recession; dampen ANSWER: c 155. During a recession, the value of a homeowner's house falls significantly below the amount of debt associated with the home. Who is harmed as a result? a. the homeowner only b. the homeowner's bank c. the homeowner's neighbors d. the homeowner, the homeowner's bank, and the homeowner's neighbors ANSWER: d 156. The equity in your home refers to the market value of your: a. home. b. home minus the price you paid. Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 14 c. home minus the amount you still owe on your mortgage. d. home plus the cost of any improvements made. ANSWER: c 157. During a recession, lending typically declines because: a. banks need to hold less as a cushion for themselves. b. asset prices fall and therefore the net worth of firms declines as well, making them look riskier to banks. c. there are fewer collateral shocks. d. there is more demand for investment funding. ANSWER: b 158. Collateral shocks: a. force banks to hold more of their assets as cash. b. typically shift employment from one industry to another. c. force people to sell their homes. d. slow the adjustment of the economy to business cycle fluctuations. ANSWER: d 159. Collateral shocks tend to amplify business cycles because: a. assets are typically worth more in booms than in recessions, and the value of assets tends to be positively
correlated with firms' ability to obtain investment funding. b. the returns to work are higher in booms than in recessions, so people work more during booms and less during recessions. c. the returns to investment are higher when others are investing as well; thus, we see more investment during booms and less during recessions. d. the uncertainty of recessions tends to increase people's job search time, while greater certainty decreases search time during booms.
ANSWER: a 160. Individuals and firms have more of an incentive to take care of their assets if: a. they do not own the assets. b. they have a lot of equity in the assets. c. the economy is in a recession. d. others value their assets. ANSWER: b 161. Equity refers to the: a. difference between the value of the asset and the amount of debt owed on the asset. b. value of the asset. c. value of the asset minus the purchase price. d. taxable value of the asset. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 14 162. Collateral is: a. a valuable asset that is pledged to a lender to secure a loan. b. the cost of shifting workers from declining sectors of the economy to growing sectors. c. the allocation of consumption, work, and leisure across time to maximize well-being. d. the tendency for economic activities to be coordinated at common points in time. ANSWER: a 163. A collateral shock is: a. one shock causing another shock. b. a requirement to pledge an asset to secure a loan. c. a reduction in the value of collateral. d. an increase in the value of collateral. ANSWER: c 164. If a house is worth $600,000 and its owner owes $400,000 on the mortgage, how much equity does the owner have? a. $0 b. $200,000 c. $400,000 d. $600,000 ANSWER: b 165. If a house is worth $600,000, its owner owes $400,000 on the mortgage, and the value of the house falls to $300,000, how much equity will the owner have? a. $200,000 b. $0 c. $100,000 d. –$100,000 ANSWER: d 166. A collateral shock refers to a reduction in: a. the value of collateral so that borrowing becomes more difficult. b. collateral requirements so that borrowing becomes easier. c. interest rates so that it is less costly to borrow. d. the effect of a negative shock on the damage to businesses. ANSWER: a 167. For a given negative economic shock, a country with more collateral will: a. experience a smaller negative effect on its aggregate demand. b. experience a larger negative effect on its aggregate demand. c. take a longer time to see the effect on its aggregate demand. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 14 d. more easily confine the shock to the financial sector. ANSWER: b 168. Banks typically lend to firms that have: a. positive net worth. b. negative net worth. c. zero net worth. d. unstable net worth. ANSWER: a 169. We call a reduction in the value of assets that could be pledged to safeguard a loan: a. intertemporal substitution. b. collateral damage. c. irreversible investment. d. labor adjustment cost. ANSWER: b 170. Collateral shocks make borrowing: a. more difficult. b. less difficult. c. neither more nor less difficult. d. less expensive. ANSWER: a 171. When the value of a house is less than the amount owed on the house, the borrower: a. has negative equity in the house. b. is underwater. c. must pay any remaining loan balance when the house is sold. d. has negative equity, is underwater, and must pay any remaining loan balance when the house is sold. ANSWER: d 172. A thinly capitalized bank has: a. high capital value. b. low capital value. c. rising capital value. d. falling capital value. ANSWER: b 173. Why are banks usually more concerned about downside risk than upside gain? a. Banks generally are very risk averse and try to minimize any possible level of risk. b. Banks are highly regulated, and therefore they have to manage their risk very efficiently. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 14 c. If the firm does poorly, the bank could lose the entire value of its loan, but if the firm does incredibly well, the bank simply gets its loan back plus interest. d. If the firm does poorly, the bank could lose the entire value of its loan, but if the firm does incredibly well, the bank will also receive a higher return.
ANSWER: c 174. A house is said to be underwater if the market value of the house is: a. less than the book value of the house. b. the same as the remaining amount of the mortgage. c. less than the remaining amount of the mortgage. d. above the remaining amount of the mortgage. ANSWER: c 175. Which statement explains how real shocks and aggregate demand shocks can reinforce and amplify one another? a. During a boom, higher wealth and lower risk lead to lower consumer spending but higher business investment. b. During a boom, higher wealth and greater risk lead to higher consumer spending but lower business investment. c. During a recession, lower wealth and lower risk lead to lower consumer spending but higher business investment. d. During a recession, lower wealth and greater risk lead to lower consumer spending and less business investment.
ANSWER: d 176. Which is a collateral shock? a. John obtains a mortgage to buy a home for $350,000 with no money down. b. James sells his house for $200,000 and has $20,000 left over after paying off the mortgage. c. Jack sells his house for $650,000 but is short $50,000 to pay off his mortgage. d. Jeff buys a house for $150,000 in cash. ANSWER: c 177. An owner's equity is the: a. total value of the owner's assets. b. value of the asset minus the debt. c. value of a company's stock owned by its shareholders. d. total value of the owner's assets and debt. ANSWER: b 178. Which is generally true for firms? a. During a recession, asset values decrease and they have better cash flow. b. During a recession, asset values increase and they have worse cash flow. c. During an economic boom, asset values increase and they have better cash flow. d. During an economic boom, asset values decrease and they have worse cash flow. Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 14 ANSWER: c 179. Collateral shocks make borrowing _____ and lending _____. a. easier; easier b. easier; more difficult c. more difficult; easier d. more difficult; more difficult ANSWER: d 180. When a collateral shock occurs during a recession, the recession is: a. amplified as it leads to fewer loans and more firm failures. b. amplified as it triggers reduced unemployment and less time bunching. c. lessened as it leads to more loans and fewer firm failures. d. lessened as it triggers more unemployment and more time bunching. ANSWER: a 181. From a lender's perspective, collateral typically _____ the risk of making a loan; a collateral shock makes loans _____. a. increases; more safe b. increases; less safe c. decreases; more safe d. decreases; less safe ANSWER: d 182. If a collateral shock reduces the value of collateral by 20%, which has negative equity after the collateral shock? a. A bank makes $100 million in mortgage loans on homes worth $115 million with the homes as collateral. b. A business with a net worth of $100,000 gets a $70,000 loan using the net worth as collateral. c. A couple buys a home valued at $370,000 with a $300,000 mortgage and the home as collateral. d. A firm gets a $10 million loan to build a factory valued at $13 million with the factory as collateral. ANSWER: a 183. Other things being equal, which would make a lender view a borrower as low risk? a. low equity in the collateral on a loan b. a collateral shock c. a borrower who is underwater on a loan d. escalation of the market value of collateral ANSWER: d 184. Which is NOT a factor that helps to amplify economic shocks? a. collateral shocks Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 14 b. labor adjustment costs c. consumption smoothing d. intertemporal substitution ANSWER: c 185. Which is NOT a transmission mechanism? a. reductions in the money supply b. intertemporal substitution c. uncertainty d. sticky wages and prices ANSWER: a 186. A medium-sized negative shock: a. always produces a medium-sized economic downturn. b. will not have a great impact on gross domestic product. c. can cause a large economic downturn. d. will always cause a large economic downturn. ANSWER: c 187. Which is NOT a factor that amplifies economic shocks? a. labor adjustment costs b. technology adjustment costs c. intertemporal substitution in labor supply d. irreversible investment and uncertainty ANSWER: b 188. A medium-sized economic shock may lead to a _____. This is called _____. a. proportionate increase in economic production and employment; par growth b. disproportionately small reduction in economic production and employment; an economic boom c. proportionate decrease in economic production and employment; parity d. disproportionately large change in economic production and employment; amplification ANSWER: d 189. When adapted to the real business cycle theory, the Solow model shows that output is dependent on _____ as well as capital, and _____ represents _____. a. technology; F; amplification b. money supply; K; human capital and physical capital c. inflation; Y; the nominal value of output d. labor; A; any factor that influences productivity ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 14 190. Which is NOT one of the three types of decision makers that, when adding shocks to the Solow model and adapting it to be a model of the real business cycle theory, allows a better understanding of how three types of individuals make decisions? a. workers b. policy makers c. investors d. savers ANSWER: b 191. The larger a given sector's contribution to a country's gross domestic product (GDP) is, the larger the impact of a shock to that sector on GDP is. a. True b. False ANSWER: a 192. Because of transmission mechanisms, a real shock takes a shorter time to affect real gross domestic product growth. a. True b. False ANSWER: b 193. Firms are willing to supply greater numbers of goods when prices rise. This decision is very similar to the intertemporal substitution decision by a working individual to supply labor. a. True b. False ANSWER: a 194. If you work an extra hour when your boss offers to pay you double, you are time bunching. a. True b. False ANSWER: b 195. Because of intertemporal substitution, a real shock has more of an effect on real gross domestic product growth but less of an effect on inflation. a. True b. False ANSWER: a 196. Economists disagree on the importance of intertemporal substitution in generating real effects from fiscal policy. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 14 ANSWER: a 197. When the economy is in recession, we tend to see fewer people entering college. a. True b. False ANSWER: b 198. When the economy is in recession, we tend to see more people entering college. a. True b. False ANSWER: a 199. Intertemporal substitution can magnify the effects of a negative shock, thus leading to a recession. a. True b. False ANSWER: a 200. Intertemporal substitution means that a person or a business is LEAST likely to work hard when working hard brings the greatest return. a. True b. False ANSWER: b 201. People tend to work harder and for longer hours during an economic boom than during a recession. a. True b. False ANSWER: a 202. Intertemporal substitution explains why real gross domestic product growth correlates positively with the employment‒population ratio. a. True b. False ANSWER: a 203. Intertemporal substitution refers only to the substitution between work and leisure. a. True b. False ANSWER: b 204. Uncertainty might keep resources in less productive uses. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 14 ANSWER: a 205. If your university decides to build five new dormitories in anticipation of higher enrollment next year, this is an example of an irreversible investment. a. True b. False ANSWER: a 206. Many investments involve sunk costs. a. True b. False ANSWER: a 207. Because of uncertainty, it takes less time for an entrepreneur to make an investment decision that involves more sunk costs. a. True b. False ANSWER: b 208. Uncertainty usually slows investment and keeps resources in less productive uses. a. True b. False ANSWER: a 209. Negative shocks also increase certainty, which is bad for business investment. a. True b. False ANSWER: b 210. Uncertainty can cause investors to wait for strong and certain signals that will give them assurance of a profitable outcome. a. True b. False ANSWER: a 211. Marriage is a kind of irreversible investment. a. True b. False ANSWER: a 212. The construction of a home is an irreversible investment. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 14 b. False ANSWER: a 213. A positive real shock will increase real gross domestic product growth more if there are more irreversible investments. a. True b. False ANSWER: a 214. Higher labor adjustment costs increase the effect of a real shock on real gross domestic product growth. a. True b. False ANSWER: a 215. Labor adjustment costs always lead to rational choices. a. True b. False ANSWER: b 216. While people are making necessary but costly labor adjustments, output and employment will be higher than normal. a. True b. False ANSWER: b 217. During a recession, higher labor adjustment costs lead to higher search-related unemployment. a. True b. False ANSWER: a 218. A negative shock to the economy, by remixing opportunities, induces more people to quit their jobs and thus causes more search-related employment. a. True b. False ANSWER: b 219. The high cost of reversing job decisions can lead to unemployment, just as the costs of reversing investment can cause investors to invest more. a. True b. False ANSWER: b 220. Time bunching explains why more investment occurs during booms than during recessions. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 14 a. True b. False ANSWER: a 221. Most people prefer parties at which each guest arrives and leaves without overlapping with the other guests. a. True b. False ANSWER: b 222. Time bunching causes shocks to spread through the economy. a. True b. False ANSWER: a 223. Seasonally adjusted data would reduce the visibility of time bunching in economic activity. a. True b. False ANSWER: a 224. Time bunching prevents shocks from spreading through time and through the economy. a. True b. False ANSWER: b 225. A collateral shock can either increase or decrease the value of collateral; it depends on the circumstances. a. True b. False ANSWER: b 226. Collateral shocks make borrowing and lending more difficult and help to exacerbate economic fluctuations. a. True b. False ANSWER: a 227. Individuals who are underwater in their home are more likely to take good care of their home. a. True b. False ANSWER: b 228. In recessions, as the prices of assets fall, the owner's equity in these assets falls as well. Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 14 a. True b. False ANSWER: a 229. People who are evicted from their home during a foreclosure sometimes trash the place first. a. True b. False ANSWER: a 230. Terry, an artisan mandolin maker, expected to make and sell 100 mandolins per year, and built a factory that minimizes cost for that number of instruments. The market took a downturn, however, and only 50 musicians now want one of Terry's mandolins this year. That number of sales is just barely profitable at the current price, but what is Terry's best option? a. Terry should make the 50 mandolins even though the factory could produce 100. b. Terry should make 100 mandolins since the factory is built for that number. c. Terry should shut the factory down. d. Terry should make 100 mandolins and drop the price until they all sell. ANSWER: a 231. Which is the MOST likely outcome of the switch to work-from-home during the COVID-19 pandemic? a. Investments in office building dropped due to uncertainty regarding the post-pandemic nature of work. b. Some businesses could afford to hire many more workers since they did not have to provide offices and equipment. c. Businesses upgraded office space and the cafeteria to lure workers back to the office.
d. To provide even more flexibility to workers, businesses switched to asynchronous work, letting workers choose to work whenever they wanted.
ANSWER: a 232. The main factor causing businesses to delay investments in times of uncertainty is: a. the fear of incurring sunk costs with no payoff. b. the need to conduct an inventory. c. increased costs of capital. d. a perceived need to focus attention on current customers. ANSWER: a 233. The rule is to ignore sunk costs when making decisions. Why then are irreversible investments such an issue? a. The issue is whether to undertake irreversible investments in uncertain times—in other words, deciding whether to incur the sunk costs before they are sunk. b. Irreversible investments always carry sunk costs, so they are irrelevant in decision making.
c. Irreversible investments have no connection with sunk costs, so they are relevant in decision making. d. It is possible to ignore sunk costs, but not irreversible investments. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 14 234. What is one way the basic Solow growth model differs from the real business cycle model? a. The index of ideas, A, increases smoothly over time in the Solow model, but in the real business cycle model
it represents both negative and positive shocks. b. The index of ideas, A, increases smoothly over time in the real business cycle model, but in the Solow model it represents both negative and positive shocks. c. The Solow model is based on nominal, or current-year, values, whereas the real business cycle model is based on inflation-adjusted values. d. The Solow model uses technology and knowledge to explain growth, whereas the real business cycle model expresses growth as dependent on labor and capital only.
ANSWER: a 235. In both the Solow growth model and the real business cycle model, investment (I) is a function of output (Y), I = γY. How do the two models differ regarding investment? a. In the Solow model, γ is a constant, whereas in the real business cycle model, γ fluctuates. b. In the real business cycle model, γ is a constant, whereas in the Solow model, γ fluctuates. c. In the Solow model, γ is a constant less than one, whereas in the real business cycle model, γ is a constant greater than one. d. In the Solow model, γ is a constant greater than zero but less than one, whereas in the real business cycle model, γ is a constant less than one, but it can be zero.
ANSWER: a 236. Which statement is true? a. In the Solow model, L represents the population and is fixed or growing slowly, but in the real business cycle model, L represents the labor force and is volatile as workers move into and out of the labor force. b. In both models, investment is a constant proportion of output.
c. In neither model does technology play an important role. d. The Solow model focuses on short-run output, whereas the real business cycle model focuses on long-term output.
ANSWER: a 237. Economists generate the real business cycle model from the Solow growth by adding: a. shocks and a more sophisticated explanation of decision making. b. an index of ideas. c. investment. d. a banking sector that funnels funds from savers to investors. ANSWER: a 238. A couple takes out a $500,000 mortgage on a home valued at $600,000. By the time they pay off half of the mortgage, home prices have risen by 20%. What is the couple's equity in their home? a. $470,000 b. $620,000 c. $120,000 d. $720,000 ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 14 239. A couple takes out a $600,000 mortgage on a home valued at $700,000. After the couple brings the mortgage balance down to $580,000, a negative shock causes collateral damage and house prices fall by 20%. Which best describes the couple's situation? a. They are underwater. b. They are experiencing intertemporal substitution. c. They have avoided an irreversible investment. d. They are incurring labor adjustment costs. ANSWER: a 240. Explain the difference between intertemporal substitution and time bunching. Are there any similarities between the two? ANSWER: Intertemporal substitution is the allocation of consumption, work, and leisure across time to maximize well-being. Time bunching is the tendency for economic activities to be coordinated at common points in time. Intertemporal substitution is affected by shocks, as a result of which people decide how best to allocate their time to different ends most beneficially. Time bunching takes advantage of synergies created by people doing related activities simultaneously. Both may result in people making similar choices at various points in time, in an effort to maximize their well-being.
241. What is intertemporal substitution? How does intertemporal substitution affect the impact of a negative real shock on an economy? ANSWER: Intertemporal substitution is the allocation of consumption, work, and leisure across time to maximize well-being. When there is a negative shock, the returns to work and investing fall, and often people work less and invest less. The ripple effects of this process help turn an initial shock into a broader recession.
242. "Fiscal policy can have a permanent effect on real growth because of intertemporal substitution." Explain this statement with the aid of an AD–AS diagram. ANSWER: Expansionary fiscal policy will shift the aggregate demand curve to the right, from AD1 to AD2. People will take advantage of the growing economy by delaying retirement, moving back into the labor force, and increasing consumption as a result of rising incomes—that is, choosing labor and current consumption over leisure and future consumption. Investors will increase investment, too. These responses result in a larger labor force and more capital, and will shift the long-run aggregate supply (LRAS) curve from LRAS1 to LRAS2.
243. Using the concept of intertemporal substitution, explain why accountants tend to work nearly 80-hour workweeks during tax season, but then take multiweek vacations during the summer. ANSWER: It would be almost impossible to extend the season and smooth out hours for accountants across the year. Companies must wait until the tax year is over to issue W2s and other forms, and then everything is due around April 15. The return to working on taxes for those few months is very high, whereas there is less demand for accounting services at other times of the year. These months, when the return to accounting work is lower, is the best time for accountants to take their vacations.
244. Explain how intertemporal substitution transmits and amplifies real shocks and aggregate demand shocks. ANSWER: When there is a negative shock to the economy, whether real or via a leftward shift in the aggregate demand curve, the return to work and investing fall, and often people work less and invest less, which makes things go just a little worse. The ripple effects of this process help turn an initial shock into a broader recession. Of course, on the upside, intertemporal substitution can feed an economic boom and make it more intense. If things are going well, many people will be inclined to work harder, which will in turn increase output and make things go even better.
245. Figure: AD–AS Graph Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 14
Using the AD–AS graph shown, suppose the economy is initially at point A when a reliable forecast is released that indicates a recession is forthcoming. a. Illustrate the effect on the economy as consumers react to this forecast. b. If uncertainty subsequently emerges over the length and severity of the shock shown in part a, how will the economy be affected? Comment on the role of intertemporal substitution and time bunching in this scenario. ANSWER: Such a report would produce uncertainty in consumers about their job and income security, after which they would reduce consumption spending to prepare for a possible loss of income. This would shift the aggregate demand curve to the left. If uncertainty grows, consumers will reduce purchases even more and businesses will postpone investments until prospects improve. The opportunity cost of leisure has fallen so workers will shift from labor to leisure. The changes in investment and labor/leisure reflect intertemporal substitution. The decisions would happen more or less simultaneously, so there is also an element of time bunching.
246. Explain why negative shocks reduce investment in physical capital. ANSWER: Negative shocks slow the economy down, and as sales fall the return to investment falls. Business will delay new investments until the outlook improves.
247. How does the nature of irreversible investments affect the impact of a negative shock on the economy? ANSWER: A negative shock creates not only a slowdown in the economy but also greater uncertainty. Since irreversible investments have high value only under a specific set of circumstances, if investors become less confident that those circumstances will prevail, they will postpone the investments. This can turn the negative shock into a much bigger problem.
248. Why does the irreversible nature of some investments cause them to be delayed or not undertaken at all? ANSWER: Since irreversible investments have high value only under a specific set of circumstances, if investors become less confident that those circumstances will prevail, they will postpone the investments. Businesses will not risk funding the investment unless they have an acceptable level of confidence that the investment will be profitable.
249. What are labor adjustment costs? Give an example of how they will make a negative shock worse. ANSWER: Labor adjustment costs are the costs of shifting workers from declining sectors of the economy to the growing sectors. As the economy transitions from fossil fuels to renewable resources, for example, coal miners may resist moving from coal-mining regions to other places that have factories producing windmills and solar panels, or other output for which Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 14 demand is growing. This can lead to misallocated labor and lower output and higher unemployment.
250. In July 2009—one month after the official end of the 2007–2009 recession—the unemployment rate in Detroit topped 17%. This was the highest rate of unemployment of all 49 U.S. urban areas with over 1 million residents and was also the largest one-year increase in unemployment of any major urban center. Using the transmission mechanisms found in this chapter, explain why Detroit—also known as the Motor City and the center of the automobile industry—experienced such a severe and long-lasting decrease in employment during this time period. ANSWER: There were problems on both sides of the Detroit area labor market. Unionized auto workers may have been resistant to taking lower-paying jobs in other sectors or moving to areas with more growth. Automobile plants are irreversible investments, so until there was a clearly positive future for the automobile industry, investment would be low, with a depressant impact on output and employment.
251. Describe the labor adjustment costs that may amplify unemployment during a recession. ANSWER: Labor adjustment costs are the costs of shifting workers from declining sectors of the economy to the growing sectors. These would include workers waiting for a job with the same income as the previous job when such a job does not exist. Other decisions may be difficult to reverse, such as moving to another, more prosperous part of the economy, waiting for the original job to be available again, or to take another, perhaps less desirable job. The difficulty of deciding on the best course of action will amplify unemployment.
252. What is the seasonal business cycle, and which transmission mechanisms are responsible for it? ANSWER: The "seasonal business cycle" is one form of economic time bunching. For example, in many countries, the fourth quarter of the year—October through December—brings more economic activity than any other time. Production is higher, sales are higher, and gross domestic product (GDP) grows faster, relative to the other parts of the year. After the holidays are over, however, the party ends and GDP in the next period is typically lower. GDP also tends to grow slowly during the summer months when many people take their vacations.
253. Explain what time bunching is and how rush-hour traffic is the result of the time bunching of workers. ANSWER: Time bunching is the tendency for economic activities to be coordinated at common points in time. There are advantages to being at work when everyone else is at work—say, between 9 AM and 5 PM. Time bunching means that workers are going to work just before nine and leaving just after five. Putting all of those workers on the roads at the same time leads to rush-hour traffic jams.
254. Explain what a collateral shock is and provide an example of how it fills the role of a transmission mechanism. ANSWER: A collateral shock is a reduction in the value of collateral. Collateral shocks make borrowing and lending more difficult, which has a negative impact on investment and output.
255. During the recession that began in 2007, the economy experienced what many called a credit crunch. Investment funds dried up, and banks were not lending. Many people who wanted to (and could afford to!) buy homes during the housing market collapse could not obtain a loan to do so. In addition, before the recession, many homeowners had outstanding lines of credit (basically a loan) on the equity in their homes. This meant that they could borrow money against the equity they already had accumulated in their homes for things like home improvements and other projects. During the recession, however, many of these lines of credit were eliminated, leaving people with no available credit. Explain what transmission mechanism this is and how it contributed to the severity and duration of the recession. ANSWER: The collateral shock generated by the problems in the real estate market made banks much less willing to make loans. This had negative impacts on other markets, leading to higher unemployment and lower output. Many financial institutions came under severe stress, and there were few opportunities to pursue profitable projects. The reduction in asset value led to a record number of banks failing in the years 2009–2010. Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 14 256. Explain why collateral damage reduces bank lending. ANSWER: Bank lending depends on the financial viability of potential borrowers. If the collateral applicant's pledge for loans loses value, banks will be less willing to make loans.
257. How is the collateral damage caused by a negative shock to net worth similar to the effects of irreversible investments as a transmission mechanism? ANSWER: A negative shock that reduces collateral value results in fewer loans to fund investment projects, with a drop in investment overall. Growing uncertainty about the economy's prospects means businesses will hesitate to pursue investment projects that involve irreversible elements, again reducing investment overall.
258. What adjustments are made to the Solow model, Y = A × F(K), so that it becomes a model of the real business cycle theory? ANSWER: Labor as well as capital is included in the model, with the recognition that business cycles involve workers moving into and out of the labor force as conditions change, whereas in the long-run Solow model, the population is assumed to change slowly and steadily. Investment in the Solow model is a simple function of output, but in the real business cycle model, saving and investment fluctuate as conditions change. Finally, the index of ideas in the Solow model becomes a productivity shock variable in the real business cycle model.
Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 15 1. Which institution usually has the most influence over aggregate demand in the United States? a. the Senate Banking Committee b. the U.S. Department of the Treasury c. the Comptroller of the Currency d. the Federal Reserve ANSWER: d 2. The Federal Reserve can influence the economy by shifting the: a. aggregate demand curve. b. short-run aggregate supply curve. c. long-run aggregate supply curve. d. aggregate demand, short-run aggregate supply, and long-run aggregate supply curves. ANSWER: a 3. Which institution has more influence over aggregate demand in the United States than any other institution? a. consumers b. the Federal Reserve System c. the private banking system d. the Money Supply Board ANSWER: b 4. The Federal Reserve is the: a. federal government's bank. b. U.S. central bank. c. banker's bank in the United States. d. federal government's bank, central bank, and banker's bank in the United States. ANSWER: d 5. The Federal Reserve: a. clears all checks. b. conducts monetary policy. c. prints all currency. d. makes loans to individuals. ANSWER: b 6. The Federal Reserve acquires its exclusive powers through its ability to: a. tax individuals and firms. b. stop economic recessions. c. issue money. d. make loans. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 15 7. In the United States, bank notes are issued by: a. the leading financial institutions of the United States. b. investment houses and banks. c. the Federal Reserve. d. private banks and the Federal Reserve. ANSWER: c 8. In the United States, bank notes are issued by the: a. Federal Deposit Insurance Corporation, also known as the FDIC. b. U.S. Congress. c. Federal Reserve. d. Securities and Exchange Commission, also known as the SEC. ANSWER: c 9. The world's largest bank customer is the: a. Federal Reserve. b. U.S. Treasury. c. Federal Deposit Insurance Corporation. d. Securities and Exchange Commission. ANSWER: b 10. Which is NOT a function of the Federal Reserve? a. serving as the lender of last resort b. regulating the U.S. financial system c. regulating the U.S. money supply d. providing loans to small businesses ANSWER: d 11. The Federal Reserve: a. clears all checks. b. regulates the banking system. c. prints all currency. d. makes loans to individuals. ANSWER: b 12. When the U.S. Treasury borrows, the borrowing is managed by the: a. Treasury itself. b. Senate Banking Committee. c. Comptroller of the Currency. d. Federal Reserve. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 15 ANSWER: d 13. Which is NOT a duty performed by the Federal Reserve System? a. create money b. manage the borrowing and issuing of bonds for the U.S. Treasury c. manage the federal budget deficit d. act as a bank for large commercial banks ANSWER: c 14. Which is NOT a duty performed by the Federal Reserve System? a. manage the nation's payment system b. set the prime interest rate c. regulate the U.S. banking system d. maintain the bank account for the U.S. Treasury ANSWER: b 15. Which is a duty performed by the Federal Reserve System? a. regulate the U.S. money supply b. set the interest rate for the International Monetary Fund c. provide loans to small businesses d. manage the federal budget deficit ANSWER: a 16. Which is NOT true of the Federal Reserve System? a. It maintains the bank account of the U.S. Treasury. b. It carries out monetary policies passed by the federal government. c. It regulates the nation's money supply. d. It serves as the banker's bank. ANSWER: b 17. The Federal Reserve acquires its unique powers through its ability to: a. set the consumer price index. b. intervene in the bond markets. c. issue money. d. oversee banking operations. ANSWER: c 18. The paper currency circulated in the United States is called a(n): a. American note. b. bank note. c. United States note. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 15 d. Federal Reserve Note. ANSWER: d 19. The government's bank and the bankers' bank in the United States are called the: a. central bank. b. Federal Reserve System. c. Bank of America. d. Bank of the United States. ANSWER: b 20. As the government's bank, the Fed does NOT: a. manage the borrowing of the U.S. Treasury. b. maintain the bank account of the U.S. Treasury. c. conduct the issuing, transferring, and redeeming of U.S. Treasury bonds. d. approve the transactions involving corporate bonds and stocks. ANSWER: d 21. What is a Federal Reserve Note? a. a loan agreement between the Federal Reserve and borrowers b. a quarterly update on monetary policy that the Fed gives to Congress c. a U.S. dollar bill d. a loan that finances the U.S. national debt ANSWER: c 22. Which is NOT a role of the Federal Reserve System? a. banker's bank b. issuer of currency c. fiscal policymaker d. government's bank ANSWER: c 23. Which is NOT a service that the Fed provides to the U.S. government as the government's bank? a. The U.S. Treasury has an account at the Fed. b. Tax payments to the Internal Revenue Service are deposited into a government account at the Fed. c. The Fed holds the deposits that some banks are required to make at the Fed. d. The Fed manages borrowing by the U.S. Department of the Treasury. ANSWER: c 24. Which is NOT true of the Fed as a bank for bankers? a. The Fed serves as a safe, convenient place for banks to place their deposits. b. The Fed lends money to banks. Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 15 c. The Fed holds the reserve deposits of private banks. d. The Fed lends money to private individuals. ANSWER: d 25. Which is NOT a function of the Federal Reserve System? a. conducting fiscal policy b. regulating the U.S. money supply c. providing banking services to the U.S. government d. serving as a banker for banks ANSWER: a 26. Which asset would you classify as being most liquid? a. currency b. small-time deposits c. a home d. gold bullion ANSWER: a 27. Which asset would you classify as being most liquid? a. small-time deposits b. small-cut diamonds c. an oil painting by Claude Monet d. money market mutual funds ANSWER: a 28. Why are debit cards not listed as money? a. They perform the same function as checks, and checks are counted as money. b. Debit cards cannot be used for payments at most stores. c. Debit cards draw on checkable deposits, which are already counted as money. d. Not all banks issue debit cards. ANSWER: c 29. Table: Statistics for a Small Economy Item Value (millions) Cash held by public $7 Small-time deposits $30 Money market mutual funds $18 Liquid deposits $50 Currency and total reserves at the Fed $12 Large-time deposits $20 The table shows some statistics for a small economy. Based on only the information provided, M1 in this country amounts to: Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 15 a. $69 million. b. $57 million. c. $43 million. d. $50 million. ANSWER: b 30. Table: Statistics for a Small Economy Item Value (millions) Cash held by public $7 Small-time deposits $30 Money market mutual funds $18 Liquid deposits $50 Currency and total reserves at the Fed $12 Large-time deposits $20 The table shows some statistics for a small economy. Based on only the information provided, M2 in this country amounts to: a. $105 million. b. $121 million. c. $137 million. d. $129 million. ANSWER: a 31. Table: Statistics for a Small Economy Item Value (millions) Cash held by public $7 Small-time deposits $30 Money market mutual funds $18 Liquid deposits $50 Currency and total reserves at the Fed $12 Large-time deposits $20 The table shows some statistics for a small economy. Based on only the information provided, the monetary base amounts to: a. $149 million. b. $71 million. c. $19 million. d. $12 million. ANSWER: d 32. Rank the major means of payment from the largest to the smallest amount of dollars. a. liquid deposits, money market mutual funds, small-time deposits b. money market mutual funds, small-time deposits, liquid deposits c. money market mutual funds, liquid deposits, small-time deposits d. small-time deposits, money market mutual funds, liquid deposits Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 15 ANSWER: a 33. Which is the LEAST liquid asset? a. currencies b. liquid deposits c. small-time deposits d. money in savings accounts ANSWER: c 34. The monetary base refers to: a. currency. b. currency plus total reserves held at the Fed. c. currency plus liquid deposits. d. currency, liquid deposits, money market mutual funds, and small-time deposits. ANSWER: b 35. M1 refers to: a. currency. b. currency plus total reserves held at the Fed. c. currency plus liquid deposits. d. currency, checkable deposits, liquid deposits, money market mutual funds, and small-time deposits. ANSWER: c 36. M2 refers to: a. currency. b. currency plus total reserves held at the Fed. c. currency plus liquid deposits. d. currency, liquid deposits, money market mutual funds, and small-time deposits. ANSWER: d 37. Which definition of money has the greatest value in the money supply? a. the monetary base b. M1 c. the monetary base plus M1 d. M2 ANSWER: d 38. Which definition of money has the lowest value in the money supply? a. the monetary base b. M1 c. M2 Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 15 d. M3 ANSWER: a 39. What part of the money supply does the Fed have direct control over? a. the monetary base b. M1 c. the monetary base plus M1 d. M2 ANSWER: a 40. Money is best defined as: a. anything that has a high nominal value. b. anything that is a widely accepted means of payment. c. only the amount we spend in a given period. d. the total amount of fixed assets we own. ANSWER: b 41. Which is NOT included in the U.S. money supplies M1 and M2? a. currency in circulation b. liquid deposits c. bond mutual funds d. savings deposits ANSWER: c 42. Which is MOST liquid? a. a mortgage loan b. checkable deposits in a bank c. a new truck d. a diamond ANSWER: b 43. Which is NOT a means of payment in the United States? a. Federal Reserve notes b. liquid deposits c. total reserves held at the Fed d. stock options ANSWER: d 44. The narrowest measure of the U.S. money supply is: a. the monetary base. b. M1. Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 15 c. M2. d. the borrowing limit of the federal government. ANSWER: a 45. The main difference between M1 and M2 is that: a. M1 includes some less liquid assets in addition to the assets in M2. b. M1 includes more liquid assets in addition to the assets in M2. c. M2 includes some less liquid assets in addition to the assets in M1. d. M2 includes more liquid assets in addition to the assets in M1. ANSWER: c 46. Table: Money Supply Components Type of Money Amount (billions) Reserves held by banks at the Fed $120 Currency $800 Liquid deposits $1,025 Small-time deposits $957 Money market mutual funds $486 According to the data in the table, the total amount of M1 equals: a. $920 billion. b. $1,825 billion. c. $3,268 billion. d. $3,388 billion. ANSWER: b 47. Table: Money Supply Components Type of Money Amount (billions) Reserves held by banks at the Fed $120 Currency $800 Liquid deposits $1,025 Small-time deposits $957 Money market mutual funds $486 According to the data in the table, the total amount of M2 equals: a. $920 billion. b. $1,825 billion. c. $3,268 billion. d. $3,388 billion. ANSWER: c 48. Table: Money Supply Components Type of Money Amount (billions) Reserves held by banks at the Fed $120 Currency $800 Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 15 Liquid deposits $1,025 Small-time deposits $957 Money market mutual funds $486 According to the data in the table, the total amount of the monetary base equals: a. $920 billion. b. $1,825 billion. c. $3,268 billion. d. $3,388 billion. ANSWER: a 49. The Fed has the most control over: a. the monetary base. b. M1. c. M2. d. money market mutual funds. ANSWER: a 50. To be considered money, an asset must be: a. backed by gold or other precious metals. b. widely accepted as a means of payment. c. currency. d. issued by the Federal Reserve or a major commercial bank in the United States. ANSWER: b 51. Which serves as a means of payment in the United States? a. currency b. liquid deposits c. money market mutual funds d. currency, liquid deposits, and money market mutual funds ANSWER: d 52. In the United States, the largest category of means of payment is: a. currency. b. money market mutual funds. c. liquid deposits. d. small-time deposits. ANSWER: c 53. Which is the MOST liquid asset? a. currency b. small-time deposits Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 15 c. reserves held at the Fed d. money market mutual funds ANSWER: a 54. Which is included in M2? a. currency b. money market mutual funds deposits c. small-time deposits d. currency, money market mutual funds and small-time deposits ANSWER: d 55. The monetary base is equal to currency plus: a. liquid deposits. b. total reserves held at the Federal Reserve. c. money market mutual funds. d. small-time deposits. ANSWER: b 56. M1 is equal to currency plus: a. liquid deposits. b. total reserves held at the Federal Reserve. c. money market mutual funds. d. small-time deposits. ANSWER: a 57. The Federal Reserve has direct control over: a. the monetary base. b. M1. c. M2. d. Each of these answers is correct. ANSWER: a 58. The largest means of payment in the United States is: a. US dollar. b. money market mutual funds. c. stock option. d. bitcoin. ANSWER: a 59. Which asset is the LEAST liquid? a. cash Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 15 b. small-time deposits c. liquid deposits d. money in savings accounts ANSWER: b 60. The monetary base consists of currency: a. plus liquid deposits. b. plus liquid and small-time deposits. c. plus total reserves held at the Fed. d. with the inclusion of coins. ANSWER: c 61. A liquid asset is: a. an asset that can be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments. b. an asset that cannot be used for payments, or can quickly and without loss of value be converted to an asset that can be used for payments. c. a very narrowly accepted means of payment.
d. gold and only gold. ANSWER: a 62. Reserves held at the Fed are: a. kept in a secure vault in Washington, DC. b. electronic claims that can be converted into currency if the bank wishes. c. mostly held by banks in Panama, Ecuador, and El Salvador. d. kept exclusively in the form of gold bars. ANSWER: b 63. The single largest category of means of payment in the United States is: a. traveler's checks. b. index funds. c. mutual funds. d. US dollars. ANSWER: d 64. Which asset is the LEAST liquid? a. a bar of gold b. a $100 bill c. a pile of dog fur d. a current-edition used textbook ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 15 65. Which asset is the LEAST liquid? a. real estate b. cash c. stocks d. bonds ANSWER: a 66. Which definition of the money supply includes the most assets? a. currency b. M1 c. M2 d. the monetary base ANSWER: c 67. Over which of these definitions of the money supply does the Fed have the most control? a. M1 b. M2 c. the monetary base d. savings deposits ANSWER: c 68. Which is NOT a means of payment? a. currency b. small-time deposits c. money market mutual funds d. a credit card account limit ANSWER: d 69. Which concept describes the ease with which an asset can be quickly converted into money without losing its value? a. solvency b. opportunity cost c. liquidity d. moral hazard ANSWER: c 70. Which asset is MOST liquid? a. a money market mutual fund b. cash c. a house d. antique furniture Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 15 ANSWER: b 71. Which money supply component is the smallest? a. monetary base b. M1 c. M2 d. currency ANSWER: d 72. Money is: a. anything that is widely accepted as a means of payment. b. currency only. c. another name for income. d. stocks and bonds. ANSWER: a 73. Withdrawing which asset will incur a penalty before a certain period has passed? a. checkable deposits b. savings deposits c. small-time deposits d. traveler's checks ANSWER: c 74. An asset that without loss of value can be quickly converted into money: a. is a liquid asset. b. is nonexistent. c. is housing. d. must rise in value over time. ANSWER: a 75. The Federal Reserve has direct control over: a. the monetary base. b. M1. c. M2. d. checkable deposits. ANSWER: a 76. Which statement is correct? a. M1 is always larger than M2. b. M2 is always larger than M1. c. M1 is larger than M2 during recessions, while M2 is larger than M1 during expansions. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 15 d. M2 is larger than M1 during recessions, while M1 is larger than M2 during expansions. ANSWER: b 77. Which does NOT serve as means of payment in the United States? a. paper bills and coins b. stocks c. deposits in a checking or debit account d. savings deposits ANSWER: b 78. Which is the LEAST liquid means of payment? a. small-time deposits b. money market mutual funds c. reserves held at the Fed d. currency ANSWER: d 79. A money market mutual fund invests in: a. short-term debt and government securities. b. long-term debt and government securities. c. stocks. d. real estate. ANSWER: a 80. Liquid deposits are part of: a. the monetary base. b. M1. c. M2. d. M1 and M2. ANSWER: d 81. Table: The Definition of the Money Supply Type of Money Currency and reserves held by banks at the Fed Currency held by the public Liquid deposits Money market mutual funds Small-time deposits What is the M1 money supply? a. $150 million b. $250 million c. $350 million Copyright Macmillan Learning. Powered by Cognero.
Amount (millions) $50 $100 $400 $25 $10
Page 15
Name:
Class:
Date:
Chapter 15 d. $500 million ANSWER: d 82. Table: The Definition of the Money Supply Type of Money Currency and reserves held by banks at the Fed Currency held by the public Liquid deposits Money market mutual funds Small-time deposits What is the M2 money supply? a. $400 million b. $550 million c. $535 million d. $585 million ANSWER: c
Amount (millions) $50 $100 $400 $25 $10
83. Which is NOT an asset that serves as a means of payment? a. liquid deposits b. liquid deposits, money market mutual funds, and small-time deposits c. credit cards d. currency ANSWER: c 84. Currency is: a. checking account balances. b. cash (dollar bills and coins). c. something that pertains to the present time period. d. an established borrower-lender relationship. ANSWER: b 85. The main asset-based means of payment does NOT include: a. checkable liquid deposits. b. total reserves held by banks at the Fed. c. dollar bills and coins. d. real estate equity. ANSWER: d 86. In the United States, the largest asset that is used as a means of payment is: a. credit cards. b. liquid deposits. c. small-time deposits. Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 15 d. money market mutual funds. ANSWER: b 87. Total reserves held by banks at the Fed are: a. a means of payment used regularly by the average person. b. used by banks trading with each other and for their dealings with the Fed. c. unable to be converted into currency when desired by banks. d. composed of collected currency and credit balances. ANSWER: b 88. Which is the most liquid asset a person can hold? a. cash b. shares of stock c. real estate d. savings account ANSWER: a 89. What measure of the money supply is equal to currency plus liquid deposits? a. M1 b. M2 c. the monetary base d. the payment base ANSWER: a 90. The Fed has direct control over _____, but _____ have the most influence on aggregate demand. a. M1; currency and the monetary base b. M2; M1 and currency c. the monetary base; M1 and M2 d. currency; M1 and the monetary base ANSWER: c 91. Holding reserves is costly for banks because: a. it forces banks to pay for ATMs. b. it leads to the risk of bank robberies. c. it leads to fewer profits. d. the Fed charges banks interest on reserves. ANSWER: c 92. Commercial banks make profits primarily through: a. the interest differential between deposits and loans. b. interest paid on deposits. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 15 c. interest paid on reserves. d. bailouts by the Fed. ANSWER: a 93. The Federal Reserve's major tool(s) to control the money supply is (are): a. open market operations. b. changing the reserve ratio. c. paying interest on reserves. d. open market operations and paying interest on reserves. ANSWER: d 94. To increase the money supply in the economy, the Fed would: a. increase the prime interest rate. b. carry out open market sales and/or increase the interest rate paid on reserves. c. carry out open market sales. d. carry out open market purchases and/or decrease the interest rate paid on reserves. ANSWER: d 95. To reduce the money supply in the economy, the Fed would: a. decrease the prime interest rate. b. carry out open market sales and/or increase the interest rate paid on reserves. c. carry out open market purchases. d. carry out open market purchases and/or increase the interest rate paid on reserves. ANSWER: b 96. To reduce the money supply in the economy, the Fed would: a. engage in actions to increase interest rates. b. carry out open market purchases. c. carry out open market sales and lower the interest rate. d. carry out open market purchases and increase the interest rate paid on reserves. ANSWER: a 97. To increase the money supply in the economy, the Fed would: a. engage in actions to decrease interest rates. b. carry out open market sales. c. carry out open market purchases and increase the interest rate. d. carry out open market sales and decrease the interest rate paid on reserves. ANSWER: a 98. If the Fed wants short-term interest rates to rise, it could: a. carry out open market purchases. Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 15 b. carry out open market sales. c. buy T-bills. d. issue a directive for banks to raise interest rates. ANSWER: b 99. If the Fed wants short-term interest rates to fall, it could: a. carry out open market purchases. b. carry out open market sales. c. sell T-bills. d. issue a directive for banks to decrease interest rates. ANSWER: a 100. If the Fed wants to temporarily remove liquid reserves from the banking system, it could: a. engage in a repo transaction with a financial institution. b. engage in a reverse repo transaction with a financial institution. c. purchase Treasury bills. d. print more money. ANSWER: b 101. If the Fed wants to temporarily add liquid reserves to the banking system, it could: a. engage in a repo transaction with a financial institution. b. engage in a reverse repo transaction with a financial institution. c. sell Treasury bills. d. cease printing money. ANSWER: a 102. A repo is similar to an open market _____ because it _____ liquid reserves to the banking system. a. purchase; adds b. sale; removes c. purchase; removes d. sale; adds ANSWER: a 103. A reverse repo is similar to an open market _____ because it _____ liquid reserves to the banking system. a. purchase; adds b. sale; removes c. purchase; removes d. sale; adds ANSWER: b 104. The major tools that the Fed uses to control the money supply include: Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 15 a. controlling the amount of government spending. b. serving as the lender of last resort by making loans to troubled banks. c. open market operations. d. paying interest on reserves held at the Fed and open market operations. ANSWER: d 105. If the Fed wants to increase the money supply, it will typically: a. raise interest rates. b. increase the money multiplier. c. extend new loans. d. purchase additional government bonds. ANSWER: d 106. Open market operations refer to: a. the buying and selling of stocks in the stock market. b. the buying and selling of primarily government bonds by the Fed. c. decisions by the Fed to raise or lower interest rates. d. decisions by the Fed to increase or decrease the money multiplier. ANSWER: b 107. Which are the two major tools the Fed uses to control the money supply? a. making loans to troubled banks and open market operations b. printing paper money and paying interest on reserves held by banks at the Fed c. open market operations and altering the reserve ratio d. paying interest on reserves held by banks at the Fed and open market operations ANSWER: d 108. Open market operations occur when: a. the Fed buys and sells government bonds. b. the Fed loans money to banks and other financial institutions when no one else will. c. banks become insolvent. d. banks are illiquid. ANSWER: a 109. If the Fed wants to increase the money supply, it will _____ Treasury securities. a. sell b. buy c. hold d. issue ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 15 110. When the Fed buys short-term Treasury securities, short-term interest rates: a. fall. b. rise. c. could rise or fall. d. stay the same. ANSWER: a 111. If instead of buying short-term Treasury securities the Fed decides to purchase the country's supply of paper clips, the money supply: a. will not change. b. might expand or contract. c. will expand. d. will contract. ANSWER: c 112. The Federal Funds rate is the: a. interest rate banks pay when they borrow directly from the Fed. b. overnight lending rate on loans from one major bank to another. c. interest rate on short-term Treasury securities. d. ratio of reserves to deposits. ANSWER: b 113. Quantitative easing is the: a. Fed purchase of longer-term government bonds. b. government purchase of private equities. c. interest rate on short-term Treasury securities. d. lowering of the ratio of reserves to deposits. ANSWER: a 114. Cameron owes $100,000, but he owns Mexican Amati paintings that he could sell immediately for $80,000 or within a few months for $120,000. If these are all the assets and liabilities that Cameron has, Cameron is: a. insolvent and illiquid. b. insolvent but liquid. c. solvent and liquid. d. solvent but illiquid. ANSWER: d 115. Paying a higher interest rate on reserves held at the Fed will tend to: a. increase the money supply. b. decrease the money supply. Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 15 c. not change the money supply. d. have an ambiguous effect on the money supply. ANSWER: b 116. Which is NOT used by the Fed to control the money supply? a. open market operations b. quantitative easing c. paying an interest rate on bank reserves held at the Fed d. prime interest rate lending ANSWER: d 117. When the Fed lowers the Federal Funds target: a. both interest rates and the money supply increase. b. interest rates decrease but the money supply increases. c. interest rates increase but the money supply decreases. d. both interest rates and the money supply decrease. ANSWER: b 118. Which tool(s) can the Federal Reserve use to control the money supply? a. open market operations b. forcing banks to make more/fewer loans c. paying interest on reserves d. open market operations and paying interest on reserves ANSWER: d 119. Which tool(s) can the Federal Reserve use to control the money supply? a. open market operations b. quantitative easing c. repurchase agreements d. open market operations, quantitative easing, and repurchase agreements ANSWER: d 120. Open market operations involve the Federal Reserve: a. buying and selling government bonds. b. lending reserves directly to banks. c. providing reserves to banks through auction. d. competing with investment banks for Treasury securities. ANSWER: a 121. The Fed can increase the money supply by: a. selling government bonds. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 15 b. decreasing the interest paid on reserves held by banks. c. increasing the interest paid on reserves held by banks. d. selling corporate bonds in lagging sectors of the economy. ANSWER: b 122. Quantitative easing involves the Federal Reserve: a. buying long-term government bonds. b. lending reserves directly to banks. c. providing reserves to banks through an auction. d. competing with investment banks for Treasury securities. ANSWER: a 123. The goal of an open market sale by the Federal Reserve is to: a. reduce bank reserves and increase the money supply. b. increase bank reserves and reduce the money supply. c. reduce bank reserves and reduce the money supply. d. increase bank reserves and increase the money supply. ANSWER: c 124. The Federal Reserve typically affects the real rate of interest in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: a 125. Paying interest on reserves allows the Fed to: a. set the prime rate. b. influence the level of reserves in the economy. c. choose the level of reserves and influence other interest rates in the economy. d. set the prime rate and choose the level of reserves in the economy. ANSWER: c 126. The interest rate that commercial banks charge each other on overnight loans is called the: a. prime rate. b. Federal Funds rate. c. nominal rate. d. Treasury bill rate. ANSWER: b 127. The Federal Funds rate is said to be at zero _____ bound when it is near or at zero. Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 15 a. lower b. upper c. positive d. negative ANSWER: a 128. The Federal Reserve controls the Federal Funds rate through its control of: a. the monetary base. b. M1. c. M2. d. currency in circulation. ANSWER: a 129. _____ refers to the Federal Reserve's purchase of longer-term government bonds or other securities. a. An open market purchase b. An open market sale c. Quantitative easing d. Quantitative tightening ANSWER: c 130. _____ refers to the Federal Reserve's purchase of securities with the agreement that the seller will repurchase the securities from the Fed at a later date, usually the next day. a. A repo b. A reverse repo c. Quantitative easing d. The Federal Funds rate ANSWER: a 131. _____ refers to the Federal Reserve's sale of securities with the agreement that it will repurchase the securities from the buyer at a later date, usually the next day. a. A repo b. A reverse repo c. Quantitative easing d. The Federal Funds rate ANSWER: b 132. An insolvent bank is one that: a. borrows in the market for Federal Funds. b. borrows from the Fed. c. has more liabilities than assets. d. sells in the open market. Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 15 ANSWER: c 133. An illiquid bank is one that: a. borrows in the market for Federal Funds. b. borrows from the Fed. c. has more short-term liabilities than short-term assets. d. has more long-term assets than liabilities. ANSWER: c 134. If the Fed wants to increase the money supply, it will: a. require less reserves to be held. b. sell government bonds. c. require more reserves to be held. d. decrease the rate of interest paid on reserves. ANSWER: d 135. If the Fed wants to increase the money supply, it will: a. buy government bonds. b. sell government bonds. c. require more reserves to be held. d. increase the rate of interest paid on reserves. ANSWER: a 136. If the Fed wants to decrease the money supply, it will: a. buy government bonds. b. lend money to banks. c. decrease the reserve ratio. d. increase the rate of interest paid on reserves. ANSWER: d 137. Which is an example of quantitative easing by the Federal Reserve? a. The Fed purchases $100,000 worth of short-term government bonds. b. The Fed purchases $50,000 worth of long-term government bonds. c. The Fed raises the money multiplier. d. The Fed lowers interest rates. ANSWER: b 138. When the Fed conducts open market purchases, it: a. buys government securities. b. sells government securities. c. buys shares of corporations. Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 15 d. sells shares of corporations. ANSWER: a 139. When the Fed engages in a repo transaction, it: a. buys securities that it will sell back at a later date. b. sells securities that it will buy back at a later date. c. buys securities that it will hold onto indefinitely. d. sells securities that it has no intention of buying back. ANSWER: a 140. When the Fed sells government bonds in the open market: a. the monetary base increases and interest rates decrease. b. the monetary base decreases and interest rates increase. c. both the monetary base and interest rates decrease. d. both the monetary base and interest rates increase. ANSWER: b 141. If the Fed wishes to lower interest rates, it should: a. conduct an open market purchase. b. conduct an open market sale. c. increase the rate of interest paid on reserves. d. do nothing. ANSWER: a 142. Quantitative easing occurs when the: a. Fed sells long-term securities. b. Fed buys long-term securities. c. government lowers income and other taxes. d. government raises income and other taxes. ANSWER: b 143. The key difference between quantitative easing and a typical open market purchase is that quantitative easing: a. does not involve the purchase of government securities, while a typical open market purchase involves the purchase of government securities. b. involves short-term government securities, while a typical open market purchase involves long-term government securities. c. involves longer-term government securities and other securities, while a typical open market purchase involves short-term government securities. d. involves state and local government securities, while a typical open market purchase involves federal government securities.
ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 15 144. The interest rate that the Fed has the most control over is the: a. Federal Funds rate. b. mortgage loan rate. c. long-term government bond rate. d. prime rate. ANSWER: a 145. Open market operations occur when the Fed: a. lends money to troubled banks. b. changes the rate of interest paid on reserves. c. buys and sells government bonds. d. changes the reserve ratio. ANSWER: c 146. When the Fed buys bonds, it increases the demand for bonds, which pushes: a. up the price of bonds, thus raising the interest rate. b. up the price of bonds, thus lowering the interest rate. c. down the price of bonds, thus raising the interest rate. d. down the price of bonds, thus lowering the interest rate. ANSWER: b 147. When the Federal Reserve makes an open market purchase, the reserves of the banking system will: a. increase. b. decrease. c. remain constant. d. become difficult to predict. ANSWER: a 148. When the Federal Reserve makes an open market purchase, the amount of money available for the banking system to loan: a. increases. b. decreases. c. remains constant. d. becomes difficult to predict. ANSWER: a 149. An open market operation occurs when: a. banks loan funds to one another. b. banks increase the reserve ratio. c. the Fed buys or sells government bonds. d. the Fed enforces regulations on the banking industry. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 15 ANSWER: c 150. When the Fed buys U.S. government bonds to affect the money supply, it is: a. making a loan to a troubled bank. b. discount borrowing from the U.S. government. c. conducting an open market sale. d. conducting an open market purchase. ANSWER: d 151. When the Fed wants to increase interest rates, it: a. instructs banks across the nation that they must raise their rates. b. sells bonds in the open market. c. buys bonds in the open market. d. adjusts the fractional reserve ratio. ANSWER: b 152. The relationship between bond prices and interest rates is: a. neither positive nor negative. b. positive. c. negative. d. sometimes positive and sometimes negative. ANSWER: c 153. When the Federal Reserve buys bonds, the demand curve for bonds: a. does not shift. b. shifts to the right. c. shifts to the left. d. sometimes shifts to the right and sometimes shifts to the left. ANSWER: b 154. When the Federal Reserve buys bonds, the supply curve for bonds: a. does not shift. b. shifts to the right. c. shifts to the left. d. sometimes shifts to the right and sometimes shifts to the left. ANSWER: a 155. What is the overnight lending rate from one bank to another? a. the Federal Funds rate b. the Federal Reserve rate c. the money market rate Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 15 d. the money multiplier rate ANSWER: a 156. If the Fed buys government bonds, which will likely NOT increase? a. the monetary base b. M1 c. the Federal Funds rate d. bank reserves ANSWER: c 157. The Federal Funds rate is the interest rate charged on a(n): a. low-interest loan from the Federal Reserve to a bank. b. loan from the Federal Reserve to a bank. c. long-term loan from one bank to another. d. overnight loan from one bank to another. ANSWER: d 158. When the Federal Reserve conducts monetary policy, the Federal Reserve usually focuses on: a. M1. b. M2. c. the Federal Funds rate. d. the prime interest rate. ANSWER: c 159. When the Federal Funds rate is near the zero lower bound, the Fed: a. engages in open market operations. b. engages in quantitative easing. c. adjusts the Federal Funds rate. d. raises the required reserve rate. ANSWER: b 160. When the Fed buys and sells government bonds, it is engaging in: a. the manipulation of reserves. b. reserve market operations. c. open market operations. d. the manipulation of open reserves. ANSWER: c 161. Which is consistent with the events that occur if the Fed uses open market operations to decrease the money supply? a. The Fed buys bonds. Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 15 b. The funds received from bond sales are deposited in bank accounts. c. Bank reserves decrease. d. The change in reserves times the multiplier is equal to the change in the money supply. ANSWER: c 162. If the Fed wants to increase interest rates, it should _____ bonds so that bond prices _____. a. buy; rise b. buy; fall c. sell; rise d. sell; fall ANSWER: d 163. If the Fed wants to decrease interest rates, it should _____ bonds so that bond prices _____. a. buy; rise b. buy; fall c. sell; rise d. sell; fall ANSWER: a 164. If the Fed buys bonds, bond prices will _____ and interest rates will _____. a. rise; rise b. rise; fall c. fall; rise d. fall; fall ANSWER: b 165. If the Fed sells bonds, bond prices will _____ and interest rates will _____. a. rise; rise b. rise; fall c. fall; rise d. fall; fall ANSWER: c 166. Which is NOT neutral in the long run? a. aggregate demand b. output c. real interest rates d. money ANSWER: b 167. Quantitative easing refers to: Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 15 a. any action by the Fed to increase the money supply. b. any action by the Fed to increase the money supply at a faster rate. c. the Fed buying long-term government bonds and securities. d. the Fed buying short-term government bonds and securities. ANSWER: c 168. When the Federal Funds rate is at or near the zero lower bound, actions by the Fed to increase the money supply involve: a. buying short-term bonds. b. selling short-term bonds. c. quantitative easing. d. quantitative constraining. ANSWER: c 169. When the Fed pays interest on bank reserves, it effectively: a. sets a ceiling on the Federal Funds rate. b. sets a floor on the Federal Funds rate. c. discourages banks from holding reserves. d. discourages banks from holding deposits. ANSWER: b 170. If the Fed pursues expansionary monetary policy, interest rates will _____ and loans will _____. a. rise; rise b. rise; fall c. fall; rise d. fall; fall ANSWER: c 171. A bank will become illiquid if: a. it has short-term liabilities that exceed its short-term assets. b. it is insolvent. c. it is solvent and liquid. d. there is a financial crisis like the one of 2008. ANSWER: a 172. If the value of a bank's liabilities is greater than its assets, there is a: a. solvency crisis. b. liquidity crisis. c. liability crisis. d. profitability crisis. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 15 173. When a bank has more liabilities than assets, the bank is considered: a. insolvent. b. illiquid. c. solvent. d. liquid. ANSWER: a 174. When a bank has assets that are difficult to sell, the bank is considered: a. insolvent. b. illiquid. c. solvent. d. liquid. ANSWER: b 175. If the total liabilities of bank A are less than its total assets, but its short-term liabilities are greater than its short-term assets, bank A is: a. both liquid and solvent. b. both illiquid and insolvent. c. liquid, but insolvent. d. illiquid, but solvent. ANSWER: d 176. Banks hold many illiquid assets, including: a. short-term loans. b. loans that are payable over long periods of time. c. real estate and office equipment. d. overnight loans to other banks. ANSWER: b 177. The main assets held by banks are: a. deposits. b. bond holdings. c. loans. d. reserves. ANSWER: c 178. When businesses are insured, they tend to take on too much risk. This is called: a. hazard insurance. b. insurance risk. c. overinsurance. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 15 d. moral hazard. ANSWER: d 179. A bank run can cause systemic risk because: a. there is significant risk that the bank will fail. b. there is a likelihood that interest rates will rise. c. panics decrease the ability of banks to extend new loans. d. there is a likelihood that the run will extend to other banks and cause a bank panic. ANSWER: d 180. The Fed lends to banks: a. on a regular basis as a way to increase the money supply. b. only in dire emergencies to avoid insolvency. c. as an attempt to limit the number of new loans extended by banks. d. as a way of earning profits, which in turn are passed on to the federal government. ANSWER: b 181. A bank is considered illiquid but solvent if: a. it has short-term liabilities greater than its short-term assets, but overall assets greater than liabilities. b. it has liabilities greater than the value of its assets. c. the value of its outstanding loans is greater than the value of its deposits. d. it has lost its FDIC coverage. ANSWER: a 182. The extra lending by the Fed during the 2007–2009 recession was done primarily to: a. lower interest rates. b. restore confidence in the banking system. c. restore liquidity to credit markets. d. increase the money supply. ANSWER: c 183. Moral hazard occurs when: a. businesses don't assume enough risk because of a poor business environment. b. businesses are insolvent. c. banks are illiquid. d. businesses take on too much risk because they are insured. ANSWER: d 184. When a bank has short-term liabilities that are greater than its short-term assets, but overall its assets are greater than its liabilities, the bank is considered: a. liquid and solvent. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 15 b. illiquid but solvent. c. liquid but insolvent. d. illiquid and insolvent. ANSWER: b 185. The Fed is the "lender of last resort" because it: a. lends to financial intermediaries during financial crises. b. buys and sells government bonds to increase or decrease the money supply. c. raises or lowers the interest rate paid on reserves to encourage lending. d. buys long-term government bonds. ANSWER: a 186. Systemic risk is present when: a. a bank or other financial institution acts recklessly, hoping that the Fed and regulators will later bail it out. b. the U.S. government defaults on Treasury securities. c. the failure of one financial institution will bring down other institutions as well. d. the Fed increases the money supply when it should decrease it. ANSWER: c 187. The risk that the failure of a few large financial institutions can affect the entire financial system is called: a. systemic risk. b. moral hazard. c. credit risk. d. solvency risk. ANSWER: a 188. When banks take on too much risk with the hope that the Fed will eventually bail them out, a condition of _____ exists. a. systemic risk b. liquidity risk c. a solvency crisis d. moral hazard ANSWER: d 189. The risk that the failure of one financial institution can lead to the failure of other financial institutions is called: a. systemic risk. b. moral hazard. c. liquidity risk. d. solvency risk. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 15 190. Moral hazard occurs when banks and other financial institutions: a. hesitate to lend because of concern over excessive risk. b. take on too much risk, believing that the Fed and regulators will bail them out. c. fail to ensure that their assets exceed their liabilities. d. fail and then bring down other institutions in the system. ANSWER: b 191. Systemic risk is: a. the risk of contagion that occurs when a failing financial institution owes significant sums of money to other financial institutions. b. a risk that is limited to a specific sector only.
c. the risk of a bubble in the entire asset pricing system. d. the risk that, when a financial institution fails, its depositors will lose not only their money but also their trust in the monetary system.
ANSWER: a 192. The financial crisis of 2008 illustrates that: a. systemic risk is no longer a serious concern for the U.S. economy. b. the Fed does not concern itself with the actions of investment banks. c. the Fed has the power to control the U.S. president's responses to a financial and economic crisis and
supervise fiscal policy. d. the Fed has the power to step outside its normal functions and lend to investment banks when it perceives the risk of financial contagion.
ANSWER: d 193. What was the rationale for the Fed lending billions of dollars to the insurance company American International Group (AIG)? a. The Fed knew it would receive a high return on the loan. b. The Fed was following a long-time precedent in rescuing top insurance companies. c. If AIG collapsed, the insurance industry would as well. d. AIG's bankruptcy would pose a systemic risk to financial institutions. ANSWER: d 194. Moral hazard occurs when: a. the failure of one financial institution can bring down other institutions as well. b. financial institutions take on too much risk because they are insured. c. financial institutions become insolvent because they have issued too many loans. d. there are more short-term liabilities than short-term assets. ANSWER: b 195. The Fed loaned money to American International Group (AIG) because it was concerned about: a. moral hazard on the part of this insurance company. Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 15 b. systemic risk, because AIG's bankruptcy would put other financial institutions at risk of insolvency. c. the liquidity of this insurance company. d. the market demands being placed on this insurance company. ANSWER: b 196. Which is an example of moral hazard? a. Only people with very high risk of default on loans borrow from banks. b. Drivers have less incentive to avoid accidents after getting auto insurance. c. When one bank fails, other banks become more cautious in lending. d. People living along the Gulf Coast are more likely to buy flood insurance. ANSWER: b 197. The possibility that the failure of one bank affects the performance of other banks is called: a. moral hazard. b. a liquidity crisis. c. systemic risk. d. credit risk. ANSWER: c 198. An institution is considered insolvent when: a. deposits exceed reserves. b. reserves exceed deposits. c. the value of assets exceeds the value of liabilities. d. the value of liabilities exceeds the value of assets. ANSWER: d 199. An insolvent bank has: a. liabilities of greater value than assets. b. assets of greater value than liabilities. c. a higher interest rate on loans than on deposits. d. a higher interest rate on reserves. ANSWER: a 200. An illiquid bank has _____ and _____. a. assets that exceed liabilities; may or may not be solvent b. liabilities that exceed assets; an inability to make debt payments c. many assets that can be converted into cash quickly without any loss of value; is solvent d. many assets that cannot be converted into cash quickly without any loss of value; may or may not be solvent ANSWER: d 201. From a bank's perspective, a loan is a(n): Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 15 a. illiquid asset. b. liquid asset. c. illiquid liability. d. liquid liability. ANSWER: a 202. A systemic risk in the financial industry is a risk in which: a. there are no connections between the successes or failures of financial institutions. b. the failure of one financial institution will trigger the failure of others. c. the Fed changes the reserves of one financial institution and will do so for all. d. the Fed raises the reserves of one financial institution but will not do so for all. ANSWER: b 203. If banks make risky loans based on the assumption that the government will help them from failing if the loans are not repaid, the banks have a problem with: a. illiquidity. b. short-term neutrality. c. reverse insolvency. d. moral hazard. ANSWER: d 204. Figure: Aggregate Demand and Monetary Policy
Suppose a given economy starts at point A in the figure. If the Fed engages in an expansionary monetary policy, what would you expect to happen in the short run? Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 15 a. Aggregate supply will decrease because of higher wages. b. Aggregate demand will decrease because of higher interest rates. c. Aggregate demand will increase because of lower interest rates. d. The economy will move along the aggregate demand curve to a lower inflation rate. ANSWER: c 205. The Fed has the greatest influence over _____ interest rates. Investment spending depends on _____ interest rates. a. short-term; short-term b. short-term; long-term c. long-term; short-term d. long-term; long-term ANSWER: b 206. As a result of an increase in the growth rate of the money supply: a. real gross domestic product growth increases only in the short run, and the inflation rate increases in both the short run and the long run. b. real gross domestic product growth increases only in the long run, and the inflation rate increases only in the short run. c. real gross domestic product growth increases in both the short run and the long run, and the inflation rate increases only in the short run. d. both the real growth and the inflation rate increase only in the short run.
ANSWER: a 207. If the Fed buys bonds in the open market, which of these will likely NOT happen? a. Investment spending will increase. b. Short-term interest rates will increase. c. Aggregate demand will increase. d. The monetary base will increase. ANSWER: b 208. Suppose the economy is growing faster than its long-run potential growth rate. To bring the real growth rate back to the long-run potential rate, the Fed should: a. lower the reserve ratio. b. buy government bonds in the open market. c. engage in actions to raise interest rates. d. lower the interest rate on reserves. ANSWER: c 209. When the Fed conducts open market operations to decrease the monetary base, real gross domestic product growth: a. decreases only in the short run. b. increases only in the short run. Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 15 c. decreases in both the short run and the long run. d. increases in both the short run and the long run. ANSWER: a 210. An increase in money growth will cause the economy's aggregate demand curve to: a. not shift. b. shift inward. c. shift outward. d. shift outward during expansions and inward during contractions. ANSWER: c 211. An increase in money growth will cause inflation to increase in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: c 212. An increase in money growth will cause output growth to increase in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: a 213. Which would typically NOT occur following an increase in the money supply? a. a decrease in interest rates b. an increase in investment c. an increase in aggregate demand d. a decrease in the overall price level ANSWER: d 214. If the Fed was concerned about the economy falling into recession, it might try to stimulate the economy by: a. raising the interest rate paid on reserves. b. purchasing additional government securities. c. conducting open market sales. d. raising the interest rates that consumers and businesses pay when taking out loans. ANSWER: b 215. The intended effect of an expansionary monetary policy is that aggregate demand: Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 15 a. increases, raising real gross domestic product growth only in the long run. b. increases, raising inflation and real gross domestic product growth in both the short run and the long run. c. increases, raising real gross domestic product growth in the short run, but only inflation rises in the long run. d. remains unchanged while the economy's long-run potential growth rate increases. ANSWER: c 216. An increase in the money supply will cause the economy's aggregate demand curve to: a. become steeper. b. become flatter. c. shift leftward. d. shift rightward. ANSWER: d 217. Through its use of monetary policy, the Fed is attempting to shift the: a. aggregate demand curve. b. short-run aggregate supply curve. c. long-run aggregate supply curve. d. short-run aggregate demand curve. ANSWER: a 218. If the Fed wants to increase aggregate demand, it will _____ bonds or _____ the interest paid on reserves. a. buy; raise b. buy; lower c. sell; raise d. sell; lower ANSWER: b 219. If the Fed wants to decrease aggregate demand, it will bonds _____ or _____ the interest paid on reserves. a. buy; raise b. buy; lower c. sell; raise d. sell; lower ANSWER: c 220. Reasons why conducting monetary policy is complex do NOT include: a. the Fed's inability to influence interest rates. b. time lags between policy actions and responses. c. uncertainty about how much investment spending will be affected by interest rate changes. d. the difficulty in predicting exactly how much aggregate demand will respond to open market operations. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 15 221. To design effective monetary policy, the Fed does NOT need to monitor or estimate: a. how much change in interest rates is needed to achieve the desired change in borrowing. b. the extent to which changes in reserves will lead to changes in lending. c. how changes in interest rates impact the aggregate supply. d. how quickly changes in the monetary base will lead to changes in the money supply. ANSWER: c 222. The members of the Board of Governors of the Federal Reserve have 14-year nonrenewable terms. Thus: a. they are somewhat insulated from the political process. b. the chairman of the Board of Governors also has a 14-year term. c. every president of a Federal Reserve regional bank will serve at least 14 years on the Board of Governors. d. the New York Federal Reserve Bank president can serve only 14 years on the Federal Open Market Committee.
ANSWER: a 223. The members of the Board of Governors of the Federal Reserve are appointed for: a. 4 years. b. 7 years. c. 14 years. d. life. ANSWER: c 224. How many regional banks constitute the Federal Reserve System? a. 4 b. 10 c. 12 d. 16 ANSWER: c 225. How many years does the chairperson of the Federal Reserve serve? a. 4 b. 8 c. 14 d. until they retire ANSWER: a 226. Each of the seven-member Board of Governors is appointed by the _____ and confirmed by the _____. a. president; Senate b. president; House of Representatives c. Senate; president d. House of Representatives; president Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 15 ANSWER: a 227. Who has some oversight over the Federal Reserve? a. the Senate only b. the House of Representatives only c. both houses of Congress d. voters ANSWER: c 228. What is the purpose of the Fed's structure? a. to give the U.S. president as many tools as possible to regulate the economy b. to make sure all states are given equal access to monetary policy decisions c. to keep the private sector out of the monetary policymaking arena d. to keep the power of the Fed dispersed ANSWER: d 229. Which is true of the structure of the Fed? a. All seven members of the Board of Governors are appointed by the U.S. president. b. The U.S. president serves as a member of the Board of Governors. c. The U.S. secretary of the Treasury chairs the Federal Open Market Committee. d. The U.S. president is a member of the Federal Open Market Committee. ANSWER: a 230. Which is correct regarding the governance and structure of the Federal Reserve System? a. The 12 regional Federal Reserve banks each have seven directors. b. The seven regional Federal Reserve banks each have 12 directors. c. The 14 members of the Board of Governors are appointed for seven-year terms. d. The seven members of the Board of Governors are appointed for 14-year terms. ANSWER: d 231. Which is incorrect regarding the U.S. Federal Reserve System? a. When the Fed sets an interest rate target, its target is achieved through a desired Federal Funds rate. b. The Fed lends to banks and major financial institutions on a regular basis. c. The Fed has little influence over long-run real rates of interest. d. When the Fed sells bonds, the money supply increases. ANSWER: d 232. In a bank's T-account, loans are _____ and deposits are _____. a. liabilities; liabilities b. liabilities; assets c. assets; liabilities Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 15 d. assets; assets ANSWER: c 233. In a bank's T-account, assets: a. are greater than liabilities. b. are equal to liabilities. c. are less than liabilities. d. have no relationship with liabilities. ANSWER: b 234. Large private banks keep their own accounts at the Federal Reserve. a. True b. False ANSWER: a 235. The Federal Reserve acquires its unique power through its ability to issue money. a. True b. False ANSWER: a 236. The U.S. Treasury borrows by issuing currency. a. True b. False ANSWER: b 237. The Federal Reserve has the power to create money. a. True b. False ANSWER: a 238. U.S. currency has the words "Federal Reserve Note" on it. a. True b. False ANSWER: a 239. The Federal Reserve lends money to other banks. a. True b. False ANSWER: a 240. The money supply in the United States is measured as the amount of currency, including coins, in circulation. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 15 a. True b. False ANSWER: b 241. The Fed has direct control over the M1 supply of money, but only indirect control over M2. a. True b. False ANSWER: b 242. The Fed has direct control over the monetary base, but only indirect control over M1 and M2 money supply. a. True b. False ANSWER: a 243. If you use a credit card for a payment, you have made a money transaction. a. True b. False ANSWER: b 244. Credit cards are included only in the M2 definition of the money supply. a. True b. False ANSWER: b 245. The more liquid an asset, the more it can serve as money. a. True b. False ANSWER: a 246. The most liquid asset is cash. a. True b. False ANSWER: a 247. M2 is included in M1. a. True b. False ANSWER: b 248. Money market mutual funds are more liquid than liquid deposits. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 15 b. False ANSWER: b 249. M2 includes M1 and is thus larger than M1. a. True b. False ANSWER: a 250. When a person withdraws money from a savings account, M2 decreases but M1 increases. a. True b. False ANSWER: b 251. The monetary base is larger than M2. a. True b. False ANSWER: b 252. If banks did not hold reserves, ATMs would not function. a. True b. False ANSWER: a 253. Quantitative easing occurs when the Fed sells longer-term government bonds or other securities. a. True b. False ANSWER: b 254. Quantitative easing occurs when the Fed purchases long-term government bonds. a. True b. False ANSWER: a 255. Open market purchases stimulate the economy through both an increased money supply and lower interest rates. a. True b. False ANSWER: a 256. A reverse repo is similar to an open market purchase because it adds liquid reserves to the banking system. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 15 ANSWER: b 257. A repo is similar to an open market purchase because it adds liquid reserves to the banking system. a. True b. False ANSWER: a 258. When the Federal Reserve makes an open market purchase, the Federal Reserve buys reserves from the banking system. a. True b. False ANSWER: b 259. When the Fed wants to change the money supply, it usually buys or sells money market mutual funds. a. True b. False ANSWER: b 260. The Fed usually focuses on the Federal Funds rate because it is a convenient signal of monetary policy. a. True b. False ANSWER: a 261. The Fed's quantitative easing is designed to encourage borrowing by banks. a. True b. False ANSWER: b 262. Most of the time, a majority of banks borrow from the Federal Reserve. a. True b. False ANSWER: b 263. The Fed will lower the interest rate paid on reserves if it wants to increase the money supply. a. True b. False ANSWER: a 264. An insolvent bank has greater liabilities than assets. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 15 265. The Fed is most likely to use quantitative easing when the Federal Funds rate is at or near the zero lower bound. a. True b. False ANSWER: a 266. The interest rate that the Fed charges to commercial banks when they borrow money from the Fed is called the Federal Funds rate. a. True b. False ANSWER: b 267. A liquid bank has short-term liabilities that are greater than its short-term assets but overall has assets that are greater than its liabilities. a. True b. False ANSWER: b 268. Other things held constant, if the Fed increases its payment of interest on bank reserves, the money supply will decrease. a. True b. False ANSWER: a 269. If you owe your banker $1 million and can't pay, you have a problem. If you owe your banker $1 billion and can't pay, your banker has a problem. a. True b. False ANSWER: a 270. A decrease in the money supply reduces aggregate demand and real gross domestic product growth in the short run. a. True b. False ANSWER: a 271. As the growth rate of the money supply increases, aggregate demand will increase along with interest rates in the short run. a. True b. False ANSWER: b 272. An increase in the growth rate of the money supply raises both real growth and inflation in the long run. Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 15 a. True b. False ANSWER: b 273. The Federal Reserve is one of the least independent agencies in the U.S. government. a. True b. False ANSWER: b 274. The Federal Reserve is controlled by the Bilderberger Group and the Trilateral Commission to avoid influence from the political system. a. True b. False ANSWER: b 275. The federal government has considerable control over policy actions of the Federal Reserve because the U.S. president appoints all Federal Reserve Bank presidents. a. True b. False ANSWER: b 276. The Federal Reserve is one of the most independent agencies in the U.S. government. a. True b. False ANSWER: a 277. During the financial crisis of 2008, the Federal Reserve worked closely with the U.S. Treasury. a. True b. False ANSWER: a 278. Describe the structure of the Federal Reserve System and its relationship to the federal government. ANSWER: The Federal Reserve has a seven-member Board of Governors who are all appointed by the president and confirmed by the Senate. Governors are appointed for 14-year terms and cannot be reappointed. This means that a single president will rarely appoint a majority of the board. The chairperson of the Federal Reserve is appointed by the president from among the members of the Board of Governors and confirmed by the Senate for a term of four years. Additionally, the Federal Reserve has to periodically report to overseers in both houses of Congress. The Federal Reserve is made up 12 banks, each headquartered in a different region of the country. This is to disperse the power of the Federal Reserve. Each regional bank is a nonprofit bank with nine directors. Six of these directors must be nonbankers. The directors of the regional banks appoint a regional bank president. Finally, the seven members of the Board of Governors, along with five rotating presidents of the regional Federal Reserve banks, make up the Federal Open Market Committee. The Federal Open Market Committee determines the stance of monetary policy by controlling open market policy. It is therefore the most important and influential part of the Federal Reserve System.
Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 15 279. What is the central bank in the United States, what is its primary function, and how does it carry out this function? ANSWER: The bank of the United States is the Federal Reserve. The Federal Reserve's primary function is to influence aggregate demand in the U.S. economy. It carries out this function using it's five "tools." These tools are raising or lowering the interest rate paid on reserves, open market operations, repurchase/reverse repurchase agreements (also known as repos and reverse repos), quantitative easing, and acting as a lender of last resort. Through these tools the Federal Reserve is able to influence aggregate demand increases when the economy is in a slump, and aggregate demand decreases when the economy is at the risk of inflation.
280. What three measures of the money supply are discussed in this chapter, and what does each measure include? ANSWER: The three measures of the money supply are the monetary base (MB), M1, and M2: 1. MB consists of currency and total reserves held at the Federal Reserve. 2. M1 consists of currency plus liquid deposits. 3. M2 consists of M1 plus money market mutual funds and small-time deposits.
281. How are credit cards related to the money supply? ANSWER: Credit cards are usually not included as an asset that serves as a means of payment in the United States. This is because a loan ultimately has to be paid by transferring money, typically one of the assets already listed in the money supply (currency, total reserves held by banks at the Federal Reserve, liquid deposits, money market mutual funds, and smalltime deposits). So while credit is important, it is not included in the money supply for fear of double-counting the same dollars twice.
282. Table: Money Supply Type of Money Amount (billions) Reserves held by banks at the Fed $100 Currency $650 Liquid deposits $825 Small-time deposits $550 Large-time deposits $670 Money market mutual funds $270 Using information in the table shown, calculate the amount of the monetary base, M1, and M2. ANSWER: The monetary base (MB) consists of currency and total reserves held at the Federal Reserve: Thus, the MB is $750 billion. M1 money supply consists of currency plus liquid deposits: Thus, the M1 money supply is $1,475 trillion. M2 money supply consists of M1 plus money market mutual funds and small-time deposits: Thus, the M2 money supply is $2,295 trillion.
283. We often think of the Fed as controlling the money supply. Explain how the Fed, in reality, controls only a small part of the money supply. ANSWER: The Fed only has direct control over the monetary base, which is smaller than M1 and M2. Through this control, however, the Fed tries to influence M1 and M2. This does not always prove to be easy since the Fed cannot always accurately predict the responses to their actions. The Fed must try to predict how much changes in reserves will actually affect bank lending, how quickly increases in reserves translate into new bank loans, whether or not businesses even want to borrow, how low short-term and long-term interest rates have to go to stimulate more investment borrowing, Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 15 what businesses will do with the money if they even do borrow, and how people and firms will just over all respond to the Fed's actions.
284. Why do banks hold reserves? ANSWER: Banks hold reserves primarily to be able to accommodate withdrawals from their depositors in case an unusually high amount of people want to withdraw at once. They are also required to hold reserves by law.
285. How do banks earn profits? ANSWER: Banks earn profit primarily by lending funds to customers that the customers will pay back at a later date with interest. Therefore, there is a cost to holding reserves at the Fed, the biggest of which being that the banks could be using these funds to earn interest by making loans. The Fed tries to offset this by paying interest on the reserves. Thus, banks are constantly comparing how much they could earn by lending funds to their customers with how much they could earn by holding their funds at the Federal Reserve.
286. Explain how an open market purchase of bonds by the Federal Reserve will increase the money supply. ANSWER: It is important to understand that bond prices and interest rates are inversely related; when bond prices go up, interest rates go down, and when bond prices go down, interest rates go up. When the Federal Reserve buys bonds, it increases the demand for bonds, which pushes up the price of bonds, thus lowering the interest rate. This decrease in the interest rate will increase the money supply.
287. Why is quantitative easing used? ANSWER: Quantitative easing can be very useful in two cases. First, sometimes financial conditions are especially bad or especially likely to create systemic risk in some particular markets and the Fed wants to support these markets directly rather than waiting for interventions in the Federal Funds market to work their way through the system. Similarly, sometimes influencing short-term interest rates does not always move longer-term interest rates by a comparable amount. However, the longer-term interest rates may be more important in influencing investment. Quantitative easing tries to push around the longer-term rates more directly. Second, sometimes short-term interest rates are at or near the zero lower bound, which means that the Federal Funds rate is close to zero. It is difficult to push interest rates much below zero, so to further stimulate the economy, the Fed can buy longer-term bonds that have interest rates that are still far from zero, lowering the long-term interest rates even when they cannot lower the short-term interest rates anymore.
288. Explain how the Federal Reserve controls the money supply. ANSWER: The Federal Reserve controls the money supply by using the five "tools" they have at hand. 1. The Federal Reserve can raise or lower the interest rate paid on reserves. If it wants to decrease the money supply, it can increase the interest rate paid on reserves to increase reserve demand and reduce bank lending. If it wants to increase the money supply, it can lower the rate paid on reserves to decrease reserve demand and expand bank lending. 2. The Federal Reserve can take part in open market operations, the buying and selling of short-term U.S. government bonds. The Federal Reserve buys bonds to lower interest rates and increase the money supply and it can sell bonds to raise interest rates and decrease the money supply. 3. The Federal Reserve can engage in repo/reverse repo transactions. A repo is a repurchasing agreement between the Federal Reserve and a financial institution where the Federal Reserve agrees to buy a security that the seller will buy back at a later date, temporarily increasing the money supply. A reverse repo is a reverse repurchasing agreement between the Federal Reserve and a financial institution where the Federal Reserve sells a security that it agrees to buy back at a later date, temporarily decreasing the money supply. 4. The Federal Reserve can take part in quantitative easing, which is the buying and selling of longer-term U.S. government bonds and other securities. Buying the bonds lowers the interest rates and increases the money supply, and selling the bonds increases interest rates and decreases the money supply. 5. The Federal Reserve also acts as a lender of last resort, lending to banks and other financial institutions in a crisis to maintain borrowing and lending.
289. What are the two tools the Fed can use to change the money supply in the economy? Briefly explain how they can affect the money supply. Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 15 ANSWER: 1. The Federal Reserve can raise or lower the interest rate paid on reserves. If it wants to decrease the money supply, it can increase the interest rate paid on reserves to increase reserve demand and reduce bank lending. If it wants to increase the money supply, it can lower the rate paid on reserves to decrease reserve demand and expand bank lending. 2. The Federal Reserve can take part in open market operations, the buying and selling of short-term U.S. government bonds. The Federal Reserve buys bonds to lower interest rates and increase the money supply and it can sell bonds to raise interest rates and decrease the money supply.
290. Explain why the existence of the Federal Deposit Insurance Corporation may reduce bank panics. ANSWER: The existence of the Federal Deposit Insurance Corporation, or FDIC, may reduce bank panics because people feel safer holding their money in banks during times of uncertainty. The FDIC promises to allow people to withdraw their money, up to a certain amount, whether or not the bank has the funds that would allow them to withdraw initially.
291. Why did the Federal Reserve begin to pay interest on reserves held by banks? ANSWER: The Federal Reserve began to pay interest on reserves held by banks to induce banks to hold more reserves than they otherwise would have in anticipation of greater default rates on home mortgages and other loans. By paying interest on reserves, the Federal Reserve hoped to induce banks to increase their reserve holdings and thereby reduce the chance of bank failures. Changing the interest rate paid on reserves encourages banks to hold more or less in reserves on their own, without forcing banks to do so by mandate.
292. How would the Fed conduct contractionary monetary policy by changing the interest rate paid on reserves? Explain how the Fed's action will lead to subsequent changes in the money supply. ANSWER: The Fed could conduct contractionary monetary policy by raising the interest rate paid on reserves. This would increase reserve demand and reduce bank lending, thus leading to a decrease in the money supply.
293. What is systemic risk, and how does the Fed deal with it? ANSWER: Systemic risk is the risk that the failure of one financial institution can bring down other institutions. If a financial institution is found out to be insolvent, that is one that has liabilities that are greater than its assets, then depositors will rush to withdraw their money, which could lead to the institution to fail. This is where direct deposit insurance and the Fed come in. The deposit insurance lets the depositors know they do not need to worry because even if the bank is insolvent, they will still be paid. When the insurance is not enough, or when the financial institution is not covered by deposit insurance, then the Fed can step in as the lender of last resort. The Fed provides the bank with enough cash to pay off any depositor who wants to be paid off, without requiring the bank to liquidate its assets too early.
294. If the Fed wishes to implement a policy to influence aggregate demand, what are some of the important variables that it monitors and predicts in order to fine-tune its actions? ANSWER: The Fed must try to predict how much changes in reserves will actually affect bank lending, how quickly increases in reserves translate into new bank loans, whether or not businesses even want to borrow, how low short-term and longterm interest rates have to go to stimulate more investment borrowing, what businesses will do with the money if they even do borrow, and how people and firms will just over all respond to the Fed's actions.
295. Suppose the Fed has increased the interest rate paid on reserves. With the aid of an AD–AS diagram, explain how this monetary policy action will affect real growth and inflation in the short run and the long run. ANSWER: Growth and inflation will both increase in the short run. In the long run, only inflation will increase. 296. If money is neutral in the long run, why would the Fed want to increase the money supply? Explain carefully. ANSWER: The Fed would want to increase the money supply to stimulate aggregate demand. Money is neutral in the long run, but it still has a short-run effect on the economy. Increasing the money supply, and thus increasing the aggregate demand, could still have real benefits in the present if an economy is in a slump. It could prevent the economy from getting even worse if it is in a recession or on the verge of going into one. It could bring the economy back on track to operating at its long-run potential growth if it is currently operating below it. Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 15 297. Figure: Fed Policy
If an economy is operating below its long-run potential growth rate as shown in the graph, what can the Fed do to bring the economy back toward its long-run growth rate? Explain. ANSWER: The Fed can use any number of its tools to help shift aggregate demand rightward. For example, the Fed could buy government bonds, increasing the demand for bonds, pushing up the price of bonds, and thus leading to a decrease in interest rates. This would increase the money supply and increase the quantity of goods and services demanded at any given price level, shifting the aggregate demand curve to the right until it is back at its long-run growth rate.
298. Use the AD‒AS model to illustrate how real gross domestic product and the inflation rate will change in the short run and in the long run if the Fed conducts an open market purchase.
Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 15 ANSWER: In the short run, the open market purchase will shift the aggregate demand curve rightward. This would increase the quantity of goods and services demanded at any given price level, thus causing movement along the short run aggregate supply, moving equilibrium from point A to point B. Here, real gross domestic product (GDP) and inflation have increased from Y1 to Y2 and from 3% to 5%, respectively. However, as there have been no increases in labor or capital, the long run aggregate supply curve has not shifted. Therefore, in the long run, real GDP will drop back down to Y1, except now the equilibrium will be at C, resulting in higher inflation with no change in real GDP.
299. In what ways is the Federal Reserve System independent of the political process in the United States? ANSWER: The Federal Reserve System is referred to as a quasi-private, quasi-public institution. The members of the Board of Governors are appointed by the president and confirmed by the Senate. Aside from that, however, members of the Federal Reserve do not have to directly report to any political party. They cannot be easily fired, they serve 14-year terms, and cannot be reappointed. This makes it difficult for any single party to be able to appoint a majority of the board. Aside from having to periodically report to overseers in both houses of Congress, members of the Federal Reserve do not have to do what a political party would want them to. The Federal Reserve System does not need a president's or a congressional member's approval to enact policy.
300. Explain how the Fed is structured and controlled. ANSWER: The Federal Reserve has a seven-member Board of Governors who are all appointed by the president and confirmed by the Senate. Governors are appointed for 14-year terms and cannot be reappointed. This means that a single president will rarely appoint a majority of the board. The chairperson of the Federal Reserve is appointed by the president from among the members of the Board of Governors and confirmed by the Senate for a term of four years. Additionally, the Federal Reserve has to periodically report to overseers in both houses of Congress. The Federal Reserve is made up of 12 banks, each headquartered in a different region of the country. This is to disperse the power of the Federal Reserve. Each regional bank is a nonprofit bank with nine directors. Six of these directors must be nonbankers. The directors of the regional banks appoint a regional bank president. Finally, the seven members of the Board of Governors, along with five rotating presidents of the regional Federal Reserve banks, make up the Federal Open Market Committee. The Federal Open Market Committee determines the stance of monetary policy by controlling open market policy. It is therefore the most important and influential part of the Federal Reserve System.
301. The Federal Reserve System is known to be one of the more independent parts of the U.S. federal government. Why is it independent, and why is the Fed's independence controversial? ANSWER: The Federal Reserve System is independent because of the way that its structured; it does not really have to answer to anyone, within reason of course. Some members are appointed by the president and confirmed by the Senate, but that is the extent of any political control over the Fed, aside from having to periodically report to overseers in both houses of Congress. The Federal Reserve System does not need a president's or a congressional member's approval to enact policy. This is precisely how it was intended to be. The Federal Reserve System is not there to do favors for politicians, such as artificially expanding the economy during election years. This independence is rather controversial as some people think that this gives them too much power, as having control over the U.S. economy is, after all, an enormous and daunting task.
Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 16 1. Which is NOT a tool that the Federal Reserve can use to influence AD? a. open market operations b. quantitative easing c. interest rate paid on reserves d. printing money ANSWER: d 2. Which is NOT one of the three main tools used by the Fed to influence aggregate demand? a. changes in the interest rate paid on reserves b. lending to banks and other financial institutions c. open market operations d. distributing currency ANSWER: d 3. Which is NOT one of the three main tools used by the Fed to influence aggregate demand? a. changes in the interest rate paid on reserves b. lending to banks and other financial institutions c. open market operations d. increasing taxes ANSWER: d 4. Three key practical questions that are important to the central bank's use of monetary policy do NOT include whether the: a. Fed is able to shift both the aggregate demand and short-run aggregate supply curves. b. Fed will be able to influence aggregate demand. c. Fed's influence on aggregate demand will lead to higher GDP growth rates. d. Fed should try to influence aggregate demand. ANSWER: a 5. Which is more difficult for the Fed to respond to through monetary policy tools? a. positive real shocks b. negative real shocks c. positive aggregate demand shocks d. negative aggregate demand shocks ANSWER: b 6. When the Fed uses the tools of monetary policy, what economic impact is it seeking to accomplish? a. a shift of the real shock demand curve b. a shift of the long-run aggregate supply curve c. a shift of the short-run aggregate supply curve d. a shift of the aggregate demand curve Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 16 ANSWER: d 7. In the absence of monetary intervention following a negative shock to aggregate demand: a. inflation, real growth, and nominal wage growth will all decrease. b. inflation will decrease, but real growth and nominal wage growth will increase. c. inflation will increase, real growth will decrease, and nominal wage growth will stay the same. d. inflation and real growth will decrease, but nominal wage growth will stay the same. ANSWER: a 8. In the case of a negative shock to aggregate demand, the central bank should: a. decrease the rate of growth of the money supply to control inflation. b. increase the rate of growth of the money supply to restore spending growth. c. decrease the rate of growth of the price level to keep real growth high. d. do nothing. ANSWER: b 9. What is a reason it might be hard for the Fed to restore aggregate demand in the face of a negative demand shock? a. The Fed might run out of money. b. Banks usually don't do what the Fed demands of them. c. The Fed must operate in real time, when a lot of the data about the state of the economy are unknown. d. The economy responds to the Fed's actions with no lag. ANSWER: c 10. When the Fed supplies "too much" monetary stimulus in the face of a negative aggregate demand shock: a. inflation, real growth, and nominal wage growth all decrease. b. inflation increases, but real growth and nominal wage growth decrease. c. inflation and nominal wage growth decrease, but real growth increases. d. inflation, real growth, and nominal wage growth all increase. ANSWER: d 11. Disinflation is a(n): a. decrease in prices, that is, a negative inflation rate. b. reduction in the rate of inflation. c. increase in prices. d. increase in the rate of inflation. ANSWER: b 12. Deflation is a(n): a. decrease in prices, that is, a negative inflation rate. b. reduction in the rate of inflation. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 16 c. increase in prices. d. increase in the rate of inflation. ANSWER: a 13. Disinflation is more painful when the central bank: a. increases the rate of inflation. b. runs out of money. c. is credible. d. is not credible. ANSWER: d 14. Credible policies make disinflation _____. a. more painful b. less painful c. become inflation d. impossible to implement ANSWER: b 15. In the AD–AS diagram, a "tight" monetary policy shifts the: a. AD curve to the left. b. AD curve to the right. c. LRAS curve to the left. d. LRAS curve to the right. ANSWER: a 16. In the AD–AS diagram, an expansionary monetary policy shifts the: a. AD curve to the left. b. AD curve to the right. c. LRAS curve to the left. d. LRAS curve to the right. ANSWER: b 17. Which is a limitation of monetary policy in stabilizing the economy? a. Central banks have too much control over the money supply. b. Most central bank policymakers are controlled by the government. c. Monetary policy is subject to uncertain lags. d. Central banks have no discretion over policy tools. ANSWER: c 18. Which is a limitation of monetary policy in stabilizing the economy? a. Central banks have too much control over the money supply. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 16 b. Central banks must act when much data about the state of the economy is unknown. c. Monetary policy typically affects the economy with a lag of a few days. d. Central banks have no discretion over policy tools. ANSWER: b 19. Monetary policy is used to stabilize the economy by changing factors that shift the: a. AD curve. b. SRAS curve. c. LRAS curve. d. aggregate demand, short-run aggregate supply, and LRAS curves. ANSWER: a 20. If the Fed overreacts to a negative spending shock by increasing money growth too much: a. both real GDP growth and inflation will decrease more than the Fed prefers. b. both real GDP growth and inflation will increase more than the Fed prefers. c. real GDP growth will increase more and inflation will increase less than the Fed prefers. d. real GDP growth will increase less and inflation will increase more than the Fed prefers. ANSWER: b 21. Which shock can the Fed deal with MOST effectively? a. a major oil shock b. a shock to the LRAS curve c. a shock that shifts the SRAS curve d. a shock to AD ANSWER: d 22. The economy's AD curve is: a. upward sloping. b. downward sloping. c. vertical. d. horizontal. ANSWER: b 23. The economy's SRAS curve is: a. upward sloping. b. downward sloping. c. vertical. d. horizontal. ANSWER: a 24. The economy's LRAS curve is: Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 16 a. upward sloping. b. downward sloping. c. vertical. d. horizontal. ANSWER: c 25. The BEST type of negative shock for the Federal Reserve to respond to is a negative shock to: a. AD. b. SRAS. c. LRAS. d. inflation. ANSWER: a 26. A decrease in money supply growth will cause the: a. AD curve to shift to the left. b. SRAS curve to shift to the left. c. LRAS curve to shift to the left. d. price level to rise. ANSWER: a 27. In the short run, a negative AD shock will cause the growth rate of output to: a. increase. b. decrease. c. remain unchanged. d. become more volatile. ANSWER: b 28. In the short run, a negative AD shock will cause the inflation rate to: a. increase. b. decrease. c. remain unchanged. d. become more volatile. ANSWER: b 29. If the Federal Reserve wishes to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be a(n): a. increase in government spending growth. b. tax cut. c. increase in money supply growth. d. lower goal for inflation. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 16 30. Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising: a. unemployment. b. inflation. c. output growth. d. Solow growth. ANSWER: b 31. A significant decrease in the rate of inflation is called: a. deflation. b. credible inflation. c. disinflation. d. quantitative easing. ANSWER: c 32. In the short run, a monetary contraction leads to increased unemployment because wages: a. and prices are sticky. b. and prices are flexible. c. are sticky, while prices are flexible. d. are flexible, while prices are sticky. ANSWER: a 33. Increased uncertainty will cause the economy's AD curve to: a. shift inward. b. shift outward. c. become steeper. d. become flatter. ANSWER: a 34. Shortly after September 11, 2011, the Federal Reserve: a. decreased its lending to banks. b. increased its lending to banks. c. decreased its lending to individuals. d. increased its lending to individuals. ANSWER: b 35. If the growth rate of the money supply slows, there will be a(n): a. decrease in aggregate demand. b. decrease in aggregate supply. c. increase in aggregate demand. Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 16 d. increase in aggregate supply. ANSWER: a 36. If the Federal Reserve offsets a negative shock to aggregate demand with increased money growth: a. inflation will rise, but real GDP growth will remain unchanged compared to if the Fed had not acted. b. inflation will fall, but real GDP growth will remain unchanged compared to if the Fed had not acted. c. both inflation and real GDP growth will rise compared to if the Fed had not acted. d. both inflation and real GDP growth will fall compared to if the Fed had not acted. ANSWER: c 37. Which describes one of the difficulties that make it hard for the Fed to effectively implement monetary policy? a. The Fed has too much data to sort through quickly. b. All monetary policies must be approved by Congress before being implemented. c. The Fed's control of the money supply is incomplete and subject to uncertain lags. d. The effects of monetary policy always offset those of fiscal policy. ANSWER: c 38. Although the Federal Reserve may increase the monetary base, the larger monetary aggregates (M1 and M2) and thus aggregate demand won't increase very much in response if: a. the interest rate is too high. b. the tax rate is too high. c. banks are slow to lend. d. the economy is in recession. ANSWER: c 39. An increase in the money supply typically affects the economy with a lag that varies in time from _____ months. a. 1 to 2 b. 3 to 6 c. 6 to 18 d. 18 to 36 ANSWER: c 40. If businesses react to a pessimistic outlook and decrease spending, the Fed can counteract this by: a. decreasing money supply growth to spur the economy out of the recession. b. increasing money supply growth, lowering real interest rates, and encouraging borrowing. c. increasing government expenditures to spur the economy out of the recession. d. decreasing corporate taxes to encourage firms to increase their spending. ANSWER: b 41. The Fed's job in manipulating monetary policy is made harder by the fact that: Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 16 a. monetary authorities do not have a good understanding of how monetary policy works. b. monetary policy is usually pulling the economy in the opposite direction from fiscal policy. c. the Fed operates in real time and information on recessions becomes available with a lag. d. monetary policy is hardly ever effective in influencing business fluctuations. ANSWER: c 42. When aggregate demand decreases, the Fed will want to use its policy tools to: a. keep aggregate demand lower until wages catch up. b. quickly bring aggregate demand back to its original position. c. push aggregate demand higher than it was originally to make up for lost growth potential. d. shift aggregate supply to the left to balance with lower demand. ANSWER: b 43. Figure: Monetary Policy
Assume that the economy is initially at point Y in the graph. In the best-case scenario, the Fed will: a. increase money supply to take the economy to point X. b. decrease money supply to take the economy to point W. Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 16 c. increase money supply to take the economy to point W. d. decrease money supply to take the economy to point X. ANSWER: a 44. Figure: Monetary Policy
Assume that the economy is initially at point Y in the graph. If the Fed took the appropriate action with monetary policy but banks were slow to lend, then the: a. Fed action would be magnified and the economy would move to point X. b. Fed action would be nullified and the economy would remain at point Y. c. Fed action would be partially effective and the economy would move to point Z. d. LRAS curve would shift to the left. ANSWER: c 45. Figure: Monetary Policy
Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 16
Assume that the economy is initially at point Y in the graph. If the Fed took the appropriate action with monetary policy but overestimated how serious the recession is, then the: a. LRAS curve would shift to the left. b. Fed would take the economy to point X. c. Fed would fail to stimulate the economy and it would remain at point Y. d. Fed would overshoot and the economy would move to point W. ANSWER: d 46. What is a possible reason for the Fed's inability to prevent a recession? a. The Fed has too much power over M1 and M2 and can flood the money supply. b. Much of the information about the economy is unknown when the Fed is making policy. c. Firms and individuals do not often understand the goals of the Fed. d. The Fed often performs complex and conflicting maneuvers at the same time. ANSWER: b 47. An increase in the money supply can typically affect the economy with a lag of _____ months. a. 2 to 3 Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 16 b. 4 to 10 c. 6 to 18 d. 10 to 24 ANSWER: c 48. When a negative shock to aggregate demand occurs, the inflation rate will: a. increase. b. remain the same. c. decrease. d. be automatically adjusted by the Fed. ANSWER: c 49. When aggregate demand moves to the right, the inflation rate will: a. increase. b. remain the same. c. decrease. d. be automatically adjusted by the Fed. ANSWER: a 50. When an economy is adjusting to a recent reduction in the money supply, what is a likely consequence? a. Inflation remains high. b. Growth stays positive. c. Interest rates continue to rise. d. Unemployment is high. ANSWER: d 51. How can the Fed offset a positive shock to aggregate demand? a. increase the growth rate of the money supply b. decrease the growth rate of the money supply c. increase the growth rate of government spending d. decrease the growth rate of government spending ANSWER: b 52. How can the Fed offset a negative shock to aggregate demand? a. increase the growth rate of the money supply b. decrease the growth rate of the money supply c. increase the growth rate of government spending d. decrease the growth rate of government spending ANSWER: a 53. In the AD–AS diagram, an increase in money supply growth causes a(n): Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 16 a. shift of the aggregate demand curve to the left. b. shift of the aggregate demand curve to the right. c. downward movement along the aggregate demand curve. d. upward movement along the aggregate demand curve. ANSWER: b 54. Suppose the Fed reacts to an economic shock and quickly restores the economy to its long-run potential growth rate. It is MOST likely that this shock was a(n): a. aggregate demand shock. b. real shock. c. productivity shock. d. supply shock. ANSWER: a 55. The economy is growing at its long-run potential growth rate of 3% with an inflation rate of 4%. If a positive aggregate demand shock occurs and the Fed responds by decreasing money growth but fails to fully offset the aggregate demand shock, then in the short run the real growth rate will be: a. 3% and the inflation rate will be 4%. b. lower than 3% and the inflation rate will be lower than 4%. c. higher than 3% and the inflation rate will be lower than 4%. d. higher than 3% and the inflation rate will be higher than 4%. ANSWER: d 56. Figure: Monetary Policy and Demand Shocks
In the figure, assume that the initial real growth rate of the economy is 3% when a negative aggregate demand shock shifts the AD curve from AD1 to AD2. As a result of the Fed's policy response, the AD curve shifts to Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 16 AD5 in the short run. Which of these is TRUE about the Fed's policy response? a. The Fed responded too little to the shock. b. The Fed responded too much to the shock. c. The Fed provided just the right amount of response to the shock. d. The Fed was too fast in responding to the shock. ANSWER: b 57. Figure: Monetary Policy and Demand Shocks
In the figure, assume that the initial real growth rate of the economy is 3% when a positive aggregate demand shock shifts the AD curve from AD1 to AD4. The correct monetary policy response is to: a. reduce money supply growth so that the AD curve shifts back to AD1. b. reduce money supply growth so that the AD curve remains at AD4. c. increase money supply growth so that the AD curve shifts to AD3. d. increase money supply growth so that the AD curve shifts to AD5. ANSWER: a 58. Figure: Monetary Policy and Demand Shocks
Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 16
In the figure, assume the initial real growth rate of the economy is 3% when a negative aggregate demand shock shifts the AD curve from AD1 to AD2. The correct monetary policy response is to: a. increase money supply growth so that the AD curve shifts back to AD1. b. increase money supply growth so that the AD curve remains at AD2. c. reduce money supply growth so that the AD curve shifts to AD3. d. reduce money supply growth so that the AD curve shifts to AD5. ANSWER: a 59. Figure: Monetary Policy and Demand Shocks
In the figure, assume that the initial real growth rate of the economy is 3% when a positive aggregate demand Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 16 shock shifts the AD curve from AD1 to AD4. As a result of the Fed's policy response, the AD curve shifts to AD3 in the short run. Which of these is TRUE about the Fed's policy response? a. The Fed responded too little to the shock. b. The Fed responded too much to the shock. c. The Fed provided just the right amount of response to the shock. d. The Fed was too fast in responding to the shock. ANSWER: b 60. Figure: Monetary Policy and Demand Shocks
In the figure, assume that the initial real growth rate of the economy is 3% when a negative aggregate demand shock shifts the AD curve from AD1 to AD3. As a result of the Fed's policy response, the AD curve shifts to AD2 in the short run. Which of these is TRUE about the Fed's policy response? a. The Fed responded too little to the shock. b. The Fed responded too much to the shock. c. The Fed provided just the right amount of response to the shock. d. The Fed was too fast in responding to the shock. ANSWER: a 61. A negative shock to AD will cause the inflation rate to increase in: a. the short run. b. the long run. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: d 62. A negative shock to AD will cause the growth rate of real GDP to increase in: Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 16 a. the short run. b. the long run. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: d 63. In the best-case scenario, the Federal Reserve is most successful at counteracting a negative _____ shock. a. AD b. SRAS c. LRAS d. real ANSWER: a 64. An increase in money growth will cause the inflation rate to increase in: a. the short run. b. the long run. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: c 65. In the AD–AS model, an increase in money growth will cause the growth rate of real GDP to increase in: a. the short run. b. the long run. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: a 66. The first signs of trouble in the subprime mortgage market came in August: a. 2006. b. 2007. c. 2008. d. 2009. ANSWER: b 67. The lags associated with monetary policy make its implementation more difficult during: a. recessions. b. expansions. c. both expansions and recessions. d. neither expansions nor recessions. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 16 68. A potential problem with expansionary monetary policy is that banks can: a. be loaned up prior to open market operations. b. be unwilling to lend. c. decide that a recession is best for the economy. d. choose not to hold any reserves. ANSWER: b 69. The problem associated with too much expansionary monetary policy is: a. additional inflation. b. additional unemployment. c. higher interest rates. d. reduced economic growth. ANSWER: a 70. An economy in which the central bank overstimulates aggregate demand will suffer from: a. inflation. b. unemployment. c. increases in money supply. d. deflation. ANSWER: a 71. Inflation occurs if the Fed overstimulates: a. aggregate demand. b. unemployment. c. aggregate supply. d. taxation. ANSWER: a 72. Why do many people think the Fed overstimulated the money supply in the 1970s? a. because of a presidential dictate to do so b. to induce a recession c. because of the high unemployment associated with the oil crises d. because it was trying to control inflation ANSWER: c 73. The disinflation experiment reduced inflation in the United States, but at the cost of: a. an increase in the long-run growth rate of the economy. b. high unemployment. c. high inflation. d. deflation. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 16 74. What is the difference between disinflation and deflation? a. Disinflation is a slower increase in prices, whereas deflation is a decrease in prices. b. Deflation is a slower increase in prices, whereas disinflation is a decrease in prices. c. The Fed can engineer disinflation, but not deflation. d. There is no difference between disinflation and deflation. ANSWER: a 75. Table: Annual Inflation Year Rate of Inflation 1998 4.5% 1999 7.1 2000 8.3 2001 2.9 2002 1.3 2003 −0.3 2004 −0.8 2005 −1 2006 1.2 This table shows inflation data for an economy. During what period did this economy experience deflation? a. 2003 to 2005 b. 2005 to 2006 c. 1998 to 2000 d. 2000 to 2002 ANSWER: a 76. Table: Annual Inflation Year Rate of Inflation 1998 4.5% 1999 7.1 2000 8.3 2001 2.9 2002 1.3 2003 −0.3 2004 −0.8 2005 −1 2006 1.2 This table shows inflation data for an economy. During what period did this economy experience disinflation? a. 2001 to 2002 b. 2003 to 2006 c. 2005 to 2006 d. 1998 to 2000 ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 16 77. If a country's central bank becomes more credible and announces a monetary contraction in advance, then: a. more firms will invest now before the threat materializes. b. wages will fall more slowly. c. wages will rise in anticipation of the fall in incomes. d. unemployment costs will be lower. ANSWER: d 78. If a country's central bank becomes more credible and announces a monetary contraction in advance, then: a. workers will be prepared for slower wage growth and will quickly adjust to what is inevitable. b. wages will fall more slowly, some workers will end up being very cheap and employers will choose to lay them off. c. wages will rise in anticipation of the fall in incomes.
d. unemployment costs will be higher. ANSWER: a 79. What do many economists think contributed to the greater than 13% inflation rates experienced by the United States in the 1980s? a. The Fed was inflexible in its rule of 3% growth. b. The Fed did not do enough to increase the money supply. c. The Fed overstimulated the economy with too much money in the 1970s. d. The Fed did not react to the oil shocks of the 1970s. ANSWER: c 80. Under Paul Volcker, the Fed reduced the inflation rate in the early 1980s by more than 10 percentage points, causing: a. unemployment to decrease. b. housing prices to soar and interest rates to remain high. c. GDP growth to rise to 6% and consumer confidence to grow. d. a severe recession to take place. ANSWER: d 81. A reduction in the rate of inflation is called: a. deflation. b. disinflation. c. stagflation. d. devaluation. ANSWER: b 82. When the price level actually falls, what is the economy experiencing? a. deflation b. disinflation c. stagflation Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 16 d. devaluation ANSWER: a 83. If a central bank wishes to reduce inflation, it should announce its intentions and follow through with them, thereby using _____ monetary policy. a. visible b. integral c. credible d. authoritative ANSWER: c 84. Credible disinflationary monetary policy will lead to workers being increasingly_____ for _____ wage growth. a. prepared; slower b. prepared; faster c. unprepared; slower d. unprepared; faster ANSWER: a 85. Which BEST describes U.S. economic conditions in the 1980s? a. Deflation occurred because the Fed reacted too much to AD shocks. b. High inflation occurred because the Fed reacted too little to AD shocks. c. High real growth occurred because of the deliberate actions of the Fed. d. Disinflation occurred because of the deliberate actions of the Fed. ANSWER: d 86. Disinflation occurs when the Fed: a. raises the growth rate of the money supply. b. reduces the growth rate of the money supply. c. sets the money supply growth rate above the inflation rate. d. does nothing when a shock occurs. ANSWER: b 87. The Fed dealt with high inflation in the 1980s by: a. reducing the money supply and causing aggregate demand to fall. b. increasing the money supply and causing aggregate demand to rise. c. reducing the money supply and causing aggregate demand to rise. d. increasing the money supply and causing aggregate demand to fall. ANSWER: a 88. When people believe that a central bank will stick with its policy, monetary policy is likely to have: Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 16 a. high credibility. b. low credibility. c. a high bandwagon effect. d. a low bandwagon effect. ANSWER: a 89. When the Fed reacts to a positive aggregate demand shock, which is likely to make the period of disinflation shorter? a. credibility on the part of the Fed b. higher uncertainty about investment returns c. flexible wages and prices d. an increase in the velocity of money ANSWER: a 90. A reduction in the rate of inflation is called: a. reversing course. b. Volcker's regret. c. disinflation. d. deflation. ANSWER: c 91. A decrease in the price level is called: a. reversing course. b. Volcker's regret. c. disinflation. d. deflation. ANSWER: d 92. The disinflation of the 1980s led to: a. high unemployment. b. sticky wages and prices. c. reduced credibility for the Federal Reserve. d. extremely low interest rates. ANSWER: a 93. Disinflation in the 1980s was a result of: a. leftward shifts in the aggregate demand curve due to money supply reductions. b. leftward shifts in the aggregate supply curve due to sticky wages and prices. c. leftward shifts in the LRAS curve due to negative real shocks. d. rightward shifts in the LRAS curve due to positive real shocks. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 16 94. Disinflation in the 1980s would have been shorter if: a. the Fed had taken more discretionary actions. b. monetary policy had been more credible. c. prices had been stickier. d. the economy had been hit by more real shocks. ANSWER: b 95. Tight monetary policy results in a long period of disinflation and high unemployment if: a. the monetary policy is credible. b. nominal wages are sticky. c. prices are flexible. d. market confidence is high. ANSWER: b 96. Which is the MOST credible monetary policy action? a. The central bank makes policy actions in secret to avoid speculation. b. The central bank attempts to confuse the public by changing its policy stance frequently. c. The central bank announces its policy in public and sticks with the policy over time. d. The central bank does nothing to the economy regardless of any economic shock. ANSWER: c 97. If the Federal Reserve overstimulates the economy by increasing money growth too much, then inflation will: a. make long-term planning and contracting easier. b. create arbitrary redistributions of wealth. c. make price signals much easier to interpret. d. bring the economy into a recession. ANSWER: b 98. _____ is a significant reduction in the rate of inflation, while _____ is a reduction in the level of prices. a. Stagflation; deflation b. Disinflation; stagflation c. Deflation; disinflation d. Disinflation; deflation ANSWER: d 99. A monetary contraction is MOST successful when it is credible, namely, when: a. disinflation supersedes inflation. b. the effect of fiscal policy is weakening. c. market participants expect the central bank to carry through with its tough stance. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 16 d. market participants are uncertain about the current state of the economy. ANSWER: c 100. When a major negative aggregate demand shock hits the economy, a central bank can "maintain market confidence" by: a. raising the Federal Funds rate. b. buying stocks in the stock market. c. selling Treasury securities in the open market. d. promising to increase the growth rate of money if the economy worsens further. ANSWER: d 101. In response to a negative spending shock, a condition of lower market confidence makes monetary policy easing: a. more effective in raising real GDP growth. b. less effective in raising real GDP growth. c. just as effective in raising real GDP growth as higher market confidence. d. lead to increases in both real GDP growth and inflation. ANSWER: b 102. The Federal Reserve's influence over _____ is more powerful than its influence over _____. a. expectations; aggregate supply b. expectations; the money supply c. the money supply; expectations d. aggregate supply; aggregate demand ANSWER: b 103. _____ and _____ are some of the most important aggregate demand shifters, and affecting _____ is one of the Federal Reserve's most powerful tools. a. Money; resources; the money supply b. Fear; confidence; market confidence c. The interest rate; the exchange rate; currency control d. Exports; imports; the exchange rate ANSWER: b 104. Uncertainty drives people away from: a. liquid assets and toward investment spending. b. liquid assets and away from investment spending. c. investment spending and toward more liquid assets. d. investment spending and toward less liquid assets. ANSWER: c 105. Uncertainty drives people toward: Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 16 a. holding cash. b. increasing the velocity of money. c. increasing investment spending. d. nonliquid assets. ANSWER: a 106. How did the Fed encourage business confidence after the September 11 terrorist attacks? a. by lowering corporate taxes b. by reducing the money supply c. by lending billions to banks d. by putting a moratorium on bank loans ANSWER: c 107. One of the Fed's greatest powers is its ability to: a. boost market confidence. b. perfectly control the supply of M1 and M2. c. help stabilize commodity prices. d. always keep a nation on its LRAS curve. ANSWER: a 108. If uncertainty causes people to increase their demand for cash and, at the same time, the Fed raises money supply growth, then the Fed's action will: a. shift the AD curve further to the right than if the uncertainty did not exist. b. shift the AD curve less to the right than if the uncertainty did not exist. c. shift the AD curve further to the left than if the uncertainty did not exist. d. cause the economy to move to a new long-run equilibrium. ANSWER: b 109. If the Fed wants to increase real GDP growth by increasing the money supply growth, which condition will make monetary policy more effective in raising real GDP growth? a. uncertainty causing people to increase their demand for cash b. people losing confidence and reducing investment spending c. people believing the Fed will abandon its policy d. prices continuing to remain very sticky ANSWER: d 110. When uncertainty causes a delay in investment activity, it leads to a: a. scarcity of information. b. delay in action by the Fed. c. coordination failure. d. bandwagon effect. Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 16 ANSWER: d 111. The bandwagon effect causes investment to be: a. evenly distributed over time. b. unevenly distributed over time. c. more responsive to monetary policy changes during recessions. d. more responsive to monetary policy changes during expansions. ANSWER: b 112. Uneven distribution of investment over time is caused by: a. the bandwagon effect. b. confidence in the market. c. elimination of lags in the Fed's policies. d. increased credibility in the Fed's policies. ANSWER: a 113. If the public's demand for holding cash increases, the growth rate of money velocity will: a. remain unchanged. b. increase. c. decrease. d. become unpredictable. ANSWER: c 114. Following the terrorist attacks of September 11, 2001, the Federal Reserve increased: a. its lending to banks. b. tax deductions for taxpayers. c. open market sales of bonds. d. interest rates. ANSWER: a 115. Which is NOT needed for the Fed to design and implement effective monetary policy to reduce the severity and length of a recession? a. reliable, accurate data about the state of the economy b. the ability to control the money supply in a timely manner c. the ability to change taxes d. banks that are responsive to the Fed's actions ANSWER: c 116. What results if the Fed stimulates aggregate demand too much in an attempt to end a recession? a. higher national debt b. shrinking output Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 16 c. unemployment d. inflation ANSWER: d 117. Which is not a likely outcome of the Fed's response to a reduction in aggregate demand? a. inflation if the Fed increases the money supply too much b. continued unemployment if the Fed does not increase the money supply enough c. an increase in unemployment if the Fed increases the money supply too much d. a return to full employment if the Fed increases the money supply just enough ANSWER: c 118. Tight monetary policy is typically followed by a(n): a. reduction in the growth rate. b. increase in inflation. c. reduction in unemployment. d. increase in the real growth rate. ANSWER: a 119. Why is the Fed's ability to influence expectations a powerful tool toward achieving long-run potential output? a. Uncertainty increases aggregate demand, and certainty decreases aggregate demand. b. Uncertainty decreases aggregate demand, and certainty decreases aggregate demand. c. Fear decreases aggregate demand, and confidence increases aggregate demand. d. Fear increases aggregate demand, and confidence decreases aggregate demand. ANSWER: c 120. The bandwagon effect on investments is caused by: a. disinflation. b. time bunching of investments. c. time lags. d. credibility markers. ANSWER: b 121. What is certain about the impact of a given monetary policy action taken by the Fed? a. the length of time until the full effect is evident b. how much it will affect bank loans c. how much it will impact national output and inflation d. the direction aggregate demand will shift ANSWER: d 122. How long is the time lag between implementation of monetary policy and its impact? Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 16 a. 20 to 36 months b. 3 to 12 months c. 12 to 20 months d. 6 to 18 months ANSWER: d 123. Which is true about investment spending? a. Lower uncertainty leads to more saving, which drains investment funds. b. Lower uncertainty lengthens the time lags for monetary policy to have its impact on investment. c. Higher uncertainty raises investment returns and investment spending. d. Higher uncertainty leads to lower investment spending. ANSWER: d 124. Which is NOT an impact of monetary policy? a. changing expectations b. changing aggregate demand c. changing the inflation rate d. changing potential GDP ANSWER: d 125. One reason that investment spending varies a lot over the business cycle is because of: a. time lags. b. the bandwagon effect. c. unchanging expectations during changing conditions. d. the excessive credibility of monetary policy. ANSWER: b 126. Monetary policy works BEST to counteract: a. negative aggregate demand shocks. b. negative supply shocks. c. positive supply shocks. d. LRAS shocks. ANSWER: a 127. A significant real shock in an economy can result in: a. a leftward shift of the LRAS curve. b. a leftward shift of the SRAS curve. c. consumer pessimism and a leftward shift of the AD curve. d. a leftward shift of the LRAS, SRAS, and AD curves. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 16 128. When the Fed increases the money supply to counteract a negative real shock: a. growth usually returns to the level it was before the shock. b. half of the increase is seen in growth and half in inflation. c. inflation increases a lot and growth increases a little. d. growth remains stuck at the level of the negative real shock. ANSWER: c 129. Monetary policy is: a. equally effective in dealing with real shocks and aggregate demand shocks. b. more effective in dealing with real shocks than with aggregate demand shocks. c. less effective in dealing with real shocks than with aggregate demand shocks. d. totally ineffective in dealing with real shocks and aggregate demand shocks. ANSWER: c 130. In the short run, if the Fed responds to a negative real shock by raising the growth rate of the money supply, inflation will be: a. lower than the rate without responding to the negative shock. b. higher than the rate without responding to the negative shock. c. the same as the rate without responding to the negative shock. d. lower or higher than the rate without responding to the negative shock, depending on the size of money supply growth.
ANSWER: b 131. Which statement is TRUE regarding the effects of monetary policy when a real shock occurs? a. Monetary policy can always be used to simultaneously achieve a high real growth rate and lower the inflation rate. b. Monetary policy cannot simultaneously achieve a high real growth rate and lower the inflation rate.
c. Monetary policy can be used to change only the real growth rate, but not the inflation rate. d. Monetary policy can be used to change only the inflation rate, but not the real growth rate. ANSWER: b 132. If the Fed reacts to a series of negative real shocks by raising money growth every time: a. the inflation rate will increase over time. b. the inflation rate will decrease over time. c. deflation will occur. d. the inflation rate will remain unchanged. ANSWER: a 133. Suppose the central bank targets a low rate of unemployment. If a negative real shock occurs, the real growth rate will be: a. higher if the central bank counters the shock than if it does not react. b. lower if the central bank counters the shock than if it does not react. Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 16 c. the same whether the central bank counters the shock or not. d. higher or lower if the central bank counters the shock than if it does not react, depending on people's expectations.
ANSWER: a 134. Suppose a central bank targets a fixed rate of inflation. If a negative real shock occurs, then the central bank will use monetary policy to shift the: a. AD curve to the right. b. AD curve to the left. c. SRAS curve to the right. d. SRAS curve to the left. ANSWER: b 135. In a worst-case scenario, the Federal Reserve is LEAST successful at counteracting a negative _____ shock. a. AD b. real c. velocity d. spending ANSWER: b 136. If the Federal Reserve responds to a negative real shock with a decrease in money growth, the Federal Reserve's response will cause inflation to: a. remain constant. b. decrease to a lower point than it was before the shock. c. increase by less than it otherwise would have. d. increase by more than it otherwise would have. ANSWER: c 137. Uncertainty always causes: a. investment to increase. b. consumption to increase. c. government spending to increase. d. investment to decrease. ANSWER: d 138. Increased uncertainty causes the AD curve to: a. become flatter. b. shift to the left. c. shift to the right. d. become steeper. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 16 139. When a negative real shock hits the economy, in the absence of any monetary intervention: a. both inflation and real growth will decrease. b. inflation increases, but real growth decreases. c. inflation decreases, but real growth increases. d. both inflation and real growth will increase. ANSWER: b 140. If a negative real shock affects the economy's long-run potential growth rate and the Fed responds by lowering the money supply growth rate, then the economy will experience: a. too little real growth and low inflation. b. too little real growth and high inflation. c. high real growth and low inflation. d. high real growth and high inflation. ANSWER: a 141. If the economy is hit by a negative real shock that reduces real GDP growth below its long-run potential rate, what is the appropriate monetary policy to move real GDP growth back to the long-run rate without raising inflation? a. increase the growth rate of the money supply b. decrease the growth rate of the money supply c. keep the growth rate of the money supply constant while lowering interest rates d. No monetary policy can achieve this goal. ANSWER: d 142. If a real economic shock shifts the LRAS curve to the left, which of these will NOT further reduce real GDP growth and inflation? a. a decrease in money growth b. uncertainty that reduces consumption c. a monetary policy rule that is credible d. loss of market confidence about the power of monetary policy ANSWER: c 143. In response to a real shock, the Fed's monetary policy action will lead to _____ moving in opposite directions. a. unemployment and inflation b. real GDP growth and inflation c. aggregate demand and real GDP d. the economy's long-run growth rate and inflation ANSWER: a 144. A negative real shock causes the economy's: Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 16 a. AD and SRAS curves to shift to the left. b. AD and LRAS curves to shift to the left. c. SRAS and LRAS curves to shift to the left. d. AD curve to shift to the left. ANSWER: c 145. In the short run, a negative real shock will cause output growth to: a. increase. b. decrease. c. remain unchanged. d. become more difficult to predict. ANSWER: b 146. In the short run, a negative real shock will cause the inflation rate to: a. increase. b. decrease. c. remain unchanged. d. become more difficult to predict. ANSWER: a 147. In the long run, a negative real shock will cause output growth to: a. increase. b. decrease. c. remain unchanged. d. become more difficult to predict. ANSWER: b 148. In the long run, a negative real shock will cause the inflation rate to: a. increase. b. decrease. c. remain unchanged. d. become more difficult to predict. ANSWER: a 149. In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, the inflation rate will increase because of: a. the real shock. b. the increase in money growth. c. both the real shock and the increase in money growth. d. some reason other than the real shock and the increase in money growth. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 16 150. In the short run, if the Federal Reserve responds to a negative real shock with an increase in money supply growth, output growth will increase because of: a. the real shock. b. the increase in money growth. c. both the real shock and the increase in money growth. d. some reason other than the real shock and the increase in money growth. ANSWER: b 151. An example of a negative real shock is a rapid increase in: a. oil prices. b. money supply growth. c. government debt. d. housing prices. ANSWER: a 152. When the Federal Reserve increases the growth rate of the money supply to combat a negative real shock, the growth rate of real GDP: a. will increase more than the inflation rate. b. will increase less than the inflation rate. c. and the inflation rate will both increase by the same amount. d. and the inflation rate will both decrease by the same amount. ANSWER: b 153. If the Federal Reserve reduces the growth rate of the money supply to combat a negative real shock, the inflation rate will be: a. lower, but the growth rate will be higher. b. lower, but the growth rate will be even lower. c. higher, but the growth rate will be lower. d. higher, but the growth rate will be even higher. ANSWER: b 154. When facing a real shock, a central bank will encounter a dilemma that forces it to choose between too: a. low a rate of growth or too high a rate of inflation. b. high a rate of growth or too low a rate of inflation. c. low a rate of growth or too low a rate of inflation. d. high a rate of growth or too high a rate of inflation. ANSWER: a 155. A negative real shock is often amplified, creating short-run aggregate supply and aggregate demand shocks due to: a. sticky wages and flexible prices. Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 16 b. flexible wages and sticky prices. c. sticky wages and prices. d. flexible wages and prices. ANSWER: c 156. To restore growth and reduce unemployment in response to a negative real shock, the Federal Reserve would: a. decrease the money growth rate, which will lower both the inflation rate and the economic growth rate. b. decrease the money growth rate, which will increase both the inflation rate and the economic growth rate. c. increase the money growth rate, which will lower both the inflation rate and the economic growth rate. d. increase the money growth rate, which will increase both the inflation rate and the economic growth rate. ANSWER: d 157. Which creates the most difficult combination of economic problems for a monetary policymaker to address? a. a rightward shift of the aggregate demand curve b. a leftward shift of the aggregate demand curve c. a rightward shift of the short-run aggregate supply curve d. a leftward shift of the long-run aggregate supply curve ANSWER: d 158. Suppose an economy experiences a negative real shock. Monetary policymakers respond using expansionary monetary policy with the expectation that it will _____ in the short run. a. decrease inflation and decrease unemployment b. decrease inflation and increase unemployment c. increase inflation and decrease unemployment d. increase inflation and increase unemployment ANSWER: c 159. Suppose an economy experiences a negative real shock. Monetary policymakers respond using contractionary monetary policy with the expectation that it will _____ in the short run. a. decrease inflation and decrease unemployment b. decrease inflation and increase unemployment c. increase inflation and decrease unemployment d. increase inflation and increase unemployment ANSWER: b 160. Which is NOT a reason that negative supply shocks are difficult for monetary policymakers to resolve? a. Often they are accompanied by aggregate demand shocks. b. Reducing unemployment will increase inflation. c. Reducing inflation will increase unemployment. Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 16 d. Using monetary policy tools under this condition will increase both inflation and unemployment. ANSWER: d 161. What impact can be expected if the Fed responds to a negative real shock by increasing the money supply? a. Inflation will increase but there may be a reduction in unemployment. b. Inflation will increase and unemployment will increase. c. Inflation will decrease but there may be a reduction in unemployment. d. Inflation will decrease and unemployment will increase. ANSWER: a 162. What impact can be expected if the Fed responds to a negative real shock by decreasing the money supply? a. Inflation will increase but there may be a reduction in unemployment. b. Inflation will increase and unemployment will increase. c. Inflation will decrease but there may be a reduction in unemployment. d. Inflation will decrease and unemployment will increase. ANSWER: d 163. Which policy would the Fed's Board of Governors choose following a negative real shock if they are more concerned about inflation than unemployment? a. increase the money supply to shift the aggregate demand curve to the left b. increase the money supply to shift the aggregate demand curve to the right c. decrease the money supply to shift the aggregate demand curve to the left d. decrease the money supply to shift the aggregate demand curve to the right ANSWER: c 164. Which policy would the Fed's Board of Governors choose following a negative real shock if they are more concerned about unemployment than inflation? a. increase the money supply to shift the aggregate demand curve to the left b. increase the money supply to shift the aggregate demand curve to the right c. decrease the money supply to shift the aggregate demand curve to the left d. decrease the money supply to shift the aggregate demand curve to the right ANSWER: b 165. What is likely to result if the Fed decreases the money supply in response to a negative real shock? a. Unemployment will increase and inflation will increase. b. Unemployment will increase and inflation will decrease. c. Unemployment will decrease and inflation will increase. d. Unemployment will decrease and inflation will decrease. ANSWER: b 166. Which does NOT explain why the 1997–2006 housing boom increased aggregate demand? Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 16 a. The construction sector created new employment and higher wages. b. Homeowners felt wealthier as they saw their homes rising in value every year. c. Homeowners tended to spend more money and even borrow money, hoping that rising wealth from the home values would let them repay the money in the future. d. During the boom, some builders were working 60 or 80 hours a week instead of 40.
ANSWER: d 167. In the late 1990s, America's economy: a. grew at its historical pace. b. was booming and unemployment was very low. c. experienced stagflation: high inflation and low real growth. d. suffered from several severe nominal shocks, producing low inflation and low growth. ANSWER: b 168. The recession that began in 2001 was: a. long and deep. b. short, but very deep. c. mild and had little effect on unemployment. d. mild and didn't last long, but employment did not recover, even two years after the recession ended. ANSWER: d 169. In 2003–2004, the Fed kept the Federal Funds rate: a. low because the recession had not ended yet. b. low, even though the recession had ended. c. high because the recession had ended. d. high because the recession had not ended yet. ANSWER: b 170. Low interest rates in 2003–2004: a. made it more difficult to borrow. b. lowered real growth. c. increased demand for homes. d. decreased demand for homes. ANSWER: c 171. Low interest rates are a signal that: a. credit is easy and it is a good idea to borrow money. b. credit is tight and it is a bad idea to borrow money. c. deflation is on the way. d. people are no longer out for profit. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 16 172. Suppose the government subsidizes the price of bananas, making it so low that you buy an enormous number of bananas and store them on your roof. If your roof caves in, it's: a. the government's fault. b. your fault. c. no one's fault. d. the fault of banana vendors. ANSWER: b 173. In 2006, house prices started to _____, making homeowners feel _____. a. rise; poorer b. rise; richer c. fall; richer d. fall; poorer ANSWER: d 174. The Fed responded to the 1997–2006 housing boom by: a. adopting contractionary monetary policy. b. conducting expansionary monetary policy. c. applying a monetary policy rule that targets a zero inflation rate. d. actively regulating the housing and lending industries. ANSWER: b 175. Which is a reasonable cause for the formation of the housing bubble in the 2000s? a. high market confidence b. credible monetary policy c. low Federal Funds rate d. the Fed's use of a monetary policy rule ANSWER: c 176. The most appropriate monetary policy response to an asset price bubble by a central bank is to: a. react to asset price bubbles because they can easily be identified. b. not react to asset price bubbles because the bank's actions will lead to a recession. c. react to asset price bubbles aggressively because they cannot be popped any other way. d. not react to asset price bubbles because monetary policy can affect only aggregate demand, not demand in a specific market.
ANSWER: d 177. U.S. housing prices peaked in: a. 1997. b. 2001. c. 2006. Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 16 d. 2008. ANSWER: c 178. Rising housing prices increased homeowners' purchases of goods and services because rising housing prices caused homeowners': a. interest income to rise. b. wage income to rise. c. unemployment to rise. d. wealth to rise. ANSWER: d 179. The Federal Reserve reduced the Federal Funds rate during the recession of 2000–2001. Directly following the recession, the Federal Funds rate: a. increased. b. continued to decrease but remained positive. c. continued to decrease and became negative. d. remained relatively constant. ANSWER: b 180. The bursting of the bubble in the housing market caused homeowners to: a. increase spending. b. reduce spending. c. leave spending relatively constant. d. become more unpredictable in their spending habits. ANSWER: b 181. Many economists have argued that the Federal Reserve should have taken actions to burst the U.S. housing bubble. However, bursting of the housing bubble by the Federal Reserve would have caused: a. the AD curve to shift to the left. b. the SRAS curve to shift to the left. c. the LRAS curve to shift to the left. d. interest rates to fall even further. ANSWER: a 182. The Fed's power to influence aggregate demand is constrained by: a. the president and Congress. b. contracting fiscal policy. c. uncertainty and people's inability to fully understand the complexity of the economy. d. the significant amount of U.S. dollars held in foreign reserves. ANSWER: c 183. Low interest rates are, in essence, a signal to market participants that credit is: Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 16 a. tight and it is a good idea to lend money. b. tight and it is a good idea to borrow money. c. easy and it is a good idea to lend money. d. easy and it is a good idea to borrow money. ANSWER: d 184. When a "bubble" arises, asset prices are driven by: a. policymakers. b. changes in aggregate demand and aggregate supply. c. shifts in the money growth rate. d. shifts in market psychology and successive waves of irrational exuberance. ANSWER: d 185. Why did Alan Greenspan receive criticism during the 2008 financial crisis and recession? a. Critics argued that Greenspan should have tried to control the rise in AD by reducing the money supply. b. Critics argued that Greenspan should have put a cap on home values. c. Critics argued that Greenspan left the Fed without any direction as to monetary policy. d. Critics argued that Greenspan should have increased the money supply to lower housing price inflation. ANSWER: a 186. When homeowners saw the value of their homes rise in the 1997–2006 boom, they felt wealthier and: a. saved more. b. spent more. c. worked more. d. spent less. ANSWER: b 187. How did the housing boom of 1997–2006 increase aggregate demand? a. It created more jobs and increased wages in the construction sector. b. Interest rates increased to keep pace with housing demand. c. More consumers saved, so they could afford the higher housing prices. d. Higher interest rates created a boom in the banking sector. ANSWER: a 188. The housing boom of the 2000s caused a: a. negative aggregate demand shock. b. positive aggregate demand shock. c. negative real shock. d. positive real shock. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 16 189. U.S. real GDP growth turned negative in: a. 2006. b. 2007. c. 2008. d. 2009. ANSWER: c 190. If Alan Greenspan had reduced the money supply to limit the housing bubble, the result would have been a slowdown in: a. the rise of housing values. b. overall economic growth. c. both the rise of housing values and overall economic growth. d. neither the rise of housing values nor overall economic growth. ANSWER: c 191. If, during a boom, the Fed attempts to pop an asset price bubble, such as one in the housing sector, what sector of the economy is it MOST sure of having the ability to influence? a. residential real estate b. residential and commercial real estate c. the GDP of the broader economy d. consumer spending in general ANSWER: c 192. The Fed could have popped the housing bubble in the 2000s by: a. lending directly to homeowners. b. regulating the stock markets more. c. reducing the growth rate of the money supply. d. doing nothing. ANSWER: c 193. Between 1997 and 2006, U.S. housing prices: a. remained relatively constant. b. decreased rapidly. c. increased slowly. d. increased rapidly. ANSWER: d 194. Monetary policy is a _____ means of popping a bubble because monetary policy _____ push down the price of specific commodities. a. good; can b. good; can't Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 16 c. crude; can d. crude; can't ANSWER: d 195. The collapse of a financial bubble in 2008 is BEST regarded as a: a. negative shock to aggregate demand. b. positive shock to aggregate demand. c. negative shock to long-run aggregate supply. d. positive shock to long-run aggregate supply. ANSWER: a 196. In addition to conducting monetary policy, the Fed also has the power to: a. control the mortgage market. b. oversee Treasury transactions. c. regulate banks. d. monitor the housing market. ANSWER: c 197. Which would be an example of using rules to conduct monetary policy? a. A 5% increase in money supply automatically leads to a 2% increase in real GDP. b. An increase in money supply growth automatically leads to an increase in inflation. c. The Fed will increase money growth to different levels, depending on the severity of the recession. d. A 1% drop in real GDP growth will automatically elicit a 2% increase in money growth. ANSWER: d 198. What kind of monetary policy rule did Milton Friedman advocate? a. The money supply should increase by 3% every year. b. Prices should increase by 3% every year. c. Velocity growth should be 3% every year. d. Long-run economic growth should be 3%. ANSWER: a 199. What was Milton Friedman's reasoning behind the 3% growth rule for the money supply? a. monetary neutrality b. increasing long-run economic growth rates c. minimization of negative supply shocks d. price stability ANSWER: d 200. What happens to GDP if the Fed is too responsive to changes in aggregate demand? a. Volatility increases. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 16 b. Volatility decreases. c. GDP is difficult to influence in the short run and the long run. d. It ends up being lower in all cases. ANSWER: a 201. If the Fed sets a target rate of inflation below 4%, it is an example of the Fed using: a. a monetary policy rule. b. discretion. c. unofficial influence. d. the bully pulpit. ANSWER: a 202. What strict rule did Milton Friedman believe would provide for greater price stability? a. GDP should not go above 5%. b. Unemployment should never be above 10%. c. Inflation should stay below 3% a year. d. Money supply should grow by 3% annually. ANSWER: d 203. What monetary policy philosophy is against tying the hands of the central bank? a. rules b. discretion c. prudence d. inclination ANSWER: b 204. When a central bank reacts the same way to a shock every time, it is likely using: a. policy discretion. b. a policy rule. c. a bandwagon policy. d. a wait-and-see policy. ANSWER: b 205. According to Milton Friedman, if the economy's long-run growth rate is 3%, then the Fed should set the annual money growth rate at: a. 3%. b. less than 3%. c. more than 3%. d. 3% plus or minus an amount to compensate for any shocks. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 16 206. Economists who believe that the Federal Reserve is likely to make lots of mistakes in the implementation of monetary policy believe: a. in monetary policy discretion. b. in monetary policy run by the federal government. c. in monetary policy rules. d. that the Federal Reserve should be abolished. ANSWER: c 207. Which is regarded as a policy rule? a. making policy on a case-by-case basis b. discretionary changes to the money supply growth rate c. adjusting policy actions to deal with the nature of economic shocks d. keeping the money supply growth rate consistent with a given inflation rate ANSWER: d 208. When the Fed responds to a negative spending shock by increasing the money supply, it is using: a. a policy rule. b. a discretionary policy. c. its political power. d. its credibility. ANSWER: b 209. Economist Milton Friedman called for a policy rule that keeps the growth rate of the money supply at 3% because: a. real shocks on average are 3% of real GDP. b. spending shocks on average are 3% of real GDP. c. the economy's long-run potential growth rate is 3%. d. the money supply has grown on average at 3% historically. ANSWER: c 210. Economists who think that the Fed is likely to make a lot of mistakes believe that the Fed is BEST advised to: a. adjust to every aggregate supply shock. b. adjust to every aggregate demand shock. c. follow a consistent policy. d. follow a discretionary policy. ANSWER: c 211. Nobel Prize winner Milton Friedman advocated what as an adequate monetary policy? a. a discretionary rule in which the money supply should be adjusted to control the level of inflation b. a discretionary rule in which the money supply should be adjusted to counteract aggregate demand shocks Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 16 c. a strict rule in which the money supply should grow 2% higher than the long-run economic growth rate d. a strict rule in which the money supply should grow at the long-run economic growth rate ANSWER: d 212. Advocates of Fed discretion think that the Fed's adjustments, on average, push the economy in the: a. wrong direction and lower GDP volatility. b. right direction and lower GDP volatility. c. wrong direction and increase GDP volatility. d. right direction and increase GDP volatility. ANSWER: b 213. A problem with a monetary rule that requires the Fed to keep money growth constant is that: a. the Fed has no control over money growth. b. constant money growth implies more volatility in inflation. c. constant money growth implies more volatility in real output growth. d. the Fed must ignore changes in money velocity. ANSWER: d 214. Monetary rules work BEST when: a. the Fed loses control of the money supply. b. interest rates are high. c. money velocity is stable. d. inflation expectations are high. ANSWER: c 215. A rule that has been suggested to compensate for unexpected changes in velocity is a(n) _____ rule. a. real GDP b. nominal GDP c. constant money growth d. inflation-targeting ANSWER: b 216. A nominal GDP rule says that _____ should always grow at a constant rate. a. M b. Mv c. P d. YR ANSWER: b 217. A nominal GDP rule requires the Fed to: a. keep the money supply constant. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 16 b. keep the rate of money growth constant. c. adjust the money supply enough to make up for changes in velocity. d. adjust interest rates in the opposite direction of real GDP growth. ANSWER: c 218. What constraints can cause the Fed to make booms and recessions more severe rather than less severe? a. overconfidence and too much focus on the details of the economy b. overconfidence and a lack of understanding about the economy c. uncertainty and too much focus on the details of the economy d. uncertainty and a lack of understanding about the economy ANSWER: d 219. Uncertainty and the inability to understand the economy cause the Fed's policies to: a. sometimes make swings in the business cycle bigger than what would have occurred without the Fed's policies. b. consistently make recessions bigger than necessary while sometimes reducing inflation.
c. consistently reduce unemployment while sometimes increasing inflation. d. consistently make swings in the business cycle smaller than what would have occurred without the Fed's policies.
ANSWER: a 220. During the three years after the U.S. recession in 2001, monetary policy _____ and the unemployment rate _____. a. kept interest rates low; gradually fell b. kept interest rates low; remained at least as high as it was during the recession c. raised interest rates; gradually fell d. raised interest rates; remained at least as high as it was during the recession ANSWER: b 221. Which is NOT a factor contributing to the development of the speculative bubble in real estate that preceded the recession that began in December 2007? a. successive waves of irrational exuberance b. excessive caution and risk avoidance c. underestimation of the prospect of loss d. shifts in market psychology ANSWER: b 222. Low interest rates and available credit tend to _____ of homes by investors. a. increase the demolition b. decrease the demolition c. increase the flipping d. decrease the flipping Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 16 ANSWER: c 223. A distorted price signal occurs when: a. action by market participants decreases the risk so much that the price is not an effective signal. b. action by market participants increases the risk so much that the price magnifies the risks. c. government policy moves the price in such a manner that discourages investors from taking risks. d. government policy moves the price in such a manner that encourages investors to take risks. ANSWER: d 224. When government policy moves the price in a manner that encourages investors to take risks, the price: a. provides a distorted price signal. b. is a valid indicator of risk and encourages prudent behavior. c. cannot be in equilibrium. d. is a multiple of the fair market value. ANSWER: a 225. Which did not precede and contribute to the negative economic growth rate in the United States in the fall of 2008? a. freezing up of financial intermediation b. a reduction in aggregate demand c. faster growth in the money supply d. falling real estate prices ANSWER: c 226. Which is NOT a reason that the Fed was slow to respond to the housing bubble prior to the recession that began in December 2007? a. an underestimation of the havoc that the collapsing of the bubble would cause b. monetary policy that impacts total spending, not spending in particular industries c. the belief that delaying policy action would make its impact more potent d. the failure to recognize that there was a housing bubble in the first place ANSWER: c 227. What is the overall view of economists regarding what policy action the Fed should take in response to bubbles in the prices of assets such as stock or real estate? a. There is general agreement that aggressive expansionary policy should be used. b. There is general agreement that aggressive contractionary policy should be used. c. There is general agreement that expansionary policy followed by contractionary policy should be used. d. There is uncertainty and some disagreement about what action should be used. ANSWER: d 228. Advocates for monetary policy based on rules believe that discretionary monetary policy: a. is ineffective and has little impact on the economy. Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 16 b. is the proper use of monetary policy tools. c. will be prone to mistakes except when there are extreme problems. d. will do more harm than good under all conditions. ANSWER: c 229. A monetary policy rule tends to work BEST when: a. swings in the economy are extreme. b. velocity is constant. c. the money supply is shrinking. d. the money supply is expanding. ANSWER: b 230. Which is false regarding the Fed's influence over the growth rate of GDP? a. When the Fed decreases interest rates, aggregate demand tends to increase. b. The Fed's influence over the growth rate of GDP stems from its influence on the money supply. c. When the Fed decreases the money supply, aggregate demand tends to increase. d. The Fed has some influence over the growth rate of GDP. ANSWER: c 231. When the Fed tries to achieve disinflation, _____ often results. a. higher inflation b. higher employment c. a boom d. a recession ANSWER: d 232. In the best-case scenario, the Federal Reserve can increase the money supply after a negative shock to AD and restore the growth rate. a. True b. False ANSWER: a 233. The central bank should respond to a negative shock to AD with a decrease in money growth. a. True b. False ANSWER: b 234. The Federal Reserve must operate in real time, even though a lot of the data about the state of the economy are unknown. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 16 ANSWER: a 235. The central bank should respond to a positive shock to AD with a decrease in money growth. a. True b. False ANSWER: a 236. Disinflation is a decrease in prices. a. True b. False ANSWER: b 237. One of the Federal Reserve's most powerful tools is its influence over expectations, not its influence over the money supply. a. True b. False ANSWER: a 238. Monetary policy can deal with a spending shock more effectively than a real shock. a. True b. False ANSWER: a 239. In practice, the Fed has been able to totally offset all spending shocks by changing the growth rate of the money supply. a. True b. False ANSWER: b 240. Wages tend to be especially sticky in the upward direction. a. True b. False ANSWER: b 241. The Federal Reserve's control of the money supply is subject to uncertain lags. a. True b. False ANSWER: a 242. Economists who believe that the Federal Reserve is likely to make a lot of mistakes in the conduct of monetary policy believe that the Federal Reserve should not respond to all AD shocks. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 16 b. False ANSWER: a 243. The key to a less painful disinflation is to reduce the flexibility in nominal wages. a. True b. False ANSWER: b 244. One of the Federal Reserve's LEAST powerful tools is its control over expectations. a. True b. False ANSWER: b 245. The Federal Reserve can offset a negative shock to aggregate demand with a decrease in the money growth rate. a. True b. False ANSWER: b 246. One reason the Fed has difficulty adjusting to a decrease in aggregate demand is that it must spend time persuading politicians to agree to its actions. a. True b. False ANSWER: b 247. The Fed must spend time gathering and interpreting economic data, making it difficult to immediately correct a decrease in AD. a. True b. False ANSWER: a 248. A central bank can always keep an economy at its long-run growth rate by exactly offsetting any shock to aggregate demand. a. True b. False ANSWER: b 249. It is easier for a central bank to stabilize both inflation and real growth following an aggregate demand shock than following a real shock. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 16 250. At the time the Federal Reserve must make a decision, the actual state of the economy may be unknown. a. True b. False ANSWER: a 251. At the onset of the subprime mortgage crisis, most investors had no idea how many banks and other financial firms would fail. a. True b. False ANSWER: a 252. The Federal Reserve has complete control of the money supply. a. True b. False ANSWER: b 253. Monetary policy is more effective in changing real GDP growth if the policy is more credible. a. True b. False ANSWER: a 254. Deflation has occurred if the economy's price index for this year is lower than the same economy's price index for last year. a. True b. False ANSWER: a 255. Disinflation is engineered through monetary expansions. a. True b. False ANSWER: b 256. Disinflation in the early 1980s was a result of tight monetary policy. a. True b. False ANSWER: a 257. Disinflation is a decrease in prices, while deflation is a significant reduction in the rate of inflation. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 16 258. Part of the Fed's job is convincing people of its credibility. a. True b. False ANSWER: a 259. Milton Friedman was chair of the Fed in 1980 and quickly brought inflation rates down. a. True b. False ANSWER: b 260. A central bank has market credibility when people expect that it will stick with its policy. a. True b. False ANSWER: a 261. Bringing inflation down is more difficult than raising it because wages and prices are sticky downward. a. True b. False ANSWER: a 262. The Fed boosts market confidence by stabilizing AD in times of uncertainty. a. True b. False ANSWER: a 263. The Fed can boost market confidence only if its policy is credible. a. True b. False ANSWER: a 264. After September 11, 2001, the Fed resisted the temptation to loan billions of dollars to banks and boost short-run confidence. a. True b. False ANSWER: b 265. Uncertainty drives people away from investment projects. a. True b. False ANSWER: a 266. If the Fed reacts to a negative real shock by raising aggregate demand, it can keep the inflation rate stable. Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 16 a. True b. False ANSWER: b 267. Monetary policy is much less effective at combating a real shock than a demand shock. a. True b. False ANSWER: a 268. Following a negative real shock, the Fed cannot pursue policies to simultaneously reduce the inflation rate and the unemployment rate. a. True b. False ANSWER: a 269. Following a major oil price shock, a central bank can achieve low inflation and low unemployment by applying discretionary monetary policy actions. a. True b. False ANSWER: b 270. Monetary policy is more effective at combating real shocks than AD shocks. a. True b. False ANSWER: b 271. The Fed can fight the inflationary effects of a negative real shock by decreasing money growth. a. True b. False ANSWER: a 272. Decreasing money growth following a negative real shock allows the Fed to address both the higher inflation and the higher unemployment that accompany such shocks. a. True b. False ANSWER: b 273. The appropriate policy in response to a negative real shock will depend on whether the Fed wishes to fight high inflation or low growth, but it can't address both problems with the same policy. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 16 274. If the Fed reverses course and attempts to reduce inflation, it must be willing to accept lower growth as a consequence. a. True b. False ANSWER: a 275. The housing boom of the 2000s is an example of a negative real shock. a. True b. False ANSWER: b 276. Bubbles in asset markets are usually easy to identify. a. True b. False ANSWER: b 277. Monetary policy is easy if the central bank sticks to a few simple rules of thumb. a. True b. False ANSWER: b 278. Easy credit can start or intensify a housing bubble. a. True b. False ANSWER: a 279. When it is difficult to know the size and timing of monetary policy effects, the central bank should use policy discretion to deal with shocks. a. True b. False ANSWER: b 280. Supporters of discretionary monetary policy want to see the course of the economy guided by certain targets. a. True b. False ANSWER: b 281. If, too often, the Federal Reserve responds to shocks with policies that move the economy in the wrong direction or that are of insufficient strength, GDP will increase rather than decrease. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 16 ANSWER: b 282. A constant money growth rule requires the Fed to ignore changes in velocity. a. True b. False ANSWER: a 283. A nominal GDP rule requires the Fed to keep the growth rate of M constant. a. True b. False ANSWER: b 284. A nominal GDP rule requires the Fed to keep Mv constant. a. True b. False ANSWER: a 285. A nominal GDP rule requires the Fed to adjust money growth enough to offset changes in velocity. a. True b. False ANSWER: a 286. Monetary policymaking is about: a. changing expectations and manipulating numbers and equations. b. manipulating numbers and equations regardless of expectations. c. changing expectations regardless of numbers and equations. d. neither changing expectations nor manipulating numbers and equations. ANSWER: a 287. Why is monetary policy not fully effective in combating a negative supply shock? a. The Fed has no tools that stimulate an economy after a negative supply shock. b. When countering a negative supply shock, Fed action will cause deflation. c. When countering a negative supply shock to reduce inflation, Fed action will raise unemployment. d. When countering a negative supply shock to reduce unemployment, Fed action will raise inflation. ANSWER: d 288. Figure: Negative Supply Shock
Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 16
This economy initially begins at point A and a negative supply shock takes it to point Y. If the Fed reacts by increasing money growth by 9%, this will take the economy to point: a. A. b. B. c. X. d. V. ANSWER: d 289. Figure: Negative Supply Shock
Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 16
This economy initially begins at point A and a negative supply shock takes it to point Y. Taking the economy back to a 3% real GDP growth rate would require a(n): a. monetary expansion of 21%. b. inflation rate much greater than 16%. c. inflation rate of 16%. d. unemployment rate of –2%. ANSWER: b 290. To reduce inflation in response to a negative real shock, the Federal Reserve would: a. decrease the money growth rate, which would lower both the inflation rate and the economic growth rate. b. decrease the money growth rate, which would increase both the inflation rate and the economic growth rate. c. increase the money growth rate, which would lower both the inflation rate and the economic growth rate. d. increase the money growth rate, which would increase both the inflation rate and the economic growth rate. ANSWER: a 291. What is likely to result if the Fed increases the money supply in response to a negative real shock? a. Unemployment will increase and inflation will increase. b. Unemployment will increase and inflation will decrease. Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 16 c. Unemployment will decrease and inflation will increase. d. Unemployment will decrease and inflation will decrease. ANSWER: c 292. Because the Fed can easily provide too much or too little response to economic shocks, many economists advocate: a. policy discretion. b. policy rules. c. no response to any shock. d. a wait-and-see policy. ANSWER: b 293. Monetary authorities in a country say that there have been no recent negative supply shocks. The economy in this country is currently experiencing high inflation, and its productive capacity cannot be increased much. Explain how monetary policy could work to address this scenario. Are there any negative consequences of your recommended policy? ANSWER: The monetary authorities could act to reduce the money supply, which would likely help curb inflation. This would, however, decrease production in the economy and lead to increased unemployment.
294. Monetary authorities in a country face the following situation: Consumers are not spending, investment is low, and unemployment is relatively high. Explain how monetary policy could work to improve this situation. ANSWER: The monetary authorities could increase the rate of money growth, reducing interest and encouraging more bank lending and investor borrowing. All together, this would encourage a growth in real GDP and lower unemployment as businesses would require more labor.
295. What is the appropriate monetary policy response to a positive demand shock that leaves the economy operating above its long-run potential growth rate? ANSWER: The appropriate policy would be to reduce the money supply, leading to a monetary contraction. Such a policy works best when it is credible. This would encourage disinflation when the economy is running above its long-run potential growth rate. Disinflation leads to unemployment because wages and prices are sticky, especially in the downward direction.
296. Briefly explain why monetary policy cannot beat both inflation and unemployment at the same time. ANSWER: Monetary policy cannot beat both inflation and unemployment because the policy action of countering one automatically works toward increasing the other. If monetary policy is to focus on lowering unemployment, the money supply is expanded and inflation is encouraged. On the other hand, if monetary policy is to focus on lowering inflation, the money supply is contracted and access to credit becomes more difficult, leading to layoffs and increasing unemployment. Disinflation leads to unemployment because wages and prices are sticky, especially in the downward direction.
297. Suppose the spending habits of consumers suddenly change so that consumption increases. What should the central bank do to restore the economy to the old equilibrium point? Explain your answer with the aid of an AD–AS diagram. ANSWER: When consumption increases, aggregate demand shifts to the right. To bring aggregate demand back to its original location, the central bank should decrease the money supply, and therefore should persue a contractionary monetary policy.
298. Using monetary policy to deal with aggregate demand shocks is much easier in theory than in practice. Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 16 Describe three major difficulties that a central bank might face. ANSWER: The Fed must operate in real time when much of the data about the state of the economy is unknown. It takes time for data to be gathered. It also takes time for data to be interpreted and for problems to be recognized. Also, the Federal Reserve's control of the money supply is incomplete and subject to uncertain lags. A change in the money supply typically affects the economy with a lag of 6 to 18 months.
299. Explain the role of "expectations" and "credibility" in monetary policy when the policy goal is fighting inflation and keeping it low. ANSWER: Fear and confidence are some of the most important shifters of aggregate demand. One of the Fed's most valuable tools is its influence over expectations—its ability to boost market confidence. Fear discourages consumers and firms from spending, therefore such feelings go in hand with contractionary policies. Conversely, confidence encourages consumer spending and boosts the effects of an expansionary monetary policy. In order to fight inflation effectively, the Fed must avoid boosting the confidence of consumers, otherwise the necessary contractionary policy will not be effective.
300. What is a "disinflation" policy? What dilemma does it present for the Fed? ANSWER: Disinflation is a term used to describe the policy of lowering the inflation rate. Disinflation leads to unemployment, because wages and prices are sticky, especially in the downward direction. The key to a less painful disinflation is to increase nominal wage flexibility.
301. Why is it important for contractionary monetary policy to be credible? ANSWER: If a monetary contraction is not credible, then wages and prices will be especially sticky. Nominal wage growth will be too high, some workers will become too expensive, and massive unemployment will result. However, if a contractionary policy is credible, nominal wage growth will slow down, and workers will adjust to what is inevitable.
302. Briefly explain why the Fed is not very effective when a negative real shock occurs. ANSWER: A very difficult case for monetary policy is when the economy is hit by a negative real shock. This shifts the long-run aggregate supply curve to the left. If the Fed focuses on the inflation rate by decreasing the money supply, then it will reduce economic growth by more than the supply shock alone. They could increase aggregate demand, but the economy is less productive than at other times due to the negative real shock, and so most of the increase in the money supply would show up as inflation rather than real growth.
303. During the late 1970s and first part of the 1980s, the Fed seemed to react in a counterintuitive manner to the 1970s oil shocks. Explain the reasoning behind the Fed's policy decisions and the effect that they had on the economy. ANSWER: Many think that in the 1970's, the Fed overstimulated the economy. This led to inflation in 1980 as high as 13.5%/year. In the mid to late 1980's, President Reagan and the Fed chair, Paul Volcker, used tough economic policy to bring inflation down to 3%, but the consequence was a very severe recession with unemployment around 10%. The Fed reasoned that both inflation and unemployment could not be simultaneously tackled in order to solve the crisis, and thus decided to pursue a credible policy of contracting the economy. Unemployment rose, but persistent inflation was slashed to manageable levels.
304. Explain carefully why monetary policy deals more successfully with aggregate demand shocks than real shocks. ANSWER: The Federal Reserve can increase aggregate demand by increasing the money growth rate. However, when the economy is facing a negative real shock, this is less productive than at other times, due to the real shock. As a result, an increase in M -will not move the economy back to its original point. Instead, most of the increase in M will show up in inflation rather than in real growth. Central banks thus face a dilemma when it comes to negative real shocks. They must choose between too low a rate of growth (with a high rate of unemployment) and too high a rate of inflation, often receiving some of both.
305. Explain why the Federal Reserve did not reduce the growth rate of the money supply in response to rising Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 16 oil prices in 2007 and 2008. ANSWER: Such a policy would have meant reducing the growth rate of GDP for the economy as a whole. Reducing the growth rate of the money supply reduces economic growth by more than the supply shock alone would have done.
306. Many economists now believe that rising U.S. housing prices in the early 2000s were a bubble. Explain why the Federal Reserve did not pop the bubble. ANSWER: It is not always easy to identify when a bubble is present. Also, monetary policy is a crude means of "popping" a bubble. Monetary policy can influence aggregate demand, or target credit markets at the aggregate level, but it can't push demand for housing down and keep everything else up. Therefore, "targeting" an asset price bubble is impossible, the Fed's policies have ramifications for the economy as a whole.
307. Why is a negative real shock more difficult to mitigate through monetary policy than an aggregate demand shock? ANSWER: If the Fed focuses on the inflation rate by decreasing the money supply, aggregate demand decreases, which reduces economic growth by more than the negative shock alone. If the Fed increases aggregate demand while the economy is less productive than at other times due to the negative real shock, most of the increase in the money supply will show up as inflation rather than real growth.
308. Explain what factors led to the 2006 decrease in housing prices that caused a reduction in aggregate demand. ANSWER: The Fed began to raise rates in mid-2004, but rates remained relatively low until mid-2005. In 2006, housing prices peaked, and by 2007, housing prices were in freefall. New home construction also decreased. Homeowners felt poorer and so spent less, which decreased aggregate demand. By the fall of 2008, growth was negative.
309. In the face of a negative shock to consumer confidence, politicians are on the fence about whether to implement policies based on the advice of economists or to make decisions on the basis of Tarot card readings. What would happen during the period in which they are making up their minds about which strategy to pursue? a. would rise. b. would fall. c. would rise. d. would rise. ANSWER: b 310. If initially
= 5%,
= 3%,
= 2%, and
= 6% and then because of economic uncertainty
falls to
1%, what should the Fed do? a. quietly raise to 8% to offset the decrease in b. publicly lower to 3% so that stays constant at 2% c. publicly demonstrate a commitment to keep at 8% by raising d. quietly raise without telling anyone, as only unexpected inflation is expansionary ANSWER: c 311. To offset the effect of negative growth in money velocity ( ), the central bank should: a. decrease the growth rate of the money supply. Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 16 b. increase the growth rate of the money supply. c. apply a policy that stabilizes the growth in money velocity. d. apply a policy that reduces the growth in money velocity. ANSWER: b 312. An increase in uncertainty will lead to a(n): a. increase in but a decrease in . b. decrease in but an increase in . c. increase in both and . d. decrease in both and . ANSWER: d 313. If the Fed reduces
to fight inflation after a negative real shock, what should occur?
a. higher inflation b. lower real growth c. higher real growth d. no change in real growth ANSWER: b 314. If the Fed increases
to fight slower real growth after a negative real shock, what should occur?
a. no change in real growth b. lower real growth c. lower inflation d. higher inflation ANSWER: d 315. Some economists argue that the Fed should commit to keeping
fixed at a particular value, say 5%.
How would this rule require the Fed to respond in the event of a negative spending shock? A negative real shock? a. increase ; do nothing b. increase ; increase c. increase ; decrease d. decrease ; increase ANSWER: a
Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 16 316. If the Fed adheres to a strict "money growth rule" of 3% (i.e., it keeps
at 3% no matter what), what
happens if velocity growth ( ) drops? a. Inflation, real growth, and nominal wage growth all decrease. b. Inflation increases, but real growth and nominal wage growth decrease. c. Inflation and nominal wage growth decrease, but real growth increases. d. Inflation, real growth, and nominal wage growth all increase. ANSWER: a
Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 17 1. Which statement is correct? a. The burden of the FICA tax is equally split between workers and employers. b. Most of the burden of the FICA tax falls on workers. c. Most of the burden of the FICA tax falls on employers. d. Employees face no burden from the FICA tax. ANSWER: b 2. In 1940, Ida May Fuller received the first Social Security check after contributing only $24.75 in Social Security taxes before she retired and lived to be 100 years old. Her case is an example of how: a. Social Security payments were not issued to people who were close to retirement. b. people can choose not to contribute to Social Security. c. people begin to get Social Security payments before they retire. d. the first Social Security recipients benefited much more from the program than will workers entering the program today.
ANSWER: d 3. The Social Security payment system began issuing Social Security checks: a. at the end of World War II. b. in 1940. c. during the Great Depression. d. in 1913. ANSWER: b 4. Since the mid-1950s, federal government spending has been about _____% of GDP. a. 5 b. 10 c. 20 d. 40 ANSWER: c 5. Since the mid-1950s, federal government taxation has been about _____% of GDP. a. 5 b. 10 c. 18 d. 38 ANSWER: c 6. The first payment of Social Security benefits began in: a. 1929. b. 1935. c. 1940. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 17 d. 1955. ANSWER: c 7. The benefits each person receives from the federal government _____ the amount of taxes that person pays. a. are equal to b. are greater than c. are less than d. may be greater than, less than, or equal to ANSWER: d 8. What sources of tax revenues make up more than 90% of all federal government revenue? a. individual income tax, corporate income tax, and excise taxes b. corporate income tax, Social Security and Medicare taxes, and estate taxes c. individual income tax, corporate income tax, and Social Security and Medicare taxes d. corporate income tax, Social Security and Medicare taxes, and excise taxes ANSWER: c 9. What is the largest source of tax revenue for the U.S. federal government? a. individual income tax b. corporate income tax c. Social Security and Medicare taxes d. estate taxes ANSWER: a 10. In 2023, the U.S. federal government received about $_____ in tax revenue. a. 4.7 billion b. 578 billion c. 4.7 trillion d. 578 trillion ANSWER: c 11. The largest source of revenue for the U.S. federal government is: a. the corporate income tax. b. the individual income tax. c. excise taxes, such as taxes on gasoline and alcohol. d. Social Security and Medicare taxes. ANSWER: b 12. The second-largest source of revenue for the U.S. federal government is: a. the corporate income tax. b. the individual income tax. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 17 c. excise taxes, such as taxes on gasoline and alcohol. d. Social Security and Medicare taxes. ANSWER: d 13. What are the three main sources of funds for the U.S. federal government? a. individual income taxes, corporate income taxes, and Social Security and Medicare taxes b. interest on government bonds, corporate income taxes, and Social Security and Medicare taxes c. interest on government bonds, individual income taxes, and Social Security and Medicare taxes d. interest on government bonds, individual income taxes, and corporate income taxes ANSWER: a 14. What is NOT one of the main sources of tax revenue for the federal government? a. individual income tax b. Social Security and Medicare taxes c. sales tax d. corporate income tax ANSWER: c 15. As of 2023, the level of per capita federal taxes collected in the United States was about $: a. 900. b. 2,000. c. 7,000. d. 14,000. ANSWER: d 16. As income rises, the U.S. marginal tax rate: a. decreases smoothly. b. decreases in steps. c. increases smoothly. d. increases in steps. ANSWER: d 17. As income rises, the average tax rate in the United States: a. decreases smoothly. b. decreases in steps. c. increases smoothly. d. increases in steps. ANSWER: c 18. Since 1960, marginal tax rates in the United States have decreased for individuals: a. at all income levels. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 17 b. with high incomes only. c. with low incomes only. d. at no income level. ANSWER: a 19. Income that is not subject to taxation is called: a. marginal income. b. average income. c. exempt income. d. excluded income. ANSWER: c 20. Figure: U.S. Marginal and Average Tax Rates
According to the tax rates shown in the figure, an individual who earns $63,700 a year, has no deductions, and claims no exemptions will pay income tax of $: a. 8,772.50. b. 9,555.00. c. 15,925.00. d. 1,565.00. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 17 21. Figure: U.S. Marginal and Average Tax Rates
According to the tax rates shown in the figure, an individual who earns $85,000 a year will pay income tax of $: a. 5,325.00. b. 7,202.50. c. 14,097.50. d. 21,250.00. ANSWER: c 22. Figure: U.S. Marginal and Average Tax Rates
Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 17
According to the tax rates shown in the figure, an individual who earns $150,000 a year has an approximate average tax rate of: a. 28%. b. 25%. c. 20%. d. 15%. ANSWER: c 23. Figure: U.S. Marginal and Average Tax Rates
Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 17
Using the tax rates shown in the figure, assume that your annual income is $15,000, that you have a deduction Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 17 of $1,800 for moving expenses, and that you claim four exemptions of $3,300 each: one for yourself and one for each of your three children. How much are you expected to pay in taxes? a. $0 b. $120 c. $132 d. $138 ANSWER: a 24. What represents a change that has been made since the individual income tax was first levied in 1913? a. In 1969, the overall tax system was changed from a regressive to a progressive set of tax rates. b. In 1969, the alternative minimum tax was introduced to prevent the rich from paying no taxes. c. The alternative minimum tax has been adjusted for inflation. d. Social Security payments are no longer indexed to wages. ANSWER: b 25. The tax rate paid on an additional dollar of income is the: a. higher tax rate. b. secondary tax rate. c. marginal tax rate. d. reserve tax rate. ANSWER: c 26. The two lowest marginal tax brackets in the United States are: a. 5% and 10%. b. 7% and 15%. c. 10% and 12%. d. 15% and 25%. ANSWER: c 27. Which tax rate determines whether it is worth it to work an extra day? a. marginal b. average c. payroll (FICA) d. capital gains ANSWER: a 28. Which statement about individual income taxes in the United States is TRUE? a. All individuals pay the same average tax rate. b. There is a huge difference in the tax rate paid within each bracket. c. Tax rates include and vary between 10% and 91%. d. Marginal tax rates are flatter and lower today than in the past. Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 17 ANSWER: d 29. The tax rate on an additional dollar of income is the _____ tax rate. a. average b. total c. marginal d. alternative minimum ANSWER: c 30. The U.S. income tax system is: a. proportional. b. progressive. c. regressive. d. marginal. ANSWER: b 31. Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The marginal tax rate for a person earning $30,000 is: a. 10%. b. 15%. c. 20%. d. more than 20%. ANSWER: a 32. Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. The average tax rate for a person earning $35,000 is: a. 0%. b. 3.5%. c. 4.3%. d. 10.0%. ANSWER: c 33. Suppose the tax rate on the first $20,000 of income is 0%; 10% on the next $20,000 earned; and 20% on any additional income earned. A person earning $35,000 pays an income tax of $: a. 1,000. b. 1,500. c. 2,000. d. 3,500. ANSWER: b 34. In a progressive tax system, if a person moves from one income bracket to a higher income bracket: a. both the marginal tax rate and average tax rate will be higher. Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 17 b. both the marginal tax rate and average tax rate will be lower. c. the marginal tax rate will be lower, and the average tax rate will be higher. d. the marginal tax rate will be higher, and the average tax rate will be lower. ANSWER: a 35. Suppose a high-income individual, subject to a 15% capital gains tax rate, sells 100 shares of company X for a price of $9 per share (purchased at $10 each) and 500 shares of company Y for a price of $51 per share (purchased at $50 each). How much in capital gains tax will they pay? a. $60 b. $75 c. $210 d. $3,690 ANSWER: a 36. Suppose a high-income individual, subject to a 15% capital gains tax rate, sells 100 shares of company X and makes a loss of $500. They also sell 100 shares of company Y and make a profit of $1,200. How much in capital gains tax will they pay? a. $75 b. $105 c. $180 d. $255 ANSWER: b 37. The marginal tax rate is the: a. average tax rate paid on all earned income. b. tax rate paid on capital gains. c. minimum tax rate paid on income in the United States. d. tax rate paid on each additional dollar earned. ANSWER: d 38. The average tax rate is: a. the tax rate paid on an additional dollar of income. b. higher on people with lower incomes. c. the total tax payment divided by total income. d. a separate income tax code begun in 1969 to prevent the rich from paying income taxes. ANSWER: c 39. Is the marginal income tax rate or the average income tax rate higher for a typical person in the United States? a. The marginal income tax rate is higher. b. The average income tax rate is higher. c. They are equal. Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 17 d. It depends on the person. ANSWER: a 40. A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. If someone earns $75,000, how much tax does that person pay? a. $5,000 b. $7,500 c. $10,000 d. $15,000 ANSWER: c 41. A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. If someone earns $75,000, what is that person's marginal tax rate? a. 10.0% b. 13.3% c. 15.0% d. 20.0% ANSWER: d 42. A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. If someone earns $75,000, what is that person's average tax rate? a. 10.0% b. 13.3% c. 15.0% d. 20.0% ANSWER: b 43. A country has two income tax brackets: people pay 10% on their first $50,000 and 20% on everything they earn over $50,000. It also has a personal exemption of $5,000. Who benefits more from the personal exemption, a person making $35,000 or a person making $75,000? a. the person making $35,000 b. the person making $75,000 c. They benefit equally. d. It is impossible to tell. ANSWER: b 44. If tax rates are 10% on income up to $10,000, 20% for income between $10,001 and $20,000, and 30% for income over $20,000, the marginal tax rate for a person earning $25,000 is: a. 10%. b. 20%. c. 25%. d. 30%. Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 17 ANSWER: d 45. If tax rates are 10% on income up to $10,000, 20% for income between $10,001 and $20,000, and 30% for income over $20,000, the average tax rate for a person earning $25,000 is: a. 10%. b. 18%. c. 25%. d. 30%. ANSWER: b 46. If tax rates are 10% on income up to $10,000, 20% for income between $10,001 and $20,000; and 30% for income over $20,000, the total tax payment for a person earning $25,000 is approximately $: a. 2,000. b. 2,500. c. 3,000. d. 4,500. ANSWER: d 47. The tax rate paid on an additional dollar of income is called the _____ tax rate. a. last b. marginal c. total d. average ANSWER: b 48. Total tax payments divided by total income is called the _____ tax rate. a. last b. marginal c. total d. average ANSWER: d 49. At income levels above the limit for the lowest tax bracket, the average tax rate is: a. greater than the marginal tax rate. b. less than the marginal tax rate. c. equal to the marginal tax rate. d. below the marginal tax rate at first but above the marginal tax rate as income rises. ANSWER: b 50. The MOST important tax rate for determining an individual's incentive to work is the _____ tax rate. a. last Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 17 b. marginal c. total d. average ANSWER: b 51. What reduces taxable income? a. deductions b. exemptions c. both deductions and exemptions d. neither deductions nor exemptions ANSWER: c 52. The tax deduction for interest paid on home mortgages tends to: a. increase housing prices. b. decrease housing prices. c. have no impact on housing prices. d. make housing prices unpredictable. ANSWER: a 53. If your income is $65,000, with income up to $17,000 subject to a 10% tax rate and income above $17,000 subject to a 15% tax rate, then your average tax rate is: a. 11.2%. b. 12.5%. c. 13.7%. d. 14.2%. ANSWER: c 54. If your marginal tax rate is 25% and you can exempt $3,650 of your income for each member of your family (yourself, your spouse, and your one child), then the exemption means you will save $_____ in taxes. a. 912.50 b. 1,825.00 c. 2,737.50 d. 3,650.00 ANSWER: c 55. The legislation Congress passed in 1969 to make sure that the rich pay at least some income taxes was called the: a. flat tax code. b. regressive tax code. c. Social Security Tax. d. alternative minimum tax. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 17 ANSWER: d 56. The alternative minimum tax has become an added tax burden on many upper-middle-class families because: a. Congress intended it to be that way. b. it is not indexed to inflation. c. it is indexed to inflation. d. it is a regressive tax. ANSWER: b 57. Because the alternative minimum tax (AMT) is not indexed to inflation: a. more American families have become subject to the AMT over time. b. fewer American families have become subject to the AMT over time. c. every American family is subject to the AMT today. d. no American family is subject to the AMT today. ANSWER: a 58. If you purchased 10 shares of Goldman Sachs stock for $1,200 five years ago and continue to hold the stock today but its value has risen to $1,500, how much will you owe in capital gains tax on your 10 shares? Assume the tax rate on capital gains is set at 15%. a. $0 b. $45 c. $180 d. $225 ANSWER: a 59. If you purchased 10 shares of Goldman Sachs stock for $1,200 five years ago and decide to sell the stock today at a price of $1,500, how much will you owe in capital gains tax on your 10 shares? Assume the tax rate on capital gains is set at 15%. a. $0 b. $45 c. $180 d. $225 ANSWER: b 60. An increase in the capital gains tax will MOST likely: a. decrease investment. b. raise the marginal tax rate. c. raise the average tax rate. d. increase investment. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 17 61. Capital gains taxes are paid: a. anytime an asset rises in value. b. on bonds only. c. only when an asset is actually sold. d. mainly in times of deflation. ANSWER: c 62. If you receive a capital gain of $2,000 from selling a stock but also incur a capital loss of $1,500 from selling another stock, the total amount of tax you pay based on a 15% capital gains tax rate is $: a. 0. b. 75. c. 225. d. 300. ANSWER: b 63. What is the income tax NOT a tax on? a. labor income b. interest income c. dividends and capital gains d. welfare benefits ANSWER: d 64. The objective of the alternative minimum tax is to: a. balance the federal budget. b. ensure that even the poor pay some income taxes. c. prevent the rich from not paying any income taxes. d. raise the Social Security trust fund for retirees. ANSWER: c 65. The alternative minimum tax has effectively made the federal income tax: a. a more regressive tax system. b. a more progressive system. c. a flat tax system. d. the same in dollar terms for every taxpayer. ANSWER: b 66. The FICA tax burden is: a. paid entirely by the employer. b. shared equally by employer and employee. c. borne more by the employee even though the employer contributes an equal dollar amount. d. the same amount as the alternative minimum tax burden. Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 17 ANSWER: c 67. The purpose of FICA taxes is to fund: a. health services for elderly people. b. defense expenditures. c. presidential campaigns. d. Social Security payments. ANSWER: d 68. The Social Security program in the United States is financed by: a. individual income tax revenue. b. corporate income tax revenue. c. FICA tax revenue. d. excise tax revenue. ANSWER: c 69. Who appears to pay the FICA tax? a. mostly employees b. mostly employers c. employees and employers in equal amounts d. Congress ANSWER: c 70. The Federal Insurance Contributions Act tax is used to fund: a. the Federal Deposit Insurance Corporation. b. federal defense spending. c. Social Security payments. d. unemployment insurance. ANSWER: c 71. Which statement about Medicare taxes is TRUE? a. People who are self-employed do not share the burden of this tax with employers. b. People who own their own businesses do not have to pay this tax on themselves. c. Medicare taxes are larger in percentage terms than Social Security taxes. d. Medicare taxes are used to provide free medical care for children. ANSWER: a 72. How much FICA tax does your employer pay on the taxable portion of your income? a. 1.45% b. 6.20% c. 12.40% Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 17 d. 15.30% ANSWER: b 73. The Federal Insurance Contributions Act taxes are paid to fund: a. Medicaid. b. Medicare. c. Social Security. d. the operation of the Federal Emergency Management Agency. ANSWER: c 74. Workers bear at least a majority, if not all, of the burden of the employers' share of FICA and Medicare tax payments because the: a. workers would have earned lower wages without the tax payments. b. workers would have earned higher wages without the tax payments. c. workers would have earned the same wages as those without the tax payments. d. employers will force the workers to pay the taxes at the end of the year. ANSWER: b 75. What is the U.S. corporate tax rate? a. 6.2% b. 15.0% c. 21.0% d. 37.0% ANSWER: c 76. The U.S. corporate tax rate is _____% and U.S. corporations on average pay _____% on their corporate income. a. 35; more than 35 b. 21; less than 21 c. 60; more than 60 d. 60; 0 ANSWER: b 77. Who bears the burden of corporate income tax? a. shareholders b. consumers c. employees d. shareholders, consumers, and employees ANSWER: d 78. Under a regressive tax, people with higher incomes: Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 17 a. have higher average tax rates. b. have lower average tax rates. c. have the same average tax rates as those with lower incomes. d. pay fewer tax dollars. ANSWER: b 79. Under a flat tax: a. the marginal tax rate is zero, but the average tax rate is one. b. people with higher incomes pay fewer tax dollars. c. the average tax rate is the same for people with different income levels. d. the amount of tax payment is the same for people with different income levels. ANSWER: c 80. Under a progressive tax system, tax payments will _____ if a person's income doubles. a. double b. more than double c. less than double d. remain unchanged ANSWER: b 81. Who pays the MOST federal taxes? a. top 20% of income earners b. middle 20% of income earners c. second 20% of income earners d. bottom 20% of income earners ANSWER: a 82. In what tax systems do people with higher incomes usually end up paying more tax dollars? a. progressive b. regressive c. proportional d. progressive, regressive, and proportional ANSWER: d 83. The U.S. individual income tax system can BEST be described as a _____ tax system. a. regressive b. flat c. zero d. progressive ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 17 84. Table: A Cross-Country Comparison Country A Country B Country C Household Income Tax Paid Household Income Tax Paid Household Income Tax Paid $5,000 $1,000 $5,000 $500 $5,000 $500 15,000 1,000 15,000 2,250 15,000 1,500 25,000 1,000 25,000 5,000 25,000 2,500 35,000 1,000 35,000 8,750 35,000 3,500 This table shows data on taxes paid by three individuals living in each of the three countries: A, B, and C. The tax paid in dollars is based on the marginal tax rates assessed in each of the three countries. Assume that each individual earns an income of exactly $37,000 and there are no deductions or exemptions that need to be applied. According to the data in the table, which countries have a progressive tax system? a. A and B b. B and C c. B d. None of the countries has a progressive tax system. ANSWER: c 85. Table: A Cross-Country Comparison Country A Country B Country C Household Income Tax Paid Household Income Tax Paid Household Income Tax Paid $5,000 $1,000 $5,000 $500 $5,000 $500 15,000 1,000 15,000 2,250 15,000 1,500 25,000 1,000 25,000 5,000 25,000 2,500 35,000 1,000 35,000 8,750 35,000 3,500 This table shows data on taxes paid by three individuals living in each of the three countries: A, B, and C. The tax paid in dollars is based on the marginal tax rates assessed in each of the three countries. Assume that each individual earns an income of exactly $37,000 and there are no deductions or exemptions that need to be applied. According to the data in the table, which country has a flat tax rate system? a. A and B b. A and C c. C d. None of the countries has a flat tax rate system. ANSWER: c 86. Table: A Cross-Country Comparison Country A Country B Country C Household Income Tax Paid Household Income Tax Paid Household Income Tax Paid $5,000 $1,000 $5,000 $500 $5,000 $500 15,000 1,000 15,000 2,250 15,000 1,500 25,000 1,000 25,000 5,000 25,000 2,500 35,000 1,000 35,000 8,750 35,000 3,500 This table shows data on taxes paid by three individuals living in each of the three countries: A, B, and C. The tax paid in dollars is based on the marginal tax rates assessed in each of the three countries. Assume that each individual earns an income of exactly $37,000 and there are no deductions or exemptions that need to be applied. According to the data in the table, which country has a regressive tax rate system? Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 17 a. A b. B and C c. C d. None of the countries has a regressive tax rate system. ANSWER: a 87. The entire U.S. tax system is moderately: a. flat. b. progressive. c. regressive. d. value-added. ANSWER: b 88. The top 20% of all income earners pay almost _____% of all federal taxes in the United States. a. 10 b. 25 c. 50 d. 70 ANSWER: d 89. The top 1% of all income earners pay about _____% of all federal taxes in the United States. a. 1 b. 10 c. 30 d. 50 ANSWER: c 90. Moving from a progressive tax system to a flat tax system would MOST likely: a. raise taxes on the rich. b. raise taxes for poor and middle-income households. c. decrease investment. d. lower overall tax revenue. ANSWER: b 91. Nearly 70% of all U.S. federal income taxes are paid by the: a. bottom 20% of income earners. b. middle class: the twentieth percentile to the eightieth percentile of income earners. c. top 20% of income earners. d. top 1% of income earners. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 17 92. A progressive tax: a. is the tax rate paid on an additional dollar of income. b. places higher tax rates on people with higher incomes. c. equals the total tax payment divided by total income. d. is a separate income tax code that began in 1969 to prevent the rich from not paying income taxes. ANSWER: b 93. If tax rates are 10% on income up to $10,000; 20% for income between $10,001 and $20,000; and 30% for income over $20,000, then the income tax system is: a. progressive. b. proportional. c. flat. d. regressive. ANSWER: a 94. If a household's income tax increases by 80% when the household's income increases by 100%, then the tax system is: a. progressive. b. proportional. c. flat. d. regressive. ANSWER: d 95. In a regressive tax system, income tax as a share of income: a. decreases as income increases. b. remains the same as income increases. c. increases as income increases. d. is zero regardless of the income level. ANSWER: a 96. Under a flat tax system, a person earning an additional 10% in income has to pay _____ income tax. a. 10% less in b. the same amount of c. 10% more in d. more than 10% more in ANSWER: c 97. What is an example of a progressive tax system? a. U.S. federal income tax b. state sales tax c. property tax Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 17 d. Social Security tax ANSWER: a 98. On average, U.S. households with income in the bottom 20% pay _____ of their incomes in federal income tax. a. less than 1% b. between 1% and 15% c. between 15% and 25% d. more than 25% ANSWER: a 99. On average, U.S. households with incomes in the top 20% pay _____ of their incomes in federal income tax. a. less than 5% b. between 5% and 15% c. between 15% and 20% d. about 25% ANSWER: d 100. A tax whose rates remain constant regardless of income level is called: a. progressive. b. regressive. c. flat. d. aggressive. ANSWER: c 101. A _____ tax has higher rates on people with lower incomes. a. progressive b. flat c. regressive d. marginal ANSWER: c 102. If you pay an average tax rate of 25% on your salary of $20,000 and your neighbor pays an average tax rate of 10% on their salary of $300,000, the tax system is: a. flat. b. progressive. c. regressive. d. proportional. ANSWER: c 103. Households in the bottom 20% of the income distribution pay approximately what percentage of their income in federal taxes? Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 17 a. about 0.5% b. about 10% c. about 20% d. more than 20% ANSWER: a 104. Households in the top 20% of the income distribution pay approximately what percentage of their income in federal taxes? a. less than 5% b. about 10% c. about 20% d. more than 20% ANSWER: d 105. Compared with the federal individual income tax, sales taxes are: a. more progressive. b. less progressive. c. paid by corporations. d. fixed for all families. ANSWER: b 106. Which is NOT one of the three main sources of tax revenue for the U.S. federal government? a. the corporate income tax b. property taxes c. the individual income tax d. Social Security and Medicare taxes ANSWER: b 107. The individual income tax, the corporate income tax, and Social Security and Medicare taxes account for about _____% of the U.S. federal government tax revenue. a. 50 b. 70 c. 90 d. 95 ANSWER: c 108. What are the two biggest sources of revenue for the U.S. federal government? a. individual income tax and Social Security and Medicare taxes b. corporate income tax and Social Security and Medicare taxes c. sales tax and Social Security and Medicare taxes d. sales tax and individual income tax Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 17 ANSWER: a 109. Table: Income and Income Tax Income Income Tax Owed Year 1 $40,000 $3,600 Year 2 43,000 4,000 Year 3 47,000 4,600 Year 4 50,000 5,200 The marginal income tax rate on the increase in income from year 2 to year 3 is: a. 9.79%. b. 13.33%. c. 15.00%. d. 20.00%. ANSWER: c 110. Table: Income and Income Tax Income Income Tax Owed Year 1 $40,000 $3,600 Year 2 43,000 4,000 Year 3 47,000 4,600 Year 4 50,000 5,200 The marginal income tax rate on the increase in income from year 1 to year 2 is: a. 9.30%. b. 13.33%. c. 15.00%. d. 20.00%. ANSWER: b 111. Table: Marginal Tax Rates Income Bracket Marginal Tax Rate $0‒12,000 0% 12,001‒24,000 8 24,001‒40,000 12 40,001‒70,000 16 How much income tax is owed on an income of $36,000? a. $960 b. $1,440 c. $2,400 d. $4,320 ANSWER: c 112. Table: Marginal Tax Rates Income Bracket Marginal Tax Rate $0‒12,000 0% Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 17 12,001‒24,000 8 24,001‒40,000 12 40,001‒70,000 16 How much income tax is owed on an income of $50,000? a. $1,600 b. $4,480 c. $6,080 d. $8,000 ANSWER: b 113. Which marginal tax rate would have the biggest impact in reducing work incentive? a. 8% b. 15% c. 37% d. 52% ANSWER: d 114. How does a family's average tax rate compare to its marginal tax rate if the marginal tax rate rises as income rises? a. The average tax rate is equal to the marginal tax rate. b. The average tax rate is higher than the marginal tax rate. c. The average tax rate is lower than the marginal tax rate. d. There is no clear relationship between the average tax rate and the marginal tax rate. ANSWER: c 115. Table: Income and Income Tax Income Income Tax Owed Year 1 $40,000 $3,600 Year 2 43,000 4,000 Year 3 47,000 4,600 Year 4 50,000 5,200 The average income tax rate in year 3 is: a. 9.30%. b. 9.79%. c. 10.40%. d. 15.00%. ANSWER: b 116. Individuals pay income tax on: a. their total income. b. a set fraction of their income. c. their income after the subtraction of adjustments and deductions. Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 17 d. their income after the addition of adjustments and deductions. ANSWER: c 117. Which is true about income tax on capital gains? a. Capital gains are taxed the same as other types of income. b. Capital gains have a higher tax rate than other types of income. c. Capital gains have a lower tax rate than other types of income. d. Capital gains are not taxed. ANSWER: c 118. Which statement is false regarding the alternative minimum tax? a. It is paid as income tax only if it is higher than the person's income tax according to the tax schedule. b. It was designed to prevent wealthy people from avoiding payment of income taxes. c. It was added to the U.S. tax law in 1979. d. Because it is not indexed for inflation, it applies to upper- and middle-income taxpayers. ANSWER: c 119. The FICA tax taken out of workers' paychecks is: a. used to fund Social Security. b. used to fund education. c. part of the general tax revenue used for government expenses. d. a fee that pays for health insurance for low-income households. ANSWER: a 120. In the United States, corporations pay corporate income tax on their: a. accounting profits. b. economic profits. c. after-tax profits. d. total sales revenue. ANSWER: a 121. Table: Income and Income Tax Income Income Tax Owed Year 1 $40,000 $3,600 Year 2 43,000 4,000 Year 3 47,000 4,600 Year 4 50,000 5,200 The tax system in the table is what type of tax system? a. fractional tax rate system b. regressive tax rate system c. flat tax rate system d. progressive tax rate system Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 17 ANSWER: d 122. Table: Income Tax Income Income Tax Owed Year 1 $40,000 $4,000 Year 2 43,000 4,300 Year 3 47,000 4,700 Year 4 50,000 5,000 The tax system in the table is what type of tax system? a. fractional tax rate system b. regressive tax rate system c. flat tax rate system d. progressive tax rate system ANSWER: c 123. Future Social Security recipients with similar life expectancies have fewer benefits relative to older people who have already been receiving them for a while because: a. Social Security payments are now no longer paid out when the government has a budget deficit. b. the retirement age when one becomes eligible for Social Security will likely increase. c. Social Security payments have fallen as a percentage of the federal government's spending. d. Social Security payments are not indexed to wages. ANSWER: b 124. The largest spending program for the U.S. federal government is: a. Social Security. b. Medicaid. c. unemployment insurance. d. Medicare. ANSWER: a 125. Together, Social Security, defense, Medicare, and Medicaid make up approximately _____ of the U.S. federal budget. a. one-quarter b. one-third c. one-half d. two-thirds ANSWER: d 126. Of these, which is the smallest component of U.S. federal government spending? a. defense b. Social Security c. Medicaid Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 17 d. interest payments on government debt ANSWER: d 127. Together, Social Security, defense, Medicare, and Medicaid made up approximately _____% of federal government spending in 2017, the year illustrated in the text. a. 38 b. 49 c. 58 d. 62 ANSWER: d 128. In recent years, the average retiree has been paid $_____ per month in Social Security benefits. a. 763 b. 1,550 c. 2,121 d. 3,206 ANSWER: b 129. In 2023, the largest component of government spending was: a. national defense. b. Social Security. c. unemployment and welfare. d. "everything else" (roads, education, police, prisons, science and technology, agriculture, the environment, and other various stimulus programs).
ANSWER: b 130. What is NOT one of the four programs that make up nearly two-thirds of the federal budget in the United States? a. Social Security b. Medicare c. Medicaid d. unemployment insurance ANSWER: d 131. Which statement about the Social Security program is correct? a. Women, who generally live longer than men, benefit more from the system. b. The earlier you retire, the greater the benefits you receive from the Social Security system. c. Your Social Security withholdings from your paychecks are deposited into an account for you. d. On average, retirees in the United States receive about $8,000 per month in Social Security payments. ANSWER: a 132. The money you pay into Social Security currently goes to: Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 17 a. an individual account. b. a trust that earns interest to help pay your benefits. c. pay current beneficiaries. d. the investment fund of your choice. ANSWER: c 133. The Social Security system is becoming: a. less generous. b. more generous. c. more profitable. d. more reliable. ANSWER: a 134. If you were born after 1960, you will not be eligible to draw full Social Security retirement benefits until you reach age: a. 62. b. 65. c. 67. d. 70. ANSWER: c 135. If you were born after 1960, you will be eligible to draw partial Social Security retirement benefits when you reach age: a. 62. b. 65. c. 67. d. 70. ANSWER: a 136. The Social Security system redistributes income from: a. low-wage workers to high-wage workers. b. people with longer life expectancies to people with shorter life expectancies. c. women to men. d. people with shorter life expectancies to people with longer life expectancies. ANSWER: d 137. The single item on which the U.S. federal government spent the most in 2023 was: a. foreign aid. b. defense. c. Social Security. d. interest on the debt. Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 17 ANSWER: c 138. Social Security has become _____ over time. a. less generous and less progressive b. less generous and more progressive c. more generous and less progressive d. more generous and more progressive ANSWER: b 139. The U.S. Social Security tax (FICA) is an example of a _____ tax. a. progressive b. proportional c. regressive d. flat ANSWER: c 140. Social Security benefits are NOT based on: a. how long a person has worked. b. average earnings during a person's working life. c. whether a person is married. d. how wisely a person's FICA contributions are invested. ANSWER: d 141. Social Security is run on a _____ basis. a. pay-as-you-go b. contract c. trust fund d. prepaid ANSWER: a 142. Currently, the Social Security program pays out _____ it collects in taxes. a. more than b. less than c. significantly less than d. about the same amount as ANSWER: a 143. The United States spends _____ on defense. a. much less than any other country b. about as much as other countries c. a little more than other countries Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 17 d. much more than any other country ANSWER: d 144. Which country had the highest military expenditure in 2021? a. China b. Russia c. North Korea d. the United States ANSWER: d 145. Included among the top 10 nations in the category of military spending are: a. Saudi Arabia and France. b. North Korea and Pakistan. c. Iran and Israel. d. Turkey and Greece. ANSWER: a 146. The Medicare program offers health-care benefits for the: a. elderly. b. disabled. c. poor and disabled. d. poor. ANSWER: a 147. Which statement about Medicare and Medicaid is NOT correct? a. Medicaid covers the poor and disabled. b. Medicare reimburses the elderly for much of their medical care. c. An individual must be at least 65 years old to qualify for Medicare. d. Social Security and Medicare together make up about 15% of the federal budget. ANSWER: d 148. The main difference between Medicare and Medicaid is that Medicare covers medical care of: a. the elderly, while Medicaid covers medical care of the poor and disabled. b. the poor and disabled, while Medicaid covers medical care of the elderly. c. foreigners, while Medicaid covers medical care of only U.S. citizens. d. full-time workers, while Medicaid covers medical care of part-time workers. ANSWER: a 149. Whereas _____ covers the elderly, _____ covers the poor and the disabled. a. HMO; PPO b. PPO; HMO Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 17 c. Medicaid; Medicare d. Medicare; Medicaid ANSWER: d 150. The Medicaid program offers health-care benefits for the: a. elderly and disabled. b. poor and disabled. c. unemployed. d. disabled only. ANSWER: b 151. The federal government's main income redistribution program is: a. the Earned Income Tax Credit program. b. the Social Security system. c. Medicaid. d. Medicare. ANSWER: a 152. The federal tax system assists people below the poverty level through the: a. alternative minimum tax. b. Earned Income Tax Credit. c. Temporary Assistance for Needy Families program. d. provision of tax assistance to the working poor. ANSWER: b 153. The largest amount of federal dollars goes to which group? a. the unemployed b. the disabled c. the elderly d. the poor ANSWER: c 154. Suppose you are a married person with one child, and your whole family earns less than $20,000 a year. What will supplement your income? a. Federal Insurance Contribution Act b. alternative minimum tax c. Social Security d. Earned Income Tax Credit ANSWER: d 155. The maximum amount of time that a person can receive payments under the Temporary Assistance for Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 17 Needy Families (TANF) program is _____ years during a lifetime. a. 2 b. 5 c. 10 d. 25 ANSWER: b 156. The Earned Income Tax Credit makes the U.S. federal income tax: a. more regressive. b. more progressive. c. flatter. d. irrelevant to most taxpayers except for the rich. ANSWER: b 157. Social Security and Medicare transfer wealth primarily to: a. children. b. the unemployed. c. the poor. d. the elderly. ANSWER: d 158. What is true of government spending? a. The money spent by the government may not be as valuable in its use as it would be if spent by the taxpayer. b. The money spent by the government is likely to be more valuable in its use than it would be if spent by the taxpayer. c. The money spent by the government will be as valuable in its use as it would be if spent by the taxpayer.
d. All money should be spent by the government to reach its highest value. ANSWER: a 159. Unemployment and welfare constitute about _____% of the U.S. federal budget. a. 1 b. 5 c. 7 d. 40 ANSWER: c 160. What percentage of the total federal budget is spent on defense? a. 1 b. 4 c. 15 d. 41 Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 17 ANSWER: c 161. Combined, federal agencies, such as the FDA, FBI, NASA, and the National Science Foundation make up approximately _____% of the federal budget. a. 1 b. 8 c. 33 d. 49 ANSWER: c 162. Unemployment insurance makes payments to: a. only the poor who are out of work. b. all people who are unemployed or who are not working as much as they would like. c. only those who earn above $10,000 per year prior to being unemployed. d. anyone who is out of work and meets the requirements, regardless of income. ANSWER: d 163. Social Security makes up approximately what percentage of the U.S. federal government budget? a. 1 b. 5 c. 10 d. 23 ANSWER: d 164. Which is NOT one of the four largest categories of expenditures funded by the U.S. federal government? a. defense b. education c. Social Security d. Medicaid ANSWER: b 165. The funds to pay current Social Security benefits come from: a. the saved FICA tax payments that the beneficiaries made during their working years. b. the income tax revenues paid on all types of income. c. earnings on government bonds. d. the FICA tax payments of current workers. ANSWER: d 166. Which is TRUE regarding Social Security? a. There are fewer workers per beneficiary today than when the program began. b. Current benefits are funded from the saved FICA taxes paid when the beneficiaries were working. Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 17 c. Benefits have not changed in the past 40 years. d. Full benefits are available at age 62. ANSWER: a 167. Which is TRUE regarding defense spending by the U.S. federal government and defense spending by other countries? a. The three countries with the largest defense expenditures are the United States, China, and Saudi Arabia. b. The United States is the only North American country that ranks among the top 10 countries in national defense expenditures. c. The United States spends more than 10 times as much as Russia on defense.
d. The United States spends four times more on defense than the country with the second-largest defense expenditure.
ANSWER: d 168. Social Security and Medicare both are programs that: a. are funded by the contributions by beneficiaries accumulated during their working years. b. are designed to provide enough income to completely fund retirement. c. transfer wealth to the elderly. d. together account for the fourth-largest category of expenditures in the national budget. ANSWER: c 169. Which is NOT a type of welfare payment in the United States? a. housing vouchers b. Earned Income Tax Credit c. Medicare d. Temporary Assistance for Needy Families ANSWER: c 170. Which type of government expenditure varies greatly over each business cycle? a. unemployment compensation b. defense c. Social Security d. Medicare ANSWER: a 171. Why are Medicare and Social Security not considered to be welfare programs? a. They are funded by the accumulated contributions of beneficiaries and not by taxes on current workers. b. They have automatic monetary payments rather than vouchers for goods and services. c. Eligibility for benefits is not based on employment status. d. Eligibility for benefits is not based on income. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 17 172. Two reasons why government leaders do NOT spend tax revenue as carefully as individuals spend their own income are that: a. government leaders pay premium prices for standard products and there is little incentive to spend carefully. b. taxes can always be raised to cover the costs and they face competing pressures to spend on many different programs. c. they face competing pressures to spend on many different programs and they do not want to anger those seeking programs from the government. d. they do not know the priorities of the public and there is little incentive to spend carefully.
ANSWER: d 173. Why is wasteful spending by the government difficult to control? a. Most of the waste is in the larger spending programs like Social Security. b. Providing decision makers with necessary information and creating incentives to control costs both are difficult to achieve. c. Politicians are usually reelected because they provide more benefits to potential voters and voters do not care how high taxes are. d. Raising taxes is easier than analyzing expenditures more carefully.
ANSWER: b 174. Two reasons that there was considerable waste in U.S. government spending in Iraq and Afghanistan were that: a. spending was part of the foreign relations initiative and taxes were being raised to cover the costs. b. the desires of the Iraqi and Afghan people were not clearly known to decision makers in the United States and American taxpayers could not easily monitor the U.S. spending in Iraq and Afghanistan. c. the expenditures were necessary and the recipients of U.S. funding in Iraq and Afghanistan agreed to reimburse the United States for any wasted funds. d. corruption was widespread and recipients of U.S. funding in Iraq and Afghanistan demanded it.
ANSWER: b 175. Bill Clinton's administration experienced a federal budget surplus. What is therefore correct? a. The federal budget was still in deficit, but the deficit was smaller than in previous years. b. The national debt reached record high levels. c. The national debt held by the public decreased. d. Government expenditure was no longer counted as part of the federal budget. ANSWER: c 176. Government spending on "interest on the debt" refers to: a. interest paid to owners of government debt held by the public. b. interest charged by the U.S. government for U.S. foreign aid to other countries. c. spending by the U.S. government on education and highways. d. interest charged by the U.S. government on loans to states for education programs. ANSWER: a 177. Debt held outside the U.S. government is called the: Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 17 a. total U.S. national debt. b. debt-to-GDP ratio. c. national debt held by the public. d. debt to foreign investor holdings. ANSWER: c 178. In which year did the United States have the highest debt-to-GDP ratio? a. 1929 b. 1935 c. 1946 d. 1995 ANSWER: c 179. What is the annual difference between federal spending and revenues called? a. the deficit b. the national debt held by the public c. tax revenue shortfall d. spending as a percentage of GDP ANSWER: a 180. If the federal government spends 12% of GDP and collects revenues of 10% of GDP, what is the deficit as a percentage of GDP? a. 1% b. 2% c. 11% d. 12% ANSWER: b 181. The annual difference between federal spending and revenues is called the: a. national deficit. b. national debt. c. debt held by the public. d. debt-to-GDP ratio. ANSWER: a 182. About one-fifth of the total U.S. national debt is held by: a. China. b. private citizens. c. agencies in the federal government. d. the Federal Reserve. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 17 183. The highest debt-to-GDP ratio in U.S. history occurred: a. during the Reagan administration. b. in 2009, after the stimulus package was put into place. c. during the Great Depression. d. immediately following World War II. ANSWER: d 184. The government finances its debt by: a. printing money. b. borrowing from the Fed. c. issuing bonds. d. borrowing from foreign investors such as China. ANSWER: c 185. As of 2020, the U.S. government's debt held by the public was just over $: a. 25 million. b. 25 billion. c. 25 trillion. d. 25 quadrillion. ANSWER: c 186. In 2023, the U.S. debt-to-GDP ratio was about: a. 40%. b. 123%. c. 100%. d. 20%. ANSWER: c 187. The national debt held by the public is the amount of: a. government debt plus household debt. b. government debt at the federal, state, and local levels. c. federal debt held by individuals and organizations outside the federal government. d. federal debt held by foreign countries. ANSWER: c 188. Suppose the federal government incurred a $1 billion deficit in 2011. What was TRUE of the national debt? a. The national debt was $1 billion. b. The national debt decreased by $1 billion. c. The national debt increased by $1 billion. Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 17 d. The national debt was not related to the deficit. ANSWER: c 189. The U.S. Congressional Budget Office has projected the debt-to-GDP ratio to increase dramatically in the future. One of the major reasons is the: a. forecast of a recession. b. forecast of negative economic growth. c. projection of a high population growth rate. d. projected increasing health-care costs for the aging population. ANSWER: d 190. Which category of government spending as a percentage of GDP is MOST likely to increase in the future? a. Medicare and Medicaid payments b. unemployment benefits c. national defense d. foreign aid programs ANSWER: a 191. In which U.S. president's term of office did the federal government run a budget surplus? a. Ronald Reagan b. Bill Clinton c. George W. Bush d. Barack Obama ANSWER: b 192. The average interest rate of government debt in 2023 was about: a. 1.4%. b. 1.6%. c. 4.0%. d. 14.0%. ANSWER: b 193. When the text refers to the current U.S. national debt, it means the: a. national debt held by the public. b. public debt held by investors. c. private debt held by households. d. total debt held by foreign governments. ANSWER: a 194. What description of the "government deficit" is incorrect? a. A deficit occurs when spending is greater than revenue. Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 17 b. The deficit is caused by foreign aid spending. c. A deficit is the difference between federal spending and revenues. d. The deficit is the annual change in the national debt. ANSWER: b 195. Over the past 15 years, the U.S. debt-to-GDP ratio has been: a. steady and unchanging. b. rising. c. falling. d. unstable, particularly during periods of expansion. ANSWER: b 196. In 2023, interest payments on the U.S. national debt were approximately _____% of government revenue. a. 2 b. 5 c. 10 d. 13 ANSWER: d 197. Based on the national debt in 2020, if the interest rate on the debt were to rise from 2% to 5%, the interest payment on the debt would rise from _____% to _____% of government revenue. a. 2.0; 5.0 b. 5.0; 12.5 c. 13.0; 32.5 d. 7.0; 17.5 ANSWER: c 198. The amount by which expenditures exceed revenue in a given year is known as _____. The total amount owed is the total _____. a. insolvency; debt b. a deficit; insolvency c. a deficit; debt d. debt; a deficit ANSWER: c 199. A strict balanced budget requirement for the national government would limit: a. waste and taxes. b. government expenditures regardless of tax revenue. c. taxes to be no bigger than expenditures. d. the government's ability to address issues during wars and recessions. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 17 200. What is a reason for waste and inefficiency in government spending? a. weak incentives b. lack of information on how to spend the money effectively c. both weak incentives and lack of information on how to spend the money effectively d. neither weak incentives nor lack of information on how to spend the money effectively ANSWER: c 201. Even if the United States experiences no more recessions and the federal government spends nothing extra on any particular program, its expenditures will still rise because: a. unemployment benefits will rise. b. the government has committed to increasing Medicare payments for the next three decades. c. it will receive less foreign aid in the future. d. the population is aging and thus Social Security and Medicare payments will rise. ANSWER: d 202. During the COVID-19 recession of 2020, spending on which program increased MOST significantly? a. unemployment benefits b. Social Security c. Medicare d. foreign aid ANSWER: a 203. The primary reason that the public debt-to-GDP ratio in the United States has reached 100% in 2023 is: a. lower tax receipts. b. the war in Ukraine. c. the 2017 tax reform. d. increased spending during the COVID-19 pandemic. ANSWER: d 204. All of these countries have versions of a balanced budget law EXCEPT: a. the United States. b. Germany. c. Poland. d. Sweden. ANSWER: a 205. The United States _____ a balanced budget law at the federal level and _____ balanced budget laws at the state level. a. does not have; has. b. does not have; does not have. Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 17 c. does not have; does not have. d. has; has. ANSWER: a 206. Which Nobel Price economists argued that deficits are a natural consequence of political incentives because future taxpayers don't have a current vote? a. Friedrich Hayek b. James Buchanan c. Amartya Sen d. Paul Krugman ANSWER: b 207. Which year did NOT see an increase in government spending? a. 1974 b. 2008 c. 1943 d. 1998 ANSWER: d 208. Which year did NOT see an increase in government revenue? a. 2014 b. 2008 c. 2003 d. 1980 ANSWER: c 209. If your debt is $1,830, and the interest rate is 9%, then how much do you owe the lender in interest payments? a. $164.70 b. $16,470 c. $16.47 d. $1.65 ANSWER: a 210. The current debt-to-GDP ratio is _____ past standards. a. average by b. low by c. not comparable to d. high by ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 17 211. If the U.S. government decides to decrease the budget deficit in the future, it could: a. raise taxes. b. decrease Social Security payments. c. reduce spending on health-care programs. d. raise taxes, decrease Social Security payments, or reduce health-care spending. ANSWER: d 212. What is the expected future trend of the debt-to-GDP ratio? a. There are too many unknown variables to make a prediction. b. The ratio will remain stable. c. The ratio will decrease slightly. d. The ratio will increase greatly. ANSWER: d 213. What demographic change in the United States will cause government spending to increase in the next 50 years? a. The population older than 65 will grow. b. The population will be younger. c. Women will have more children. d. Immigration will increase. ANSWER: a 214. What is TRUE of projections for government spending and revenue as a share of GDP for the next 50 years? a. Total spending will rise at the same rate as the total revenue. b. Total spending will rise more slowly than the total revenue. c. Total spending will rise more rapidly than the total revenue. d. Both total spending and total revenue will fall. ANSWER: c 215. As the U.S. population ages and retires, Social Security payments will have to increase approximately _____% in order to maintain the level of promised benefits. a. 10 b. 24 c. 41 d. 56 ANSWER: c 216. If current spending patterns are maintained, most of the increase in planned spending over the next 50 years will be on: a. defense. b. Social Security. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 17 c. Medicare and Medicaid. d. foreign aid. ANSWER: c 217. Current projections regarding the debt-to-GDP ratio are that: a. under any plausible scenario, the federal budget is on a sustainable path. b. under any plausible scenario, the federal budget is on a continuous path. c. the federal debt will grow much more slowly than the economy over the long run. d. the federal debt will grow much faster than the economy over the long run. ANSWER: d 218. The main cause of higher government spending in the future will be: a. Medicare, Medicaid, and Social Security. b. national defense and foreign aid. c. unemployment insurance and welfare spending. d. spending on roads, bridges, and infrastructure. ANSWER: a 219. Compared to MOST developed nations, the U.S. total government spending as a percentage of GDP is: a. about average. b. less than that of many countries. c. greater than that of many countries. d. decreasing at a greater rate than that of other countries. ANSWER: b 220. Which country has the highest ratio of government spending to GDP? a. the United States b. China c. Japan d. France ANSWER: d 221. What kind of rising costs will mostly cause U.S. government spending to skyrocket in the future? a. defense b. environmental protection c. education d. health care ANSWER: d 222. Which is NOT one of the concerns about the rising U.S. debt-to-GDP ratio in 2023? a. Per person health-care costs and health care as a portion of GDP are rising. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 17 b. Defense expenditures associated with unrest in the Middle East are rising. c. The COVID-19 pandemic triggered a rapid increase in government expenditures. d. A larger share of the population will be beneficiaries of Social Security and Medicare. ANSWER: b 223. How does the United States compare to other developed nations in regards to government spending and taxes? a. They are higher in the United States than in most developed nations. b. They are lower in the United States than in most developed nations. c. About half of developed nations have levels higher than the United States. d. The United States has the same levels as most other developed nations. ANSWER: b 224. What was Milton Friedman's argument for a volunteer army instead of a military draft? a. The societal cost of a draft was much higher than the paychecks of a volunteer army because of the significant opportunity cost of drafted soldiers. b. A volunteer army would cost less in dollar terms than a drafted army.
c. The United States would no longer need an active army because the country could protect itself adequately with just a few volunteer soldiers. d. The opportunity cost of an all-volunteer army is higher than that of the draft.
ANSWER: a 225. If the opportunity cost of resources used for government programs is ignored, then the government budget _____ the role of government in the economy. a. overestimates b. underestimates c. correctly reflects d. is totally unrelated to ANSWER: b 226. What is TRUE when measuring the role of the government in an economy by the amount of its government spending? a. The amount of government spending overstates the role of the government in the economy because it ignores the costs associated with corruption in the government. b. The amount of government spending understates the role of the government in an economy because of the effects of government policies on economic activity. c. The amount of government spending overstates the role of the government in the economy because most government actions have negative effects on free markets. d. Government spending is not related to the role of government in the economy because most government actions are motivated by politics.
ANSWER: b 227. The influence of the government tends to be _____ when measures of government spending and revenues are used as indicators. Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 17 a. overcounted b. undercounted c. accurately counted d. sometimes overcounted and sometimes undercounted ANSWER: b 228. According to the U.S. budget, what types of transfer payments are larger than welfare payments? a. interest payments b. Medicaid payments c. defense transfers d. general transfers to the elderly ANSWER: d 229. Social Security taxes account for the largest source of U.S. federal government receipts today. a. True b. False ANSWER: b 230. Corporate income tax provides the largest share of federal tax receipts. a. True b. False ANSWER: b 231. Corporate income taxes bring in as much revenue to the federal government as do individual income taxes. a. True b. False ANSWER: b 232. U.S. marginal tax rates today are lower and flatter than they were in the 1960s. a. True b. False ANSWER: a 233. For a progressive income tax system, the marginal tax rate is higher than the average tax rate. a. True b. False ANSWER: a 234. In the United States, every dollar of individual income is taxed. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 17 ANSWER: b 235. The alternative minimum tax is assessed only on high-income families. a. True b. False ANSWER: b 236. Capital gains taxes are paid only when assets are sold. a. True b. False ANSWER: a 237. In most cases, Republicans and Democrats agree about how much investment income should be taxed. a. True b. False ANSWER: b 238. The AMT has significantly increased the tax burden for more than 4 million households. a. True b. False ANSWER: a 239. The alternative minimum tax is indexed to inflation. a. True b. False ANSWER: b 240. The corporate income tax makes up nearly half of U.S. federal tax revenue. a. True b. False ANSWER: b 241. The corporate income tax is the single largest source of revenue for the federal government. a. True b. False ANSWER: b 242. Corporations ultimately bear the entire burden of the corporate income tax. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 17 243. If country A has mostly rich people and country B has mostly poor people and they have identical progressive tax systems, we should expect tax revenues to be higher in country A. a. True b. False ANSWER: a 244. If most people in country A fall in the lowest tax bracket and most people in country B fall in the highest tax bracket and the countries have identical progressive tax systems, we should expect tax revenues to be higher in country A. a. True b. False ANSWER: b 245. People earning a higher income pay fewer tax dollars than lower-income earners in a regressive tax system and pay more tax dollars than lower-income earners in a progressive tax system. a. True b. False ANSWER: b 246. The U.S. federal income tax system is regressive. a. True b. False ANSWER: b 247. Because of loopholes and good tax accountants, the rich do not pay any taxes in the United States. a. True b. False ANSWER: b 248. Well over half of all income tax revenue received by the federal government is paid by the richest one-fifth of income earners. a. True b. False ANSWER: a 249. The largest component of government spending is paying interest on the national debt. a. True b. False ANSWER: b 250. Individuals receive different Social Security benefits depending on their wealth, life expectancy, marital status, and other factors. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 17 b. False ANSWER: a 251. Women tend to benefit more than men from the Social Security program because of their higher life expectancy. a. True b. False ANSWER: a 252. Measured in terms of dollars paid out, Social Security is the largest single government program in the world. a. True b. False ANSWER: a 253. When individuals make payments into Social Security, the funds go into an account identified by their Social Security number. a. True b. False ANSWER: b 254. Social Security benefits have become more generous over time. a. True b. False ANSWER: b 255. Social Security redistributes wealth across income classes. a. True b. False ANSWER: a 256. Social Security will pay you less if you live longer. a. True b. False ANSWER: b 257. Most of the burden of Social Security taxes falls on workers. a. True b. False ANSWER: a 258. The Earned Income Tax Credit (EITC) serves as the main form of antipoverty assistance at the federal level. Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 17 a. True b. False ANSWER: a 259. Most of the spending in the federal budget goes to welfare programs. a. True b. False ANSWER: b 260. The biggest spending item in the U.S. budget is foreign aid. a. True b. False ANSWER: b 261. To balance the U.S. budget, it is sufficient to reduce spending on defense. a. True b. False ANSWER: b 262. The debt held by the public in 2007 was approximately $5 trillion but has risen to over $25 trillion today. a. True b. False ANSWER: a 263. The current U.S. debt-to-GDP ratio is the highest in U.S. history. a. True b. False ANSWER: b 264. It is possible for a country to have a high positive national debt and also have a large budget surplus. a. True b. False ANSWER: a 265. Approximately one-fifth of the total national debt is held by other U.S. government agencies. a. True b. False ANSWER: a 266. The deficit is all federal debt held outside the U.S. government. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 17 ANSWER: b 267. The debt-to-GDP ratio for the United States has increased significantly over time since the beginning of World War II. a. True b. False ANSWER: b 268. The national debt held by the public increases when the federal government runs a deficit. a. True b. False ANSWER: a 269. Economists are more concerned about the future than the current debt-to-GDP ratio. a. True b. False ANSWER: a 270. The main forces driving the projections of exponential debt growth in the future are recessions and the rising costs of welfare programs. a. True b. False ANSWER: b 271. Spending on defense, law enforcement, and scientific research are all projected to increase as a percentage of GDP. a. True b. False ANSWER: b 272. In recent decades, health-care costs per capita have risen more than twice as fast as GDP per capita. a. True b. False ANSWER: a 273. A good way to judge the fiscal health of the federal government is by looking at today's budget deficit. a. True b. False ANSWER: b 274. The level of government spending is an accurate measure of government's influence in the economy. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 17 b. False ANSWER: b 275. What are the two biggest sources of tax revenue for the U.S. government? What are the two biggest expenses for the U.S. government? What can you conclude about the way these expenses will change in the future? ANSWER: The two biggest sources of tax revenue for the U.S government are individual income taxes and Social Security and other payroll taxes. The two biggest expenses are Social Security and Medicare (excluding the "all other" category). Based on the aging of the U.S. population, we would expect that Social Security and Medicare to become even larger shares of U.S. government expenditures.
276. Explain the difference between an average tax rate and a marginal tax rate. ANSWER: The average tax rate is a measure of the overall tax burden faced, calculated by dividing the total amount of taxes paid by total taxable income. It provides a broad view of how much income, on average, is directed toward taxes. On the other hand, the marginal tax rate refers to the specific tax rate applied to the last unit of income earned. It represents the tax rate incurred on any additional income received. The marginal tax rate can fluctuate as income increases or decreases, reflecting the progressive nature of many tax systems that impose higher rates on higher levels of income.
277. Using what you know about the U.S. tax code, answer the following questions. a. Why is the Social Security tax like a welfare system? b. How do health-care advances affect the Social Security payments system? c. On average, why do you think women benefit more from Social Security than men? d. How might corporate dividends be double-taxed? ANSWER: a. The Social Security tax is often likened to a welfare system because it functions as a social insurance program designed to provide financial support to individuals who have reached retirement age, become disabled, or lost a primary wage earner. Workers and their employers contribute to the Social Security system through payroll taxes, and in return, eligible individuals receive benefits when they meet specific criteria, such as reaching retirement age or becoming disabled. While Social Security is not a welfare program in the traditional sense, it shares similarities with welfare in that it provides financial assistance to those in need, funded by contributions from the workforce. b. Advances in healthcare can affect the Social Security payments system in several ways. Improved health care can lead to increased life expectancy, which can put additional strain on the Social Security system as people may receive benefits for a more extended period. However, healthier individuals may also be more likely to continue working beyond the traditional retirement age, which could help offset some of these increased costs. Additionally, advances in medical treatments and technologies may enable people with disabilities to remain in the workforce or recover and return to work, potentially reducing the number of individuals reliant on Social Security disability benefits. c. Women often benefit more from Social Security than men on average due to several factors, including longer life expectancies and their role in caregiving. Since women tend to live longer than men, they are more likely to receive Social Security benefits for a more extended period. Furthermore, women are more likely to take on caregiving responsibilities for family members, which can lead to breaks in their employment history. Social Security benefits are based on a worker's average earnings over their working years, so these employment interruptions can result in lower lifetime earnings for women. d. Corporate dividends can potentially be double-taxed under the U.S. tax system. This double taxation occurs because dividends are typically taxed at both the corporate level and the individual shareholder level. Corporate Level: When a corporation earns profits, it pays corporate income tax on those earnings. This tax reduces the company's after-tax profits. Shareholder Level: When the corporation distributes its after-tax profits to shareholders in the form of dividends, individual shareholders must report these dividends as income on their personal tax returns. They may be subject to additional taxation at their individual tax rates.
278. What kinds of tax deductions are described in the text? ANSWER: Tax deductions described in the text include: Mortgage interest payments, state and local taxes, charity. Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 17 The mortgage interest tax deduction is a financial benefit that allows homeowners to deduct the interest paid on their mortgage from their taxable income, reducing the amount of income subject to taxation. The tax deduction for state and local taxes allows individuals to deduct the amount they paid in state and local income taxes, as well as property taxes, from their federal taxable income. The tax deduction for charitable contributions enables individuals to reduce their taxable income by the amount of money or the fair market value of property they donate to qualified nonprofit organizations.
279. Table: Tax Brackets Income Marginal Tax Rate $0–17,000 10% 17,001–69,000 15 69,001–139,350 25 139,351–212,300 28 212,301–379,150 33 379,151 and above 35 Consider the tax brackets shown in the accompanying table. If your income is $90,000, what will be your tax liability, marginal tax rate, and average tax rate? ANSWER: To calculate your tax liability, marginal tax rate, and average tax rate for an income of $90,000 using the provided tax brackets, you can follow these steps: Step 1: Determine which tax bracket your income falls into. Your income of $90,000 falls into the third tax bracket: Income between $69,001 and $139,350 with a marginal tax rate of 25%. Step 2: Calculate the tax liability for each tax bracket up to your income level. For the first bracket ($0–$17,000): Tax liability = $17,000 (income in this bracket) × 0.10 (10% tax rate) = $1,700 For the second bracket ($17,001–$69,000): Tax liability = ($69,000 − $17,000) × 0.15 (15% tax rate) = $7,800 For the third bracket ($69,001 – $90,000): Tax liability = ($90,000 − $69,001) × 0.25 (25% tax rate) = $5,250 Step 3: Add up the tax liabilities from all brackets to find your total tax liability: Total Tax Liability = $1,700 + $7,800 + $5,250 = $14,750 Step 4: Calculate your marginal tax rate. Your marginal tax rate is the tax rate that applies to the last dollar of your income, which is 25% in this case since you are in the third bracket. Step 5: Calculate your average tax rate. The average tax rate is the total tax liability divided by your income: Average Tax Rate = (Total Tax Liability/Income) × 100 Average Tax Rate = ($14,750/$90,000) × 100 ≈ 16.61% So, for an income of $90,000: Tax Liability: $14,750 Marginal Tax Rate: 25% Average Tax Rate: Approximately 16.4%
280. All taxes on businesses, such as the payroll tax and corporate income tax, are actually paid by individual human beings. Explain this argument. ANSWER: The argument that all taxes on businesses are ultimately paid by individual human beings is based in the idea that businesses are not separate entities from people. They are created, owned, and operated by individuals. When governments impose taxes on businesses, these taxes can indirectly affect various individuals within and outside the business. These taxes can be divided between corporate and payroll taxes. When a government imposes a corporate income tax, it requires businesses to pay a portion of their profits in taxes. However, businesses are owned by shareholders, who are people investing their money. When businesses pay corporate income tax, they often reduce the profits available for distribution to shareholders. As a result, shareholders may receive lower dividends, see a decrease in the value of their investments, or experience reduced returns on their stocks. Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 17 Essentially, the tax burden from corporate income tax is passed on to the individual shareholders who have a stake in the business. Payroll taxes, which fund programs like Social Security and Medicare, are typically shared between employers and employees. Employers deduct a portion of these taxes from their employees' wages and contribute a corresponding amount themselves. However, it's often argued that the ultimate burden falls on employees. When employers have to cover the cost of payroll taxes, they may be less inclined to increase wages or hire more workers. In a competitive labor market, this can result in employees receiving lower take-home pay or experiencing slower wage growth.
281. Proponents of the United States moving from its current progressive tax system to a flat tax system argue that the efficiency gains associated with a flat tax system would mean that even people who are paying a higher tax rate, with increased economic growth, would be better off. Explain this argument. ANSWER: Proponents of transitioning from a progressive tax system to a flat tax system contend that such a move would enhance overall economic efficiency and benefit all taxpayers, even those subject to higher tax rates. The rationale behind this argument lies in the inherent simplicity and reduced administrative burden of a flat tax. By imposing a uniform tax rate on all income levels, the tax code becomes less convoluted and easier to navigate, reducing compliance costs for individuals and businesses alike. Moreover, proponents argue that the lower tax rates associated with a flat tax would stimulate economic growth. Lower taxes can incentivize individuals and companies to work and invest more, fostering entrepreneurship and capital accumulation. This, in turn, can lead to an expansion of the overall tax base, potentially offsetting the revenue losses from lower rates. The cumulative effect of increased economic activity and reduced compliance costs is believed to generate higher overall tax revenues. Consequently, proponents assert that even those who pay a higher percentage of their income would ultimately benefit from a more efficient and growth-oriented tax system, resulting in a more prosperous society.
282. Explain what a flat tax is, and discuss its advantages and disadvantages. ANSWER: A flat tax is a simple and uniform tax system in which everyone, regardless of their income, pays the same percentage of their earnings to the government. Typically, this percentage remains constant, providing a straightforward approach to taxation. Advantages of a flat tax include its simplicity and transparency. With a single tax rate, individuals and businesses find it easier to understand and comply with tax laws, reducing the need for complex calculations and tax planning. It can also incentivize economic growth by providing fewer disincentives for individuals and businesses to earn more income. Additionally, a flat tax can reduce the administrative burden on governments, potentially lowering tax collection costs. However, flat taxes have notable disadvantages. Critics argue that they disproportionately burden low-income earners, as a fixed percentage of their income may constitute a more significant portion of their basic living expenses. This can exacerbate income inequality, as the wealthy may pay a smaller share of their income in taxes. Furthermore, it may reduce government revenue, potentially leading to cuts in public services and social programs that disproportionately benefit lower-income individuals.
283. Table: Marginal Tax Rates Income Tax Rate $0–20,000 0% 20,001.01–40,000 10 40,001.01–60,000 20 For a family earning $45,000, use the tax rates from the accompanying table and determine its marginal tax rate, average tax rate, and total income tax payment. Is this a progressive, regressive, or flat tax code? Explain. ANSWER: Tax on the first $20,000 is 0%. Tax on the next $20,000 is 10% of $20,000, which is $2,000. Tax on the remaining $5,000 is 20% of $5,000, which is $1,000. Total tax paid is $2,000 + $1,000 = $3,000. Average tax rate = (Total Tax Paid/Total Income) × 100 Average tax rate = ($3,000/$45,000) × 100 = 6.67% Total Income Tax Payment: The total income tax payment is simply the total tax paid, which we calculated as $3,000. A progressive tax code means that as income increases, the tax rate also increases. In this case, the tax rate does Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 17 increase as income increases. The tax rate starts at 0% for the first $20,000, then increases to 10% for the next $20,000, and further increases to 20% for income beyond $40,000. This indicates a progressive tax code. Marginal Tax Rate: 20% Average Tax Rate: 6.67% Total Income Tax Payment: $3,000 Tax Code: Progressive This tax code is progressive because the tax rate increases as income rises.
284. How does the marginal tax rate compare with the average tax rate in a flat tax system? How do these two tax rates compare in a progressive tax system and a regressive tax system? ANSWER: In a flat tax system, the marginal tax rate and the average tax rate are the same for all income levels. This means that everyone, regardless of their income, pays the same percentage of their income in taxes. In a progressive tax system, the marginal tax rate is higher than the average tax rate. This means that as income increases, a taxpayer's tax rate also increases. In a regressive tax system, the opposite is true. The marginal tax rate is lower than the average tax rate as income increases. In such a system, lower-income individuals pay a higher percentage of their income in taxes compared to higher-income individuals.
285. Social Security operates on a pay-as-you-go basis. What does this mean? ANSWER: Social Security operates on a pay-as-you-go basis, which means that the current workforce's payroll taxes fund the benefits received by current retirees. When people work and earn income, a portion of their wages is deducted as Social Security taxes. These tax contributions are not saved or invested for individual accounts but are instead used to provide benefits to current retirees and other eligible beneficiaries. The system relies on the principle that when today's workers retire, the next generation of workers will be contributing to the system to fund their retirement benefits. This system works well when there's a relatively stable ratio of workers to retirees. However, challenges can arise when the number of retirees grows significantly relative to the working population, potentially leading to funding gaps or necessitating adjustments in taxes, retirement ages, or benefit levels to maintain the program's sustainability.
286. Explain the difference between Medicare and Medicaid. ANSWER: Medicare and Medicaid are two distinct government-funded health-care programs in the United States. Medicare primarily serves individuals aged 65 and older, as well as some younger people with certain disabilities. It consists of four parts: Part A (hospital insurance), Part B (medical insurance), Part C (Medicare Advantage), and Part D (prescription drug coverage). Beneficiaries typically pay premiums for Part B and D, while Part A is often premium free for those who've paid Medicare taxes. In contrast, Medicaid is designed to provide health-care coverage to low-income individuals and families, including pregnant women, children, and people with disabilities. Eligibility and benefits vary from state to state, but it's jointly funded by both federal and state governments. Medicaid often has no or very low out-of-pocket costs for eligible individuals.
287. Suppose you see the following claim made in a local newspaper: "The United States is a welfare economy, where taxes are used to redistribute wealth to the poor." Do you agree or disagree with this statement? Why or why not? ANSWER: Feedback for those taking an agree position: The United States can be considered a "welfare economy" where taxes are used to redistribute wealth to the poor. While the U.S. may not be purely a welfare state, it does have a significant system of social welfare programs designed to alleviate poverty and provide a safety net for the less fortunate. These programs include Medicaid, food stamps, unemployment benefits, and Social Security, among others. Furthermore, the progressive tax system in the United States means that higher-income individuals pay a larger share of their income in taxes, effectively redistributing wealth to fund these programs. The intention behind many government policies and regulations is to reduce income inequality and provide economic support to those in need. Feedback for those taking a disagree position: The United States cannot be considered a "welfare economy" solely dedicated to redistributing wealth to the poor. While the United States does have social welfare programs aimed at assisting low-income individuals and families, it is Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 17 not the primary function of the economy or government. The United States has a mixed-market economy with elements of both capitalism and social welfare. Taxes serve various purposes beyond wealth redistribution, such as funding public services, infrastructure, defense, and more. Moreover, the United States has a progressive tax system where higher-income individuals pay a larger share of taxes, contributing to wealth redistribution indirectly. Still, the primary goal is not just wealth redistribution but rather maintaining a balanced society where opportunity and social safety nets coexist.
288. Suppose a politician claims that they will eliminate the government deficit by reducing wasteful spending. Why are they unlikely to achieve this? ANSWER: Eliminating the government deficit solely by reducing wasteful spending is unlikely due to several factors: (1) Identifying and agreeing on what constitutes "wasteful" spending is subjective and politically contentious. (2) The deficit often results from fixed obligations (e.g., entitlements, debt interest) that can't be easily cut. (3) Reducing spending might hinder economic growth, impacting tax revenues. (4) Political resistance to cuts in popular programs. (5) Unforeseen expenses or economic downturns can disrupt plans. A comprehensive fiscal strategy must consider revenue, economic factors, and broader policy measures.
289. What are the arguments for reducing the national debt in the United States? What is the difference between the national debt and the budget deficit? ANSWER: Reducing the national debt in the United States is essential for economic stability, fiscal responsibility, and intergenerational fairness. A high national debt can lead to economic instability and divert funds from crucial services. It's seen as a responsible fiscal measure that enhances government credibility and ensures that future generations are not burdened with excessive interest payments. The budget deficit, on the other hand, is an annual imbalance between government spending and revenue. It's a snapshot of a single year's financial situation and contributes to the overall national debt when not offset by surpluses in other years. Reducing the budget deficit is often a means to address the broader goal of reducing the national debt.
290. A nation has $6 billion in revenue in year 1 and $7 billion in spending. In year 2, it has $8 billion in revenue and $10 billion in spending. In year 2, what is the national debt and what is the deficit, assuming the nation can borrow at 0% interest without paying on the principal? ANSWER: The national debt is calculated by subtracting revenue from spending in each year and summing the result: $7 billion − $8 billion + $10 billion − $8 billion= 3 billion. The deficit in year 2 is the difference only in that year, so $10 billion − $8 billion = $2 billion.
291. At the beginning of 2007, the interest rate paid on the national debt was 5%. In 2010, it was only 2%. Explain why the interest rate on the national debt fell so much between 2007 and 2010 even as the national debt increased dramatically. Do you expect it to continue to fall? Explain why or why not. ANSWER: The significant reduction in the interest rate on the national debt from 5% in 2007 to 2% in 2010 can be attributed to several interconnected factors. Firstly, during the 2008 financial crisis, central banks, including the Federal Reserve, implemented policies aimed at spurring economic growth. This involved lowering interest rates across the board, including those on government debt, in an effort to encourage borrowing and investment. Secondly, investor behavior played a role. In times of economic uncertainty, investors often seek the safety of government bonds, increasing demand for U.S. Treasury securities. This surge in demand drove up bond prices and, in turn, led to lower yields or interest rates. Furthermore, expectations about inflation influenced interest rates. Lower inflation expectations tend to result in reduced interest rates on long-term bonds, such as those used to finance the national debt. In the aftermath of the financial crisis, inflation expectations remained low, contributing to the lower rates. Lastly, central banks engaged in quantitative easing, a policy where they purchased government bonds. This increased demand for these bonds, pushing their prices higher and, consequently, causing interest rates to drop. As for the future, whether interest rates on the national debt continue to decline depends on economic conditions. If the economy remains stable and inflation stays low, rates may remain relatively low. However, if inflation surges or economic conditions change significantly, interest rates could rise.
292. What are the main causes of the increased federal government deficits since 2007? Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 17 ANSWER: The increased federal government deficits since 2007 can be attributed to several significant factors. First, the global financial crisis of 2008 led to reduced tax revenues and increased government spending to address economic challenges. Ongoing military conflicts in Iraq and Afghanistan incurred substantial military expenditures, adding to the deficit. Additionally, tax cuts, such as the Bush-era tax cuts and the Tax Cuts and Jobs Act of 2017, reduced government revenue. Rising health-care costs and an aging population increased Medicaid and Medicare spending, placing a significant burden on the federal budget. Social Security and other entitlement programs also faced growing obligations due to demographic changes and health-care cost inflation. In response to economic downturns such as the COVID-19 recession, stimulus packages were implemented, increasing government outlays. Long-term structural issues, including a growing gap between revenue and spending, have further strained the budget.
293. The Congressional Budget Office (CBO) estimates that if spending and taxes remain on their current trajectories, the U.S. debt-to-GDP ratio will approach 500% in the next 50 years. Discuss two of the main factors that are driving these CBO predictions. ANSWER: Two main factors driving the CBO's predicted rise in the U.S. debt-to-GDP ratio are escalating health-care costs due to an aging population, increasing entitlement program expenditures, and insufficient revenue generation to cover these rising expenses. Additionally, the accumulating interest on the existing debt amplifies the fiscal challenge.
294. What is the difference between the deficit and the national debt? ANSWER: The deficit and the national debt are related but distinct concepts in economics. The deficit refers to the annual gap between a government's expenditures and its revenues. It's essentially the shortfall in a single fiscal year when spending exceeds income, often funded through borrowing. In contrast, the national debt represents the cumulative total of all past deficits. It's the sum of all the money the government has borrowed over time to cover its budget shortfalls. The national debt continues to grow when deficits occur in successive years, and it reflects the government's overall level of indebtedness.
295. Except for during the 1990s, the federal deficit has shown a rising trend over time. Does this mean that the U.S. government will go bankrupt soon? If so, explain why. If not, then what are many economists worried about? ANSWER: The rising trend in the federal deficit doesn't necessarily mean the U.S. government will go bankrupt soon. Unlike individuals or businesses, governments like the United States have unique economic tools at their disposal. They can create their own currency, giving them flexibility to manage debt. Economists are concerned about the deficit for several reasons: Firstly, as the deficit grows, more money is spent on interest payments for the national debt. This diverts resources away from crucial programs like education, health care, and infrastructure. Secondly, excessive deficit spending, if not managed carefully, can lead to inflation. This erodes the purchasing power of citizens and can cause economic instability. Thirdly, when the government borrows heavily, it can "crowd out" private investment. This means there's less money available for businesses and individuals to invest, potentially slowing economic growth. Lastly, persistent and excessive deficits raise questions about the long-term sustainability of government finances. To address these concerns, economists advocate for responsible fiscal policies. This includes finding a balance between government spending and revenue collection, investing in programs that promote economic growth, and addressing structural causes of deficits, like health care and entitlement spending. It's about ensuring that government finances are sustainable and support economic stability and growth.
296. Why did the U.S. debt-to-GDP ratio rise rapidly from 2020 to 2023, and why are there concerns that it may continue rising? ANSWER: The U.S. debt-to-GDP ratio surged from 2020 to 2023 due to a combination of factors. Firstly, the COVID-19 pandemic necessitated substantial government spending on relief programs and economic stimulus, increasing the national debt. Secondly, the pandemic led to a contraction in economic activity, which lowered GDP growth. This dual effect amplified the ratio. Additionally, historically low interest rates encouraged borrowing. Concerns persist about further increases in the ratio. Continued government spending, such as on infrastructure and social programs, could add to the debt burden. Furthermore, if GDP growth doesn't outpace the rate at which debt Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 17 accumulates, the ratio will rise. Rising interest rates may also increase the cost of servicing the debt. Managing this ratio remains a priority to ensure fiscal sustainability and avoid potential economic instability.
297. Explain why government spending and revenue undercount the role of the government in the U.S. economy. ANSWER: Government spending and revenue figures often undercount the government's role in the U.S. economy for several reasons. Firstly, they focus on direct expenditures and tax revenues but overlook the indirect impact of government policies. For example, regulations, subsidies, and tax incentives shape economic behavior, yet these are not fully captured in spending and revenue data. Secondly, spending figures can underestimate the government's role because they exclude state and local government spending, which can be substantial. This decentralization means that the federal government's full economic impact is not reflected in the national figures. Additionally, the government's role extends beyond its immediate budget. Public investments in infrastructure, education, and health care, while not directly counted as government spending, have far-reaching economic consequences by enhancing productivity and long-term growth. Lastly, the government influences the economy through monetary policy, which is controlled by the Federal Reserve. While not part of government spending or revenue, these policies profoundly affect economic conditions.
Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 18 1. Fiscal policy can BEST be defined as the use of: a. government expenditure and taxation to mitigate recessions. b. government expenditure, borrowing, and taxation to influence the business cycle. c. money supply manipulation to influence the business cycle. d. international political relations to influence the business cycle. ANSWER: b 2. The primary tools of fiscal policy are: a. money supply and money demand. b. government expenditure and money supply. c. government expenditure and taxation. d. taxation and interest rates. ANSWER: c 3. Which federal government policy influences business cycle fluctuations by acting on taxes, spending, and borrowing? a. real business cycle policy b. fiscal policy c. monetary policy d. growth policy ANSWER: b 4. Which of these would help a government fight a recession? a. raising taxes b. cutting taxes c. cutting spending d. paying down the national debt ANSWER: b 5. The largest spending component of GDP is: a. consumption. b. investment. c. government spending. d. imports. ANSWER: a 6. As the Great Recession continued into early 2009, consumer confidence MOST likely: a. increased. b. decreased. c. remained constant. d. became too difficult to calculate accurately. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 18 ANSWER: b 7. Fiscal policy involving _____ is designed to influence business cycle fluctuations. a. the taxation of income b. government spending c. government borrowing d. taxation, government spending, and borrowing ANSWER: d 8. Fiscal policy: a. is the decrease in private spending that occurs when the government increases spending. b. occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut, they save it to pay future taxes. c. is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. d. is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations.
ANSWER: c 9. Fiscal policy refers to changes in: a. government regulations that affect the level of market competition. b. interest rates that affect the credit markets. c. the money supply in an attempt to raise the standard of living. d. government spending or taxes in an attempt to influence the overall economy. ANSWER: d 10. To fight a recession, the federal government can: a. increase taxes. b. increase its spending. c. increase interest rates. d. decrease the discount rate. ANSWER: b 11. Fiscal policy includes federal government policy on: a. government spending only. b. taxes only. c. both government spending and taxes. d. neither government spending nor taxes. ANSWER: c 12. President Obama's fiscal policy response to the 2008 recession involved changes in: a. government spending only. Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 18 b. taxation only. c. both taxation and government spending. d. neither government spending nor taxation. ANSWER: c 13. Congressional response to the COVID-19 pandemic involved changes in: a. government spending only. b. taxation only. c. both taxation and government spending. d. neither government spending nor taxation. ANSWER: c 14. _____ is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. a. Business policy b. Fiscal policy c. Monetary policy d. Trade policy ANSWER: b 15. One way the government can use fiscal policy to fight a recession is to: a. spend less money. b. decrease Social Security payments. c. cut taxes. d. reduce welfare subsidies. ANSWER: c 16. What policy on taxes, spending, and borrowing is designed to influence business fluctuations? a. tax-and-spend policy b. cycle-smoothing policy c. fiscal policy d. monetary policy ANSWER: c 17. Fiscal policy is a policy: a. to change the money supply and interest rates to influence business fluctuations. b. on taxes, spending, and borrowing that is designed to influence business fluctuations. c. designed to increase incomes and decrease household debt and borrowing. d. to change regulations to reduce corporate borrowing and increase corporate financial stability. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 18 18. The fiscal policy response to a recession includes what two tools? a. raising taxes and raising government spending b. raising taxes and reducing government spending c. reducing taxes and raising government spending d. reducing taxes and reducing government spending ANSWER: c 19. People holding more cash because of a decrease in consumer confidence would cause a(n): a. decrease in the growth rate of both output and inflation. b. decrease in the growth rate of output and an increase in the inflation rate. c. increase in the growth rate of output and a decrease in the inflation rate. d. increase in the growth rate of both output and inflation. ANSWER: a 20. If the economy is in a recession, the most appropriate fiscal policy would be to: a. decrease government spending to balance the budget. b. decrease both government spending and taxes. c. increase government spending and cut taxes, thus running a higher budget deficit. d. increase government spending and increase taxes to keep the budget balanced. ANSWER: c 21. The economist John Maynard Keynes said, "In the long run, we are all _____." a. old b. tired c. dead d. sticky ANSWER: c 22. When the government conducts fiscal policy, it makes up for a decrease in
with a(n):
a. increase in . b. decrease in . c. increase in . d. decrease in . ANSWER: a 23. An increase in government spending causes: a. the aggregate demand curve to shift to the left. b. the aggregate demand curve to shift to the right. c. an upward movement along the aggregate demand curve. Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 18 d. a downward movement along the aggregate demand curve. ANSWER: b 24. A decrease in consumption growth will cause: a. AD to shift to the left. b. SRAS to shift to the left. c. LRAS to shift to the left. d. AD, SRAS, and LRAS to shift to the left. ANSWER: a 25. A decrease in government spending will cause: a. AD to shift to the left. b. SRAS to shift to the left. c. LRAS to shift to the left. d. AD, SRAS, and LRAS to shift to the left. ANSWER: a 26. In the short run, a decrease in consumption growth will cause the inflation rate to: a. increase. b. decrease. c. remain unchanged. d. become unpredictable. ANSWER: b 27. In the short run, a decrease in consumption growth will cause real GDP growth to: a. increase. b. decrease. c. remain unchanged. d. become unpredictable. ANSWER: b 28. In the short run, an increase in government spending growth will cause the inflation rate to: a. increase. b. decrease. c. remain unchanged. d. become unpredictable. ANSWER: a 29. In the short run, an increase in government spending growth will cause the real GDP growth to: a. increase. b. decrease. Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 18 c. remain unchanged. d. become unpredictable. ANSWER: a 30. The best type of negative shock for fiscal policy to respond to is a negative shock to: a. aggregate demand. b. short-run aggregate supply. c. the LRAS curve. d. inflation. ANSWER: a 31. During a recession, consumers hold more money by cutting back on their spending, resulting in a(n) _____ in inflation and a(n) _____ in real growth. a. decrease; increase b. decrease; decrease c. increase; increase d. increase; decrease ANSWER: b 32. A problem that makes fiscal policy less effective is that: a. fiscal policy must be offset by monetary policy. b. government spending is a relatively large portion of GDP. c. government spending does not directly affect aggregate demand. d. higher taxes or increased borrowing to fund government spending can reduce aggregate demand. ANSWER: d 33. In working to correct a recession with fiscal policy, the government can: a. wait for wages and prices to become more flexible. b. increase the money supply. c. increase its expenditures and/or decrease taxes to shift the LRAS curve. d. raise its expenditures and/or lower taxes to increase aggregate demand. ANSWER: d 34. When using fiscal policy to fight a recession, the government will: a. decrease taxes and/or increase government expenditures. b. increase taxes and/or decrease government expenditures. c. institute technological advancement in the economy. d. decrease government expenditures. ANSWER: a 35. Figure: Aggregate Demand and Fiscal Policy Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 18
In the best-case scenario, effective fiscal policy would take which action to correct an economy in recession at point Z? a. increase aggregate demand to move the economy to point X. b. increase the LRAS curve to a level above 3%. c. decrease the LRAS curve to a level below 2%. d. increase aggregate demand to move the economy to point W. ANSWER: a 36. Figure: Aggregate Demand and Fiscal Policy
Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 18
In the best-case scenario, an economy in a recession at point Y would use fiscal policy to increase spending growth to: a. 5%. b. 7%. c. 15%. d. 10%. ANSWER: d 37. Which could be sources of funding for a government that wants to increase government expenditures? a. taxes only b. borrowing only c. both taxes and borrowing d. neither taxes nor borrowing ANSWER: c 38. Which statement is NOT a reason that government spending sometimes increases growth? a. Spending can lower inflation and keep prices and wages steady. Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 18 b. Spending can move unemployed factors of production into productive activities. c. Spending can encourage additional private investment. d. Spending can increase consumer confidence. ANSWER: a 39. Fiscal policy involves: a. government borrowing to finance the national debt. b. government taxes and spending that affect the income distribution among people. c. government taxes, spending, and borrowing that affect business fluctuations. d. a change of the money supply that affects business fluctuations. ANSWER: c 40. To fight a recession, the government can: a. increase spending. b. increase taxes. c. pay down government debt. d. increase interest rates. ANSWER: a 41. Examples of expansionary fiscal policy include increases in: a. government spending. b. income taxes. c. the money supply. d. interest rates. ANSWER: a 42. Fiscal policy can offset a positive shock to aggregate demand by raising: a. the discount rate. b. the growth rate of the money supply. c. taxes. d. government spending. ANSWER: c 43. Figure: Aggregate Demand Shifts 1
Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 18
Suppose the economy is initially at point A in the diagram. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short-run increase in inflation by increasing: a. taxes so that the AD curve shifts back to AD1. b. taxes so that the AD curve shifts further out to AD5. c. government spending so that the AD curve shifts back to AD1. d. government spending so that the AD curve shifts further out to AD5. ANSWER: a 44. Other things being equal, a decrease in government spending causes the: a. AD curve to shift to the right. b. AD curve to shift to the left. c. LRAS curve to shift to the right. d. LRAS curve to shift to the left. ANSWER: b 45. A decrease in consumption will cause aggregate demand to: a. shift left. b. shift right. c. remain unchanged. d. first shift right and then shift left. ANSWER: a 46. A decrease in consumption will cause the LRAS curve to: a. shift left. Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 18 b. shift right. c. remain unchanged. d. first shift right and then shift left. ANSWER: c 47. A decrease in consumption will cause inflation to fall in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run. ANSWER: a 48. Figure: Aggregate Demand Shifts 2
Suppose the economy is initially at point A in the diagram. If a decrease in investment spending causes a shift of the AD curve from AD1 to AD2, then the government can avoid a short-run recession by increasing: a. taxes so that the AD curve shifts back to AD1. b. taxes so that the AD curve shifts further in to AD3. c. government spending so that the AD curve shifts back to AD1. d. government spending so that the AD curve shifts further in to AD3. ANSWER: c 49. An increase in government spending will cause the AD curve to: a. shift left. b. shift right. c. remain unchanged. Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 18 d. first shift right and then shift left. ANSWER: b 50. An increase in government spending will cause the LRAS curve to: a. shift left. b. shift right. c. remain unchanged. d. first shift right and then shift left. ANSWER: c 51. Assume that the government begins a large infrastructure program, causing construction firms in the area to earn more and hire more workers. Consequently, businesses in the area enjoy an increase in sales. This story illustrates: a. a multiplier effect. b. a decrease in aggregate demand. c. a negative technology shock. d. the crowding out effect. ANSWER: a 52. Imagine an economy in a recession resulting from a decrease in consumer spending. In the best-case scenario, increased government spending to fight the recession would: a. be offset by a decrease in inflation. b. need to be a little more than the initial fall in consumer spending to make up for lost GDP. c. not need to be as large as the initial fall in consumer spending. d. need to be exactly the same amount as the initial fall in consumer spending. ANSWER: c 53. As the government builds new schools, the construction workers and material vendors employed on the project spend more in the community where they live. What is the economic term for this effect? a. hastening b. multiplier c. duplicator d. spending ANSWER: b 54. The multiplier effect is the: a. subsequent consumer spending that increases AD as a result of expansionary fiscal policy. b. subsequent consumer spending that increases AD as a result of contractionary fiscal policy. c. increase in GDP from an increase in the money supply and a decrease in taxes. d. increase in GDP from increased consumer savings and private investment. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 18 55. When the government increases its spending, the subsequent increase in nongovernment spending stimulates aggregate demand and is called the _____ effect. a. crowding out b. endowment c. multiplier d. automatic stabilizing ANSWER: c 56. Figure: Aggregate Demand Shifts 3
If the government reduces its spending so that the AD curve shifts from AD1 to AD2, the multiplier effect will cause the AD curve to: a. shift back to AD1. b. remain at AD2. c. shift farther to AD3. d. shift all the way out to AD4. ANSWER: c 57. Because of the multiplier effect, if a shock causes aggregate demand to increase by $200 million, then the government should _____ to restore the economy to its original growth rate. a. do nothing b. increase government spending by more than $200 million c. reduce government spending by less than $200 million d. increase government spending by $200 million and cut taxes by $200 million ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 18 58. When expansionary fiscal policy leads to an increase in incomes and consumer spending beyond the size of the initial expansionary fiscal policy, the subsequent increase in AD is called the _____ effect. a. expansionary b. secondary c. multiplier d. crowding out ANSWER: c 59. In order for fiscal policy to effectively offset a $1 million decrease in consumer spending, the government would MOST likely have to: a. keep a balanced budget. b. increase spending by $1 million. c. increase spending by more than $1 million. d. increase spending by less than $1 million. ANSWER: d 60. The multiplier concept is important because it shows: a. why fiscal policy is always effective. b. how small changes in government spending may have large impacts on overall output. c. how changes in taxes are multiplied into larger government revenues. d. why decreases in the tax rate may actually increase tax revenues overall. ANSWER: b 61. When expansionary fiscal policy increases income and thus consumer spending, the additional increase in AD it causes is called the: a. crowding out effect. b. secondary effect. c. spending effect. d. multiplier effect. ANSWER: d 62. As a result of the multiplier effect, a tax cut causes a: a. larger shift of the aggregate demand curve to the left. b. smaller shift of the aggregate demand curve to the left. c. larger shift of the aggregate demand curve to the right. d. smaller shift of the aggregate demand curve to the right. ANSWER: c 63. The multiplier effect from an increase in government spending causes additional increases in aggregate demand through: a. a decrease in taxes. b. even more government spending. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 18 c. an increase in consumer spending. d. a decrease in interest rates. ANSWER: c 64. The multiplier's effect comes from a(n): a. increased response of consumption to a change in income. b. decreased response of consumption to a change in income. c. increase in the income tax rate on marginal income. d. increase in consumer purchases of imports in response to a change in income. ANSWER: a 65. Which statement, if true, will NOT limit the effectiveness of fiscal policy? a. Changes in private spending offset the effects of government spending or taxation. b. Changes in government spending are small in the short run. c. There is a lot of unemployment in the economy. d. Increased government spending and tax cuts increase incomes and thus increase consumer spending further. ANSWER: d 66. Which of these limits the effectiveness of fiscal policy? a. crowding out b. the multiplier effect c. the big bucket effect d. free-riding behavior ANSWER: a 67. Which statement does NOT describe a major limit to the effectiveness of fiscal policy? a. A single increase in government spending may not be enough to stimulate the economy. b. The crowding out effect is transmitted through financial markets. c. Fiscal policy is not very effective in combating supply side shocks. d. A multiplier effect is associated with changes in spending and taxation. ANSWER: d 68. In what way are monetary and fiscal policies similar? a. They both target aggregate demand to overcome business fluctuations. b. They are both effective when the economy suffers from real shocks. c. Both are insulated from the political process. d. Neither involves a lag. ANSWER: a 69. What are the major limits to fiscal policy? a. crowding out, timing, and real shocks Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 18 b. poor information, the multiplier effect, the bandwagon effect, and election timing c. sticky wages, Ricardian equivalence, recognition lag, and crowding out d. aggregate demand deficiency, unemployed resources, long-run expenses, and implementation lag ANSWER: a 70. The difficulties of using fiscal policy to affect the economy include: a. the automatic stabilizing effect. b. the crowding out effect. c. too much consumer spending in response to tax cuts. d. the multiplier effect. ANSWER: b 71. Which poses a limit to fiscal policy? a. crowding out b. the size of government expenditures c. legislative lags d. crowding out, the size of government expenditures, and legislative lags ANSWER: d 72. Which refers to a decrease in private spending when government spending increases? a. the multiplier effect b. the timing effect c. the automatic stabilizing effect d. the crowding out effect ANSWER: d 73. When an increase in government spending leads to a decrease in private spending, it is called: a. crowding out. b. a drop in the bucket. c. bad timing. d. the implementation lag. ANSWER: a 74. If the government increases its spending, financing methods that can cause crowding out include: a. raising taxes. b. borrowing. c. both raising taxes and borrowing. d. neither raising taxes nor borrowing. ANSWER: c 75. Figure: A Real Shock Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 18
After a real shock, the economy is operating at point Y in the figure. Assuming there is no crowding out, fiscal policy that shifts aggregate demand from AD0 to AD2 will move the economy to point: a. A. b. B. c. V. d. X. ANSWER: c 76. Figure: A Real Shock
Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 18
After a real shock, the economy is operating at point Y in the figure. In the presence of crowding out, fiscal policy that would have shifted aggregate demand from AD0 to AD2 will only move the economy to point: a. A. b. B. c. V. d. X. ANSWER: d 77. Crowding out: a. limits fiscal policy's ability to increase aggregate demand. b. affects contractionary fiscal policy. c. increases the multiplier effect. d. shifts the LRAS curve to the left. ANSWER: a 78. Crowding out occurs when: a. higher government spending leads to less private spending. b. personal consumption increases due to a decrease in savings. Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 18 c. overall output is crowded out by lower government spending. d. increases in government spending lead to increases in taxes. ANSWER: a 79. Crowding out: a. is the decrease in private spending that occurs when government spending increases. b. occurs when people see that lower taxes today means higher taxes in the future, so they quickly spend the tax cut. c. is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. d. is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations.
ANSWER: a 80. The crowding out effects of fiscal policy are smaller if: a. real GDP growth is above the economy's long-run potential rate. b. nominal wages and prices are flexible. c. the economy is in a recession caused by low aggregate demand. d. the spending multiplier is also smaller. ANSWER: c 81. The crowding out effect of fiscal policy refers to: a. the decrease in private spending as a result of higher government spending. b. the decrease in real GDP growth as a result of higher government spending. c. how more federal government spending affects the size of state and local governments. d. the increase in tax revenues as a result of an increase in government spending. ANSWER: a 82. If an increase in government spending of $100 million causes an increase in aggregate spending of less than $100 million, we call this phenomenon: a. crowding in. b. crowding out. c. the multiplier. d. the Ricardian effect. ANSWER: b 83. The decrease in private spending that occurs when the government increases spending is called: a. crowding out. b. a drop in the bucket. c. a matter of timing. d. a real shock. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 18 84. Crowding out is the _____ in private spending that occurs when government _____ spending. a. increase; increases b. increase; decreases c. decrease; increases d. decrease; decreases ANSWER: c 85. Which statement pertains to the condition of crowding out? a. Government cuts spending by $300 million, resulting in a decrease in consumption by $500 million. b. Government cuts taxes, resulting in an increase in investment spending by $270 million. c. Government increases spending by $300 million on new highway construction, resulting in an increase in consumption by $500 million. d. Government raises taxes by $300 million to finance new spending on highway construction, resulting in a decrease in consumption spending by $270 million.
ANSWER: d 86. Government spending is a more effective policy tool when: a. the economy is above the LRAS curve. b. the government raises taxes to finance spending. c. consumers are pessimistic and not spending. d. interest rates in the economy are rising simultaneously. ANSWER: c 87. An increase in government spending is MOST effective at improving aggregate demand when: a. private sector spending is very low. b. wages stay low. c. banks are not lending. d. consumers are increasing their spending. ANSWER: a 88. When fiscal policy is funded through taxes, government spending primarily crowds out: a. exports. b. consumer spending. c. investment. d. real growth. ANSWER: b 89. Raising taxes to finance increases in government spending will be an effective means of increasing aggregate demand only if: a. the private sector is saving a high percentage of its income. b. the private sector is spending a high percentage of its income. c. the public sector is larger than the private sector. Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 18 d. crowding out is present. ANSWER: a 90. As the savings rate in the private sector rises: a. the government spending multiplier will also rise. b. aggregate demand will be less responsive to changes in fiscal policy. c. increases in government spending become a more effective means of stimulating aggregate demand. d. the crowding out effect will have more of a negative effect on aggregate demand. ANSWER: c 91. When consumers receive tax rebates and use them to pay down debt rather than to increase spending: a. the resulting fiscal stimulus will be much larger than the initial tax rebate. b. the resulting fiscal stimulus will be much smaller than the initial tax rebate. c. the resulting fiscal stimulus will be the same size as the initial tax rebate. d. it is impossible to say whether the resulting fiscal stimulus will be larger or smaller. ANSWER: b 92. Other things being equal, will a temporary individual tax rebate or a permanent individual tax rebate provide the largest increase in aggregate demand? a. a temporary tax rebate b. a permanent tax rebate c. They will both produce the same amount of stimulus. d. Neither will provide any stimulus. ANSWER: b 93. If $500,000 in new taxes is raised and spent on building a new school and $300,000 in private spending would have been spent anyway, how much is added to short-run aggregate demand? a. $100,000 b. $200,000 c. $300,000 d. $500,000 ANSWER: b 94. When fiscal policy is funded by government borrowing, government spending primarily crowds out: a. velocity. b. consumer spending. c. investment. d. real growth. ANSWER: c 95. Increases in government spending financed through additional borrowing will typically: Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 18 a. provide more stimulus than when government spending is financed through higher taxes. b. lead to higher taxes. c. stimulate both consumption and investment. d. lead to higher interest rates. ANSWER: d 96. The primary concern of economists worried about the crowding out effect is the: a. growing size of the national debt. b. size of the interest payments on the national debt as compared with GDP. c. debate over future generations. d. upward pressure that increased borrowing places on interest rates. ANSWER: d 97. Increases in government spending financed through additional borrowing will typically have the largest impact on aggregate demand when: a. the stock market and other private investments are booming. b. increased uncertainty has caused a decrease in private sector investing. c. interest rates are high. d. private sector spending is high. ANSWER: b 98. New government spending financed by government borrowing is MOST likely to be effective when: a. banks are eager to make loans. b. the federal government is running a large deficit. c. the private sector is eager to spend. d. the private sector is reluctant to spend. ANSWER: d 99. A government can finance its spending by: a. lending money to corporations. b. borrowing money by selling bonds. c. decreasing interest rates. d. cutting taxes. ANSWER: b 100. Given the possibilities for crowding out, expansionary fiscal policy financed through government borrowing is MOST likely to be effective when the: a. public sector is keen to spend or invest. b. public sector is reluctant to spend or invest. c. private sector is keen to spend or invest. d. private sector is reluctant to spend or invest. Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 18 ANSWER: d 101. When the government borrows money by selling bonds, some of the funds that would have gone to private investments go to the government. This situation is called: a. overcrowding. b. funneling. c. crowding out. d. underbidding. ANSWER: c 102. When the government borrows more, what happens? a. Interest rates go down and consumer spending rises. b. Interest rates go down and savings go up. c. Interest rates go up and consumer spending rises. d. Interest rates go up and savings go up. ANSWER: d 103. When consumers are very reluctant to spend in a recessionary environment, the government's MOST effective strategy is to: a. increase spending through increased government borrowing. b. decrease income taxes. c. decrease corporate taxes. d. do nothing; the economy will self-correct in the short run. ANSWER: a 104. Suppose taxpayers are given a one-time-only rebate on previous taxes paid. If consumers spend all of their tax rebate checks, what takes place in the economy? a. Aggregate demand curve shifts to the right. b. Aggregate demand curve shifts to the left. c. The LRAS curve shifts to the left. d. Inflation decreases. ANSWER: a 105. If households use tax rebate checks to pay off their existing debt (such as credit cards and mortgages), this type of fiscal stimulus: a. is likely to have a large impact on aggregate demand. b. is likely to have a negligible impact on aggregate demand. c. will only lead to higher inflation, not to an increase in the growth rate of output. d. will lead to a higher growth rate of output, but not to higher inflation. ANSWER: b 106. If the goal of a government policy change is to increase the incentive for taxpayers to work and/or invest, Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 18 which policy is MOST likely to be successful? a. an increase in marginal tax rates b. an increase in taxes on savings c. a decrease in marginal tax rates d. an increase in interest rates ANSWER: c 107. Which is the MOST effective fiscal policy for influencing the economy? a. a temporary tax rebate b. a permanent tax cut c. a tax hike with no change in consumption in response to the income change d. a tax hike that is matched by a government spending cut ANSWER: b 108. Another form of expansionary fiscal policy in addition to government spending is: a. a subsidy. b. a tax rebate. c. unemployment insurance. d. a welfare program. ANSWER: b 109. As a result of consumption smoothing, a one-time-only tax rebate tends to create a: a. big increase in spending now. b. big increase in spending over many years. c. small increase in spending now. d. small increase in spending over many years. ANSWER: d 110. Which is NOT a way to accelerate aggregate demand during an economic slowdown? a. temporary reductions in taxes on savings b. temporary investment tax credit c. temporary reduction in the payroll tax d. temporary reduction in the sales tax ANSWER: a 111. As a result of _____, a one-time-only tax rebate tends to create a small increase in spending over many years rather than a big increase in the present. a. crowding out b. intertemporal substitution c. consumption smoothing d. the bandwagon effect Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 18 ANSWER: c 112. Which fiscal stimulus policy will provide a greater incentive to work? a. a one-time-only tax rebate b. an income tax rate cut c. an income tax increase d. a government borrowing program ANSWER: b 113. What primary benefit can a temporary investment tax credit have? a. It can accelerate capital outlays in an economic downturn. b. It can encourage workers to work extra hours. c. It can encourage consumers to save more. d. It can encourage firms to hire more workers. ANSWER: a 114. Why do tax cuts stimulate the economy? a. A tax cut increases the income a consumer has available to spend after taxes are paid and thus increases consumption. b. Consumers see that tax cuts today will lead to higher taxes in the future, so they save most of the tax cut.
c. A tax cut decreases incentive. d. A tax cut only decreases the incentive to spend. ANSWER: a 115. Which of these is (are) the tool(s) used to conduct fiscal policy? a. changes in government spending b. changes in interest rates c. changes in tax rates d. changes in government spending and changes in tax rates ANSWER: d 116. Suppose the federal government gives taxpayers a tax cut financed by borrowing. If taxpayers use the tax cut to pay off their debts, total spending will: a. increase. b. decrease. c. remain unchanged. d. first increase and then decrease. ANSWER: c 117. Consumers are more likely to spend the additional income they retain after a tax cut if the tax cut is believed to be: a. permanent. Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 18 b. temporary. c. large. d. small. ANSWER: a 118. Ricardian equivalence: a. will occur less when consumers practice consumption smoothing. b. does not occur when a political administration is set to change. c. has not occurred in the United States. d. is less significant when consumers deem tax cuts or rebates as permanent. ANSWER: d 119. When consumers save their tax cut for a future tax increase, they are adhering to: a. the bandwagon effect. b. intertemporal substitution. c. the multiplier effect. d. Ricardian equivalence. ANSWER: d 120. If Ricardian equivalence holds, then an expansionary fiscal policy will: a. decrease aggregate demand in the short run. b. increase aggregate demand in the short run, but not in the long run. c. increase aggregate demand in both the short run and in the long run. d. have no effect on aggregate demand either in the short run or in the long run. ANSWER: d 121. If the government passed a tax cut to the people, but aggregate demand remained unchanged, the MOST likely reason is that: a. people saved all the additional money from the tax cut to pay for future tax increases. b. people spent all the additional money from the tax cut. c. the government spent the same amount as the total amount of the tax cut. d. the government financed the tax cut by printing more money. ANSWER: a 122. If Ricardian equivalence is correct, any tax cut will cause consumer spending to: a. increase. b. decrease. c. remain unchanged. d. change in an unpredictable manner. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 18 123. If Ricardian equivalence holds: a. taxpayers respond to lower tax rates today with increased savings today. b. taxpayers respond to lower tax rates today with increased spending today. c. consumption smoothing is less important than when Ricardian equivalence doesn't hold. d. changes in fiscal policy are more likely to have a larger impact on aggregate demand. ANSWER: a 124. Ricardian equivalence refers to the situation where taxpayers equate: a. higher budget deficits today with higher levels of government spending. b. higher government spending with lower marginal tax rates. c. budget deficits today with higher interest rates. d. lower taxes today with higher taxes in the future. ANSWER: d 125. Ricardian equivalence: a. is the decrease in private spending that occurs when government increases spending. b. occurs when people see that lower taxes today means higher taxes in the future, so instead of spending their tax cut, they save it to pay future taxes. c. is federal government policy on taxes, spending, and borrowing that is designed to influence business fluctuations. d. is central bank policy on the monetary base, interest rates, and bank reserves that is designed to influence business fluctuations.
ANSWER: b 126. Which theory states that a tax cut does NOT affect aggregate demand because people save all they gain from the tax cut? a. quantity theory of money b. inefficient market hypothesis c. purchasing power parity d. Ricardian equivalence ANSWER: d 127. If Ricardian equivalence holds, then a $100 million tax cut financed by increased government borrowing means that: a. private saving will increase by $100 million. b. consumption will increase by $100 million. c. government spending will increase by $100 million. d. aggregate demand will increase by $100 million. ANSWER: a 128. Ricardian equivalence refers to the case when lower taxes today lead to higher: a. government spending in the future. b. taxes in the future. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 18 c. aggregate demand in the future. d. inflation in the future. ANSWER: b 129. Ricardian equivalence occurs when: a. the amount of tax increase is equivalent to the amount of private spending decrease. b. a tax cut now is equivalent to a tax cut in the future. c. people see that lower taxes today means higher taxes in the future. d. the amount of tax cut is equivalent to the amount of government spending reduction. ANSWER: c 130. When Ricardian equivalence holds, a tax cut: a. increases aggregate demand in the long run. b. increases aggregate demand in the short run. c. doesn't decrease aggregate demand even in the long run. d. doesn't increase aggregate demand even in the short run. ANSWER: d 131. When the economy is at full employment, the main impact of an increase in total spending is a(n): a. increase in output. b. decrease in output. c. increase in the average price level. d. decrease in the average price level. ANSWER: c 132. Suppose the economy is at full employment and there is an increase in government spending. What impact will this have on output? a. National output will rise. b. National output will fall. c. National output will remain the same. d. The change in national output is not predictable. ANSWER: a 133. Which is an example of crowding out? a. An increase in private spending generates an increase in tax revenue that reduces government borrowing. b. An increase in tax revenue reduces after-tax income and consumer spending. c. An increase in unemployment is offset by a decrease in inflation. d. An increase in government spending is offset by a decrease in private spending. ANSWER: d 134. Due to the multiplier effect on fiscal policy, an increase in government spending will: Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 18 a. necessitate a large increase in taxes to pay for the spending. b. lead to an even larger increase in total spending. c. lead to an even larger increase in government spending. d. reduce private spending by the change in government spending. ANSWER: b 135. David Ricardo said that tax change will be ineffective fiscal policy when: a. people adjust their savings rather than spending when their after-tax income changes. b. people adjust their spending rather than savings when their after-tax income changes. c. the tax change is offset by a change in government spending. d. the tax change has a large impact on total spending. ANSWER: a 136. To the extent that people behave according to the Ricardian equivalence, fiscal policy: a. is more effective. b. is less effective. c. affects employment and output, but not price levels. d. affects price levels, but not employment and output. ANSWER: b 137. If government borrowing rises, interest rates will _____ and private spending will _____. a. rise; rise b. rise; fall c. fall; rise d. fall; fall ANSWER: b 138. Suppose the government borrows to fund increased spending. If that borrowing affects interest rates, then private spending may _____, causing fiscal policy to be _____. a. rise; effective b. rise; ineffective c. fall; effective d. fall; ineffective ANSWER: d 139. The multiplier is likely to be bigger when: a. the economy is at full employment. b. the government is unable to target its spending directly on the unemployed. c. tax cuts go to people who are likely to spend the tax cuts quickly. d. government borrowing crowds out private consumption and investment. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 18 140. Estimates during the 2008 financial crisis indicate that _____ have the highest multiplier effect. a. two-year tax cuts for lower- and middle-income people b. transfer payments to individuals c. one-time payments to retirees d. purchases of goods and services by the federal government ANSWER: d 141. The types of spending included in the American Recovery and Reinvestment Act of 2009: a. were limited to infrastructure projects. b. focused on transfer payments, and not on government purchases. c. focused on long-term, rather than short-term, spending. d. included types of spending with low multiplier effects. ANSWER: d 142. It is difficult for the federal government to increase aggregate demand through additional spending because: a. crowding out magnifies the impact of changes in government spending. b. discretionary government spending is a small part of its annual expenditures. c. changes in government spending are accompanied by matching changes in taxes. d. the government spending change creates a real shock that freezes the economy. ANSWER: b 143. In a typical year, changes in government spending compared with overall spending are relatively: a. small. b. large. c. unpredictable. d. well timed. ANSWER: a 144. Which is NOT a lag associated with fiscal policy? a. the time it takes to implement a policy once it's decided b. the time to collect the data to assess the condition of the economy c. the time it takes to assess whether the policy has worked d. the time it takes to assess whether to use fiscal or monetary policy ANSWER: d 145. Mistimed contractionary fiscal policy can cause: a. a real shock. b. rising interest rates. c. a recession. Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 18 d. inflation. ANSWER: c 146. The time it takes to _____ creates difficulty in implementing fiscal policy to deal with an economic downturn that is magnified when the downturn is short-term rather than long-term? a. recognize the problem b. propose a plan c. implement the plan d. recognize the problem, propose a plan, and implement the plan ANSWER: d 147. Which statement is TRUE about the difference between monetary and fiscal policy? a. Monetary policy is more quickly implemented. b. There is little debate over the appropriate fiscal policy response. c. Only monetary policy is subject to long lags. d. Monetary policy can affect the economy regardless of the actions banks take. ANSWER: a 148. The time between when an economic shock is recognized and when the government passes a plan to carry out a policy response is called the: a. recognition lag. b. legislative lag. c. effectiveness lag. d. adjustment lag. ANSWER: b 149. The time needed to determine that an economic problem exists is called the: a. legislative lag. b. recognition lag. c. implementation lag. d. effectiveness lag. ANSWER: b 150. The time needed for Congress to propose and pass a fiscal policy plan is called the: a. legislative lag. b. recognition lag. c. implementation lag. d. effectiveness lag. ANSWER: a 151. The time needed for government bureaucracies to carry out a fiscal policy plan is called the: Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 18 a. legislative lag. b. recognition lag. c. implementation lag. d. effectiveness lag. ANSWER: c 152. The time needed for a fiscal policy plan to have an impact is called the: a. legislative lag. b. recognition lag. c. implementation lag. d. effectiveness lag. ANSWER: d 153. Which is NOT a lag associated with the implementation of fiscal policy? a. legislative lag b. recognition lag c. monetary lag d. effectiveness lag ANSWER: c 154. Which statement is TRUE? a. It may be difficult for the Fed to print enough money to have a noticeable effect on the economy. b. The effectiveness lag associated with monetary policy is likely to be near zero. c. Monetary policy has no recognition lag. d. By the time fiscal policy is in place, it is likely that macroeconomic conditions may have changed entirely. ANSWER: d 155. Fiscal policy lags: a. are generally shorter than monetary policy lags. b. are generally longer than monetary policy lags. c. are generally the same length as monetary policy lags. d. may be shorter or longer than monetary policy lags. ANSWER: b 156. The time it takes Congress to propose and pass a plan for fiscal policy is called the: a. recognition lag. b. legislative lag. c. effectiveness lag. d. adjustment lag. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 18 157. In 2011, most of the 2009 federal stimulus package had been spent, but the unemployment rate remained exceptionally high at nearly 10%. This is an example of the: a. recognition lag. b. legislative lag. c. implementation lag. d. effectiveness lag. ANSWER: d 158. In a recession, some aspects of fiscal policy can stimulate aggregate demand without the deliberate actions of policymakers. This occurs as a result of: a. crowding out. b. the multiplier effect. c. automatic stabilizers. d. Ricardian equivalence. ANSWER: c 159. The problem with fiscal policy due to recognition, legislative, implementation, effectiveness, and evaluation and adjustment lags is: a. crowding out. b. Ricardian equivalence. c. timing. d. real shocks. ANSWER: c 160. Which is NOT a relevant lag that would delay the effect of fiscal policy? a. recognition lag b. implementation lag c. effectiveness lag d. observation lag ANSWER: d 161. Fiscal policies that help an economy in a recession without deliberate actions by policymakers are called: a. consumption smoothers. b. Ricardian equalizers. c. automatic stabilizers. d. multiplier effects. ANSWER: c 162. Which is NOT an automatic stabilizer? a. unemployment compensation b. defense spending Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 18 c. progressive tax system d. welfare programs ANSWER: b 163. Automatic stabilizers are components of federal revenue and spending that affect _____ without the need for explicit action by policymakers. a. aggregate demand b. the LRAS curve c. short-run aggregate supply d. aggregate demand and short-run aggregate supply ANSWER: a 164. In a recession, automatic stabilizers cause a(n): a. increase in tax revenues or a decrease in government spending. b. decrease in tax revenues or an increase in government spending. c. increase in both tax revenues and government spending. d. decrease in both tax revenues and government spending. ANSWER: b 165. Examples of automatic stabilizers include: a. food stamps. b. unemployment benefits. c. income taxes. d. food stamps, unemployment benefits, and income taxes. ANSWER: d 166. Which provide(s) an automatic stabilizer when the economy is declining? a. money supply b. government borrowing c. regressive tax system d. welfare and transfer programs ANSWER: d 167. Automatic stabilizers are: a. federal spending and tax policies that stimulate aggregate demand in a recession without the need for explicit action by policymakers. b. subject to significant lags.
c. a result of the U.S. regressive tax system. d. not very effective fiscal policy. ANSWER: a 168. Which is NOT TRUE regarding the 2009 stimulus plan enacted under President Obama? Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 18 a. The stimulus plan included new spending and tax cuts totaling $800 billion to $900 billion. b. Many of the tax cuts were saved rather than spent. c. Federal grants to states prevented massive state layoffs but also made state agencies highly dependent on the federal government for revenue. d. The stimulus plan led to a high degree of crowding out of private investment.
ANSWER: d 169. When fiscal policy is done through tax cuts instead of spending increases: a. individuals rather than government employees will decide how the stimulus gets spent. b. there are likely to be many "bridges to nowhere." c. the resulting spending won't pass the cost–benefit test. d. the resulting fiscal stimulus will be spent by the government. ANSWER: a 170. Regarding fiscal stimulus, Republicans tend to favor _____; Democrats tend to favor _____. a. increased government spending; tax cuts b. tax cuts; increased government spending c. tax cuts; tax cuts d. increased government spending; increased government spending ANSWER: b 171. Suppose the unemployed are mostly construction workers by profession. Which government spending project will MOST effectively target unused labor resources? a. increasing teacher quality b. investing in research on solar energy c. improving funding for medical care for the elderly d. renovating the nation's highway system ANSWER: d 172. Fiscal policy under the 2009 American Recovery and Reinvestment Act took the form of: a. government spending. b. tax cuts. c. a mix of government spending and tax cuts. d. neither government spending nor tax cuts. ANSWER: c 173. The implementation lag is likely to be: a. longer for changes in government spending than for changes in taxation. b. shorter for changes in government spending than for changes in taxation. c. indefinitely long for both changes in government spending and changes in taxation. d. similar in length for both changes in government spending and changes in taxation. Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 18 ANSWER: a 174. The difficulty with increasing government purchases as a fiscal policy stimulus is that: a. discretionary government spending is a small portion of total government spending. b. government purchases have multipliers with values below 1. c. it is easier to reduce government purchases than it is to increase government purchases. d. spending changes occur so quickly that they are hard to control. ANSWER: a 175. Which is NOT one of the time lags that make it difficult for fiscal policy to be used to offset swings in the business cycle? a. evaluation and adjustment lag b. implementation lag c. smoothing lag d. recognition lag ANSWER: c 176. Which is one of the types of time lags that prevent fiscal policy from being implemented in a timely manner? a. partitioning lag b. legislative lag c. structuring lag d. impact lag ANSWER: b 177. Which is NOT among the difficulties of using tax cuts as a fiscal policy stimulus? a. The cuts are usually a very small portion of national income. b. Tax cuts for the rich usually result in more saving than spending. c. Tax cuts for the poor have little impact on total taxes paid. d. Tax cuts are tied to decreases in government spending, so aggregate demand is unchanged. ANSWER: d 178. Which is TRUE regarding the time lags associated with monetary policy and fiscal policy? a. Time lags are identical for monetary policy and fiscal policy. b. Time lags compare unpredictably for monetary policy and fiscal policy. c. Time lags are shorter for fiscal policy than for monetary policy. d. Time lags are shorter for monetary policy than for fiscal policy. ANSWER: d 179. An automatic stabilizer is a: a. government program that is designed to stimulate aggregate demand during recessions without the need for specific actions by policymakers.
Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 18 b. type of fiscal policy tool that automatically adjusts the size of the multiplier to meet stabilization needs. c. discretionary action taken by policymakers to address current economic conditions. d. government program that maintains a constant level of spending regardless of economic conditions. ANSWER: a 180. Which does not function as an automatic stabilizer? a. unemployment insurance b. Medicaid c. the construction of a new school d. food stamps ANSWER: c 181. Which type of tax functions as an automatic stabilizer? a. flat tax b. sales tax c. progressive income tax d. regressive income tax ANSWER: c 182. If an income tax system is designed to serve as an automatic stabilizer, when incomes fall then: a. policymakers act to increase tax rates. b. policymakers act to reduce tax rates. c. after-tax income falls more than income itself. d. after-tax income falls less than income itself. ANSWER: d 183. What behavior pattern has the impact of an automatic stabilizer? a. an increase in savings during a recession b. consumption smoothing c. spending based on current incomes d. spending more when incomes are high ANSWER: b 184. Which fiscal policy action to offset a recession would increase the size of the government as a share of the economy? a. an increase in taxes b. a decrease in taxes c. an increase in government purchases d. a decrease in government purchases ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 18 185. Which fiscal policy action to offset a recession would decrease the size of the government as a share of the economy? a. an increase in taxes b. a decrease in taxes c. an increase in government purchases d. a decrease in government purchases ANSWER: b 186. What types of expansionary fiscal policy actions can be offset by crowding out? a. tax changes but not government spending changes b. government spending changes but not tax changes c. both tax changes and government spending changes d. neither tax changes nor government spending changes ANSWER: c 187. Which is NOT the result of an expansionary fiscal policy used to combat a negative real shock? a. expansionary fiscal policy impacting inflation rather than increases in output b. expansionary fiscal policy shifting the aggregate demand curve to the right c. crowding out reducing the impact of expansionary fiscal policy d. the short-run aggregate supply curve shifting to the right ANSWER: d 188. When a recession is caused by a real shock to the economy, it is difficult to recover through fiscal policy because: a. low output is not caused by inefficiency. b. shifts in aggregate demand do not affect output in the short run. c. real shocks affect only prices and not output. d. a real shock offsets fiscal policy. ANSWER: a 189. To recover from a negative real shock to the economy, fiscal policy: a. moves the economy back to its original growth rate but with a lower inflation rate. b. moves the economy back to its original growth rate and inflation rate. c. affects inflation more than output. d. affects output more than inflation. ANSWER: c 190. When a negative real shock occurs, fiscal policy cannot: a. increase government spending. b. affect taxes. c. affect the inflation rate. Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 18 d. move output above its new long-run growth rate. ANSWER: d 191. Which statement is true? a. Fiscal policy is equally effective in resolving recessions caused by real shocks and aggregate demand shocks. b. Fiscal policy is more effective in resolving recessions caused by aggregate demand shocks than by real shocks. c. Fiscal policy has shorter time lags than monetary policy.
d. The problems fiscal policy attempts to resolve are different from the problems monetary policy attempts to resolve.
ANSWER: b 192. Which is the MOST effective fiscal policy to fight a recession if people react to uncertainty by saving all additional money that they earn or receive? a. a tax cut b. a tax increase c. an increase in government spending d. a do-nothing strategy that relies on automatic stabilizers ANSWER: c 193. After a negative real shock, government spending only improves growth minimally and aggregate demand doesn't fully recover because of: a. crowding out. b. Ricardian equivalence. c. effectiveness lags. d. wealth effects. ANSWER: a 194. Fiscal policy is MOST effective in keeping both inflation and real growth stable when there is a: a. shock to the LRAS curve. b. shock to aggregate demand. c. real shock. d. change in expected inflation that shifts the SRAS curve. ANSWER: b 195. When an economy experiences a negative real shock, fiscal policy: a. using tax cuts is appropriate. b. using increased government expenditures is appropriate. c. is generally not appropriate. d. is never used by politicians. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 18 196. Fiscal policy is MOST effective in offsetting the effects of: a. shocks to aggregate demand. b. real shocks. c. shocks to the short-run aggregate supply curve. d. shocks to the LRAS curve. ANSWER: a 197. If the economy is hit by a negative real shock that raises inflation and unemployment, which fiscal policy action should the government take to keep inflation and unemployment stable? a. cut taxes b. raise taxes c. increase government spending d. No government action can achieve those goals. ANSWER: d 198. A negative real shock causes the LRAS curve to: a. shift left. b. shift right. c. become flatter. d. become steeper. ANSWER: a 199. The COVID-19 pandemic was primarily a shock to the _____ and thus fiscal policy was less effective. a. consumption smoothing b. LRAS curve c. SRAS curve d. aggregate demand ANSWER: b 200. Increases in government spending are NOT very effective in offsetting real shocks because they shift the: a. AD curve. b. SRAS curve. c. LRAS curve. d. demand for loanable funds. ANSWER: a 201. When a recession is caused by a real shock, an expansionary fiscal policy will result in an increase in: a. the growth rate that is higher than the increase in the inflation rate. b. productivity. c. the inflation rate that is higher than the increase in the growth rate. d. the unemployment rate. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 18 ANSWER: c 202. Expansionary fiscal policy today might mean: a. increased taxes in the future. b. contractionary fiscal policy in the future. c. increased public borrowing in the future. d. increased taxes, contractionary fiscal policy, and increased public borrowing in the future. ANSWER: d 203. What explains why Argentina had a greater than 100% crowding out during the 1999–2002 period? a. The government accidentally contracted expenditure instead of expanding it. b. uncertainty and pessimism c. implementation lags d. recognition lags ANSWER: b 204. What can happen when a government continues to use expansionary fiscal policy even as government debt becomes a problem? a. Real growth can only happen slowly. b. Real growth can be inconsistent. c. Real growth can continue to fall. d. The interest rate on government debt is likely to fall. ANSWER: c 205. Expansionary fiscal policy can reduce real growth if the increase in government spending: a. causes a large enough increase in private spending. b. causes a large enough decrease in private spending. c. is believed to be temporary. d. is believed to be permanent. ANSWER: b 206. When countries have severe debt problems: a. fiscal policy is an especially good idea. b. expansionary fiscal policy can reduce real growth. c. it makes no difference for fiscal policy. d. they can continue to borrow forever without any adverse consequences. ANSWER: b 207. An increase in government spending can reduce real GDP growth if: a. most government spending is used to reduce the national debt. b. decreases in private spending more than offset the increase in government spending. Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 18 c. taxes do not increase enough to finance the increase in government spending. d. the credibility of the government is too high. ANSWER: b 208. Ideal fiscal policy will: a. decrease aggregate demand in good times and pay off the debt in bad times. b. decrease aggregate demand in bad times and pay off the debt in good times. c. increase aggregate demand in good times and pay off the debt in bad times. d. increase aggregate demand in bad times and pay off the debt in good times. ANSWER: d 209. A potential problem of high levels of government debt is that: a. expansionary fiscal policy can increase real growth. b. expansionary fiscal policy can reduce real growth. c. contractionary fiscal policy can increase real growth. d. contractionary fiscal policy can reduce real growth. ANSWER: b 210. Which is an example of counter-cyclical fiscal policy? a. increasing taxes during a recession b. decreasing taxes during a recession c. increasing government purchases during an expansion d. decreasing government purchases during a recession ANSWER: b 211. If the government decreases spending during recessions and increases spending during expansions, business cycles will be: a. more volatile than if spending were steady. b. less volatile than if spending were steady. c. the same as if spending were steady. d. erratic with no predictable pattern. ANSWER: a 212. Which would be a "common sense" fiscal policy according to the text? a. increasing government spending during a recession b. increasing taxes during a recession c. decreasing government spending during an expansion d. increasing government spending during an expansion ANSWER: d 213. Fiscal policy is MOST effective if: Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 18 a. nominal wages and prices are totally flexible. b. taxpayers care about how fiscal policy is financed. c. the economy is hit by a shock to aggregate demand. d. most resources are fully employed. ANSWER: c 214. Fiscal policy is MOST effective when: a. interest rates are high. b. government can only borrow at high interest rates. c. the money supply is falling. d. there are many unemployed resources. ANSWER: d 215. The macroeconomic case for increased government spending is strongest when: a. economic performance is robust. b. national infrastructure is significantly depreciated. c. the government faces some immediate emergency. d. private spending is strong. ANSWER: c 216. Government spending is BEST for the economy when it is worth incurring some: a. short-run costs to get long-run economic growth. b. long-run costs to get a short-run economic boost. c. short-run costs to get a short-run boost and long-run economic growth. d. long-run costs to get a permanent increase in economic growth. ANSWER: b 217. Which does NOT explain when fiscal policy is MOST likely to matter? a. when the economy needs a short-run boost even at the expense of the long run b. when the problem is a deficiency in aggregate demand rather than a real shock c. when monetary policy lags behind fiscal policy d. when many resources are unemployed ANSWER: c 218. Under which scenario would expansionary fiscal policy work BEST? a. when two real shocks have occurred b. when the economy is at equilibrium in the long run c. when the economy has had a large negative supply shock d. when AD is low compared with the long-run equilibrium position of the economy ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 18 219. Fiscal policy is: a. equally effective in dealing with real shocks as with aggregate demand shocks. b. more effective in dealing with real shocks than with aggregate demand shocks. c. less effective in dealing with real shocks than with aggregate demand shocks. d. not effective in dealing with either real shocks or aggregate demand shocks. ANSWER: c 220. Fiscal policy is a good option to stimulate an economy when: a. unemployment is very high. b. the economy is very close to its long-run potential growth rate. c. a real shock occurs. d. the economy is suffering from a decrease in productivity. ANSWER: a 221. Fiscal policy is a good option to stimulate an economy when: a. consumer saving is very low. b. consumer spending is very low. c. there has been a negative technological shock in the economy. d. LRAS has suddenly shifted to the left. ANSWER: b 222. Under which circumstance should an economic advisor for a small economy recommend a large increase in government spending? a. The country is in a recession that seems to be turning into a depression. b. The government has a record high budget deficit. c. It has become more difficult for the government to borrow. d. The economy is struggling primarily because of high oil prices. ANSWER: a 223. Fiscal policy is well suited to counteract a recession or depression when: a. unemployment is low. b. taxes are high. c. a real negative shock occurs. d. resources are underused. ANSWER: d 224. Fiscal policy is more effective in increasing economic activity if: a. many resources are unemployed. b. there is a real shock instead of an aggregate demand shock. c. the economy returns to its long-run potential growth rate almost immediately. d. there is a long implementation lag. Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 18 ANSWER: a 225. Which is NOT an area of consensus regarding fiscal stimulus during the Obama administration? a. Automatic stabilizer spending was well timed and targeted those who were more likely to spend. b. A lot of the tax cuts were saved or used to pay off debts rather than being spent. c. Direct expenditures by the federal government had a large range of multipliers. d. Grants to state and local governments had low multipliers and contributed to layoffs. ANSWER: d 226. The case for deficit-spending counter-cyclical fiscal policy is weak in which situation? a. wars b. emergencies c. loss of exports d. natural disasters ANSWER: c 227. Fiscal policy is MOST likely to be effective when: a. the economy needs a long-run boost. b. government spending is efficient and productive. c. the problem is large and the fiscal stimulus targets the economy as a whole. d. the problem is a real shock to the economy. ANSWER: b 228. Fiscal policy is unlikely to be effective when: a. the problem is a decrease in aggregate demand rather than a real shock. b. the fiscal stimulus targets everyone. c. government spending is efficient and productive. d. the economy needs a short-run boost. ANSWER: b 229. What two opposing forces affect the degree of impact that fiscal policy has on the economy? a. progressive taxes and regressive taxes b. deficits and surpluses c. crowding out and the multiplier effect d. business cycles and trends ANSWER: c 230. The tools of fiscal policy are government expenditure and taxation. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 18 231. Fiscal policy is most desirable when the economy has returned to its long-run equilibrium immediately after a shock occurs. a. True b. False ANSWER: b 232. A tax cut causes the AD curve to shift to the right. a. True b. False ANSWER: a 233. Economists who believe that fiscal policy can be effective in smoothing out business cycles created by shifts in aggregate demand also believe strongly in the idea that "supply creates its own demand." a. True b. False ANSWER: b 234. The best case for fiscal policy occurs when the economy is hit by a real shock. a. True b. False ANSWER: b 235. The worst case for fiscal policy is when a recession is caused by a decrease in aggregate demand. a. True b. False ANSWER: b 236. Fiscal policy will be most effective when people have been eager to spend their money. a. True b. False ANSWER: b 237. An increase in government spending increases incomes and thus also increases personal consumption. a. True b. False ANSWER: a 238. Small changes in government spending can end up producing larger changes in the overall growth rate of output. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 18 239. Because of the multiplier effect, a smaller change in government spending can generate a larger change in aggregate demand. a. True b. False ANSWER: a 240. The multiplier effect is the increase in AD when private spending augments the effect of expansionary fiscal policy. a. True b. False ANSWER: a 241. The multiplier effect occurs when a change in government spending raises the incomes of people, who in turn increase their spending. a. True b. False ANSWER: a 242. The crowding out effect refers to an increase in private spending that leads to a decrease in government spending. a. True b. False ANSWER: b 243. An effective way to combat real shocks is to change the growth in government spending. a. True b. False ANSWER: b 244. Expansionary fiscal policy is enhanced by the multiplier effect but compromised by the crowding out effect. a. True b. False ANSWER: a 245. The crowding out effect reduces the effectiveness of fiscal policy in combating economic shocks. a. True b. False ANSWER: a 246. Raising taxes to finance increases in government spending will only be an effective means of increasing aggregate demand if private savings rates are very low. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 18 b. False ANSWER: b 247. Fiscal policy is most effective when people are otherwise unwilling to spend money. a. True b. False ANSWER: a 248. When the government borrows to finance government expenditures, it actually encourages more household saving. a. True b. False ANSWER: a 249. Expansionary fiscal policy financed through increased government borrowing is least likely to be effective when the private sector is reluctant to spend or invest. a. True b. False ANSWER: b 250. If consumers believe a tax cut is permanent, they will spend more of it. a. True b. False ANSWER: a 251. Tax cuts are likely to have a larger impact on consumer spending if they are permanent rather than temporary. a. True b. False ANSWER: a 252. Tax cuts will be effective in stimulating aggregate demand if funds from the cuts are saved. a. True b. False ANSWER: b 253. An investment tax credit provides an incentive for immediate investment spending. a. True b. False ANSWER: a 254. If Ricardian equivalence holds, fiscal policy has no effect on either inflation or real growth. Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 18 a. True b. False ANSWER: a 255. Total Ricardian equivalence will render a tax cut ineffective in stimulating AD. a. True b. False ANSWER: a 256. If an economy is 2% below its long-run potential growth rate, the federal government can offset the recession with a 2% increase in discretionary spending. a. True b. False ANSWER: b 257. The majority of the federal budget is nonsecurity discretionary spending, and this enables policymakers to influence the economy through flexibility in the budget process. a. True b. False ANSWER: b 258. The stimulus plan passed under President Obama in 2009 increased government spending and cut taxes by nearly $900 billion, but unemployment still remained above 9% for nearly two years. a. True b. False ANSWER: a 259. Most changes in government spending are large relative to the size of the economy. a. True b. False ANSWER: b 260. The U.S. fiscal stimulus plan passed in 2009 was the largest fiscal stimulus in the United States since World War II. a. True b. False ANSWER: a 261. Fiscal policy is often implemented very quickly and effectively. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 18 262. Compared with monetary policy, fiscal policy generally involves a shorter implementation lag. a. True b. False ANSWER: b 263. Monetary policy lags are generally shorter than fiscal policy lags. a. True b. False ANSWER: a 264. Automatic stabilizers automatically keep private spending lower during bad economic times. a. True b. False ANSWER: b 265. Tax cuts often have an immediate impact on redirecting an economic downturn. a. True b. False ANSWER: b 266. Lags associated with monetary policy are generally longer than lags associated with fiscal policy. a. True b. False ANSWER: b 267. President Bush favored increases in government spending as a way to stimulate the economy, while President Obama favored tax cuts. a. True b. False ANSWER: b 268. People who think that the government is spending enough will generally prefer that fiscal policy work through tax policy changes. a. True b. False ANSWER: a 269. The worst case for fiscal policy is when a recession is caused by a real shock. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 18 270. Fiscal policy is especially effective when used to combat real shocks. a. True b. False ANSWER: b 271. To keep inflation and GDP growth stable, the government can apply fiscal policy in the presence of a real shock. a. True b. False ANSWER: b 272. When countries have extremely high debt levels, expansionary fiscal policy could cause AD to contract. a. True b. False ANSWER: a 273. The fiscal stimulus undertaken by Argentina from 1999 to 2002 was counterproductive. a. True b. False ANSWER: a 274. Increases in government spending do little to change long-run economic growth. a. True b. False ANSWER: a 275. What conditions are important for fiscal policy to occur in the best-case scenario? ANSWER: The best-case scenario for fiscal policy is during a recession caused by an aggregate demand shock. In this case, the government might engage in expansionary fiscal policy by increasing spending or decreasing taxes to combat the recession. This has the potential to increase aggregate demand, which will, at least in the short run, increase real growth and help ease the pain of the recession.
276. According to the AD–AS model, the economy always returns to its long-run potential growth rate in the long run. Why then should government intervene and do anything when the economy suffers a negative aggregate demand shock and falls into a recession? ANSWER: According to the AD–AS model, the economy will eventually return to its long-run potential growth rate in the long run without government intervention. However, some economists believe that policymakers should take an active approach to stabilize an economy. The idea behind this is that the government can speed up the process of recovery and reduce the negative impact of a recession on households and firms. For example, increased levels of government spending can shift aggregate demand (AD) to the right, essentially increasing demand/consumption for certain products.
277. Explain the multiplier effect. ANSWER: The multiplier effect is a concept in economics that shows how an initial change in government spending can have a larger impact than the initial dollar amount spent. The original change in government expenditures is actually spent more than once, cycling repeatedly through the economy. The multiplier effect is calculated as the change in GDP divided by the change in government spending. Any change in government spending shifts the aggregate demand curve, Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 18 and the amount of the shift is always equal to the change in government spending times the multiplier.
278. What are the multiplier effect and the crowding out effect? Using an AD–AS diagram, contrast the implications for fiscal policy of multiplier effects with those of crowding out effects. ANSWER: The multiplier effect refers to the theory that government spending intended to stimulate the economy causes increases in private spending that additionally stimulates the economy. In essence, the theory is that government spending gives households additional income, which leads to increased consumer spending. That, in turn, leads to increased business revenues, production, capital expenditures, and employment, which further stimulates the economy. The crowding out effect is a competing force for the multiplier effect. It refers to government "crowding out" private spending by using up part of the total available financial resources. In short, the crowding out effect is the dampening effect on private-sector spending activity that results from public sector spending activity. In an AD–AS diagram, an increase in government spending would shift the aggregate demand curve to the right, leading to an increase in both real GDP and the price level. This is an illustration of the multiplier effect. However, if the crowding out effect is significant, it could reduce or even negate the impact of government spending on aggregate demand. In this case, the shift in aggregate demand would be smaller or nonexistent. The extent to which crowding out occurs depends on various factors such as the state of the economy and the type of government spending. Some economists argue that during a recession, when there is a lot of unused capacity in the economy, the crowding out effect is likely to be small and government spending can have a significant impact on aggregate demand.
279. Explain the fundamental reason that fiscal policy can work and pay for itself. ANSWER: Fiscal policy refers to the use of government spending and tax policies to influence economic conditions, especially macroeconomic conditions such as aggregate demand for goods and services, employment, inflation, and economic growth. The fundamental reason that fiscal policy can work and pay for itself is that when resources are unemployed, the economy is operating inefficiently. If spending more can employ unemployed resources, the principle can pay for itself.
280. Is fiscal policy effective in reducing both inflation and unemployment at the same time? ANSWER: Fiscal policy can be used to influence the economy and address various macroeconomic goals, including reducing inflation and unemployment. However, achieving both of these objectives simultaneously, also known as addressing the trade-off between inflation and unemployment, can be challenging. The conflict arises when trying to address both inflation and unemployment simultaneously. To reduce unemployment through expansionary fiscal policy, the government increases spending, which may lead to rising demand and inflationary pressures. Conversely, to curb inflation through contractionary fiscal policy, the government reduces spending, which can result in decreased economic activity and potentially higher unemployment. This is particularly the case in the event of a real shock, where an increase in government spending shifts the AD curve rightward. Yet, the LRAS has shifted to the left, meaning that prices will remaining permanently at significantly higher levels.
281. Explain why a negative real shock followed by an increase in government spending will lead to higher inflation. ANSWER: A negative real shock reduces the economy's production capacity. When the government responds with increased spending to stimulate growth, it boosts demand beyond the economy's capacity to produce, leading to cost-push inflation and demand-pull inflation. Higher demand without an immediate increase in supply causes resource bottlenecks, pushing up production costs, and leading to higher inflation.
282. Suppose an economy suffers a real shock that lowers the economy's long-run potential growth rate. Will fiscal policy be effective in taking the economy back to its original point? How would the existence of crowding out affect your answer? Illustrate your answer with the use of a diagram. ANSWER: If an economy experiences a real shock that reduces its long-run potential growth rate, it means that the economy's productive capacity has been permanently impaired. In this scenario, fiscal policy alone may not be sufficient to bring the economy back to its original point of potential output and growth. Fiscal policy involves government spending and taxation decisions aimed at influencing economic activity. Typically, expansionary fiscal policy, such as increased government spending or tax cuts, is used to boost aggregate demand and Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 18 stimulate economic growth. However, if the economy's potential growth rate has been permanently lowered due to the real shock, it means that the economy's productive capacity to supply goods and services has diminished. In such a situation, the effectiveness of fiscal policy is limited because the economy's ability to respond with increased production is reduced. Crowding out refers to the phenomenon where increased government spending is financed through borrowing, leading to higher interest rates. Higher interest rates can, in turn, reduce private sector investment and consumption, offsetting some of the positive effects of fiscal stimulus. If crowding out occurs, the ability of fiscal policy to stimulate economic activity is further hampered. This is because higher interest rates discourage private sector borrowing and investment, leading to reduced economic activity and partially counteracting the government's efforts to boost demand through increased spending. In summary, if an economy experiences a real shock that permanently lowers its potential growth rate, fiscal policy may not be fully effective in bringing the economy back to its original point. The real shock implies that the economy's productive capacity has been impaired, limiting its ability to respond to fiscal stimulus with sustained growth. Additionally, the existence of crowding out can further hinder the effectiveness of fiscal policy, as higher interest rates may dampen private sector spending and investment.
283. Many economists believe that the most harmful consequence of continuing to finance high budget deficits through borrowing is the upward pressure placed on interest rates. Explain this argument (i.e., explain why higher budget deficits may lead to higher interest rates and why this may be detrimental to the economy in the long run). ANSWER: Higher budget deficits may lead to higher interest rates for several reasons. One reason is that when the government runs a deficit, it must borrow money to finance its spending. This increases the demand for credit, which can drive up interest rates. Higher interest rates can make borrowing more expensive for businesses and consumers, which can reduce spending and investment (i.e., crowding them out), and ultimately slow down economic growth. In the long run, higher interest rates can be detrimental to the economy because they can reduce borrowing and investment. This can lead to less capital accumulation and a decrease in the economy's ability to produce goods and services. Additionally, higher interest rates can increase the cost of servicing the government's debt, which can further exacerbate the budget deficit.
284. What, if any, timing challenges exist with the use of discretionary fiscal policy? If there are any, compare and contrast them with the timing challenges of monetary policy. ANSWER: The following timing challenges exist with fiscal policy: 1. Recognition lag: The problem must be recognized. 2. Legislative lag: Congress must propose and pass a plan. 3. Implementation lag: Bureaucracies must implement the plan. 4. Effectiveness lag: The plan takes time to work. 5. Evaluation and adjustment lag: Did the plan work? Have conditions changed? 6. Monetary policy is also subject to lags, but these are generally shorter than for fiscal policy.
285. Identify and explain the lags relevant to the use of fiscal policy. ANSWER: The following timing challenges exist with fiscal policy: 1. Recognition lag: The problem must be recognized. 2. Legislative lag: Congress must propose and pass a plan. 3. Implementation lag: Bureaucracies must implement the plan. 4. Effectiveness lag: The plan takes time to work. 5. Evaluation and adjustment lag: Did the plan work? Have conditions changed?
286. How is a country's ability to use counter-cyclical fiscal policy to resolve recessions hindered if the government does not run budget surpluses during expansionary periods? ANSWER: A country's ability to use counter-cyclical fiscal policy to resolve recessions is hindered if the government does not run budget surpluses during expansionary periods because it limits the capacity to increase spending or implement tax cuts during economic downturns. Counter-cyclical fiscal policy aims to boost aggregate demand and stimulate economic activity during recessions by increasing government spending or reducing taxes. However, if the government is already Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 18 running budget deficits during expansionary periods (when the economy is growing), it may face difficulties in further increasing spending or cutting taxes without exacerbating the deficit and raising concerns about debt sustainability. This constraint can limit the effectiveness of counter-cyclical measures when they are most needed. This situation is related to the concept of crowding out, which refers to the phenomenon where increased government spending (fueled by deficits) leads to reduced private sector investment. When the government borrows to finance its spending, it competes with private borrowers for available funds in the financial markets. This increased demand for funds can drive up interest rates, making borrowing more expensive for private businesses and consumers. As a result, private sector investment and consumption may decline, offsetting the positive impact of government spending and dampening the overall effectiveness of counter-cyclical fiscal policy. Therefore, the lack of budget surpluses during expansionary periods not only limits the government's fiscal space in times of recession but can also create crowding out effects that hinder the policy's potency.
287. Explain the dilemma policymakers face with respect to fiscal policy when government deficits and the national debt reach burdensome levels. ANSWER: When government deficits and the national debt reach burdensome levels, policymakers face a challenging dilemma regarding fiscal policy. On one hand, expansionary fiscal policy, which involves increasing government spending and cutting taxes, can be tempting as a short-term measure to stimulate economic growth and create jobs. By injecting more money into the economy, expansionary fiscal policy can lead to increased consumer spending and business investment, potentially boosting economic activity. However, the concern with employing expansionary fiscal policy when deficits and national debt are already high is that it can exacerbate the fiscal imbalance. Higher government spending and tax cuts could lead to even larger deficits, which, if left unchecked, might further escalate the national debt and create a debt crisis. A high and unsustainable national debt can have significant adverse consequences, such as higher interest payments, reduced fiscal flexibility, and potential crowding out of private investment. Policymakers need to strike a delicate balance, weighing the shortterm benefits of expansionary fiscal policy against the long-term risks of accumulating a larger and unsustainable debt burden. In such situations, a more prudent approach may involve finding ways to address the structural causes of deficits, rationalizing government spending, and gradually reducing the debt-to-GDP ratio to more sustainable levels over time.
288. When a fiscal stimulus is used to address a decrease in
that causes a reduction in AD, the increase in
government spending must be the same size as the change in
.
a. True b. False ANSWER: b
Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 19 1. Which statement is TRUE? a. Although inefficient, trade restrictions are effective at reducing child labor. b. Most child labor around the world takes place in factories that export products. c. Rising real GDP per capita has been an important force in reducing child labor. d. About 50% of the world's children aged 10 to 14 years work. ANSWER: c 2. After World War I, the nations of the world: a. enacted the General Agreement on Tariffs and Trade. b. believed that international trade was an important part of international cooperation. c. ended the globalization that had grown before the war, and protectionism grew. d. worked hard to bring nations back together. ANSWER: c 3. After World War II, the nations of the world: a. signed the General Agreement on Tariffs and Trade for the exclusive purpose of increasing trade between
nations. b. signed the General Agreement on Tariffs and Trade to reduce barriers to international trade and to promote peaceful cooperation. c. failed to sign any trade agreements to improve international trade.
d. continued enacting protective measures to increase trade barriers. ANSWER: b 4. Under the General Agreement on Tariffs and Trade, tariffs _____ and trade _____. a. fell; increased b. fell; decreased c. rose; increased d. rose; decreased ANSWER: a 5. In early 2018, President Trump imposed new tariffs on washing machines produced outside the United States because: a. China imposed new tariffs on U.S. imports of washing machines. b. low- to medium-skilled jobs were under pressure from the international production of goods and from the automation of factories. c. the World Trade Organization suggested that it was a good idea.
d. trade was making consumers in the United States worse off. ANSWER: b 6. Consider the following statements: I. Relative to a no-trade situation, if the United States exported wheat, the U.S. domestic wheat price would rise and domestic production of wheat would expand. II. Relative to a no-trade situation, international trade causes the prices of all goods to rise. Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 19 a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false. ANSWER: a 7. Figure: Foreign Trade 1
What quantity would be traded in a free trade environment? a. 600 units b. 1,400 units c. 1,000 units d. 800 units ANSWER: b 8. Figure: Foreign Trade 1
What quantity would be produced domestically in a free trade environment? a. 600 units b. 1,400 units c. 1,000 units d. 800 units ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 19 9. Figure: Foreign Trade 1
What quantity would be imported? a. 600 units b. 1,400 units c. 1,000 units d. 800 units ANSWER: a 10. Figure: Foreign Trade 1
What quantity would be traded in the absence of any international trade? a. 600 units b. 1,400 units c. 1,000 units d. 800 units ANSWER: c 11. If the world price of cotton is less than the price that would occur domestically without trade, then a country will: a. decrease its demand for cotton and increase its demand for cotton substitutes. b. increase its demand for cotton and decrease its demand for cotton substitutes. c. import cotton. d. export cotton. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 19 ANSWER: c 12. Figure: Trade 1
If this figure represents the market for oil and the country imposes no tariffs on international trade, domestic consumption will be: a. 500 units. b. 1,000 units. c. 1,150 units. d. 1,300 units. ANSWER: d 13. Figure: Trade 1
Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 19
With free international trade, the country in this figure will find that the good: a. becomes cheaper for domestic consumers. b. becomes more expensive for domestic consumers. c. does not change in price. d. may get cheaper or more expensive for domestic consumers, but it is impossible to tell. ANSWER: a 14. If the world price for a good is higher than the domestic price, a move to free international trade means that the domestic economy will become:
Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 19
a. a net importer of the good. b. a net exporter of the good. c. neither a net importer nor a net exporter of the good. d. either a net importer or a net exporter of the good, but it is impossible to say which. ANSWER: b 15. When a country adopts free trade and becomes a net exporter of a good, that good: a. becomes cheaper for domestic consumers. b. becomes more expensive for domestic consumers. c. does not change in price. d. may get cheaper or more expensive for domestic consumers. ANSWER: b 16. Protectionism: Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 19 a. benefits domestic consumers and foreign producers. b. places a tax on exports. c. restricts trade through policies that favor domestic producers. d. restricts the quantity of goods that can be exported. ANSWER: c 17. Figure: International Trade 1
According to the figure, which of these statements is TRUE? a. After international trade, price falls by $4 and consumption increases by 4 units. b. After international trade, price falls by $4 and consumption decreases by 4 units. c. After international trade, price rises by $4 and consumption increases by 8 units. d. After international trade, price stays the same and consumption increases by 8 units. ANSWER: a 18. Figure: International Trade 1
Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 19
With the international trade in this figure, domestic consumption is _____ units, and _____ of those units are imported. a. 9; 5 b. 13; 5 c. 13; 8 d. 20; 9 ANSWER: c 19. Table: Semiconductors Price (per Quantity Demanded of Semiconductors Quantity Supplied of Semiconductors unit) (Domestic) (Domestic) $3.00 500 700 2.50 580 650 2.00 600 600 1.50 700 550 1.00 850 500 If the domestic economy in this table opens up to international trade at the world price of $1.50 per semiconductor, this economy will: a. export 550 semiconductors. b. export 150 semiconductors. c. import 550 semiconductors. d. import 150 semiconductors. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 19 20. World supply of a good _____ domestic supply. a. is less elastic than b. is more elastic than c. is equally elastic to d. has indeterminate elasticity compared with ANSWER: b 21. An increase in import trade tends to _____ domestic prices. a. increase b. decrease c. hold constant d. have an indeterminate effect on ANSWER: b 22. Import trade tends to _____ the domestic quantity of a good exchanged. a. increase b. decrease c. hold constant d. have an indeterminate effect on ANSWER: a 23. According to the supply and demand framework in the text, an increase in import trade tends to _____ domestic production of a good. a. increase b. decrease c. hold constant d. have an indeterminate effect on ANSWER: b 24. Which of these is FALSE about the economic policy of "protectionism"? a. It raises the prices of foreign goods in domestic markets. b. It restricts competitive forces in domestic markets. c. It can be achieved through quotas and tariffs. d. It can be implemented without causing any losses in the domestic economy. ANSWER: d 25. Economic policies of protectionism include: I. reduced trade barriers. II. tariffs. III. quotas. a. I and II only b. II and III only Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 19 c. I and III only d. I, II, and III ANSWER: b 26. Imposing a restrictive quota on the import of sugar will likely: a. increase the price of sugar and decrease the quantity consumed. b. increase the price of sugar and increase the quantity consumed. c. leave the price of sugar unchanged and decrease the quantity consumed. d. leave the price of sugar unchanged and increase the quantity consumed. ANSWER: a 27. Protectionism refers to government policies that: a. restrict imports of foreign products. b. give foreign producers tax credits in an effort to increase their exports. c. stimulate trade between countries and increase domestic producers' profit. d. restrict the output of domestic producers to keep their prices high. ANSWER: a 28. The U.S. government restricting the quantity of sugar imports into the country is an example of a(n): a. trade quota. b. embargo. c. trade settlement. d. market hanger. ANSWER: a 29. A tariff is a: a. tax on imports. b. subsidy on exports. c. restriction on the quantity of domestic goods consumed by foreigners. d. restriction on the quantity of imports from foreign producers. ANSWER: a 30. A tariff is a: a. tax credit for domestic exports. b. tax on imports. c. temporary grant of monopoly rights. d. renewable subsidy to the energy industry. ANSWER: b 31. Figure: Foreign Trade with a Tariff Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 19
A $1 tariff results in a(n): a. increase in imports of 80 million units. b. decrease in imports of 80 million units. c. increase in imports of 100 million units. d. decrease in imports of 100 million units. ANSWER: b 32. Figure: Foreign Trade with a Tariff
A $1 tariff generates government revenue of: a. $100 million. b. $140 million. c. $180 million. d. $200 million. ANSWER: a 33. Figure: Foreign Trade with a Tariff
Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 19
A $1 tariff generates increased domestic production by: a. 40 million units. b. 90 million units. c. 140 million units. d. 180 million units. ANSWER: a 34. Figure: Trade 2
In this figure representing the market for oil, by how much will domestic oil consumption increase or decrease following a tariff on imported oil? Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 19 a. increase by 250 units b. increase by 300 units c. decrease by 500 units d. decrease by 150 units ANSWER: d 35. Figure: Trade 2
In this figure representing the market for oil, what are the total revenues generated by the tariff? a. $25,000 b. $20,000 c. $10,000 d. $5,000 ANSWER: c 36. Which of these results from a tariff on imported goods? I. Domestic production increases. II. Domestic consumption increases. III. Government revenues increase. a. I and III only b. II and III only Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 19 c. I and II only d. I, II, and III ANSWER: a 37. A tariff is: a. the restriction of trade through regulations on domestic producers. b. a restriction on the quantity of goods that can be imported. c. equal to exports minus imports. d. a tax on imports. ANSWER: d 38. A trade quota is: a. a restriction on the quantity of goods that can be imported. b. a tax on imports. c. a tax on exports. d. the restriction of trade through regulations on domestic producers. ANSWER: a 39. When the world price is lower than the domestic price, a tariff on a good leads to: a. tariff revenues that will be lower than under free trade. b. domestic imports that will be higher than under free trade. c. lower domestic consumption of the good than under free trade. d. lower domestic production of the good than under free trade. ANSWER: c 40. Figure: Shirts
Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 19
If a $5 tariff were levied on shirts, how much tax revenue would the government collect? a. $0 b. $100 million c. $200 million d. $375 million ANSWER: a 41. Figure: Shirts
Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 19
If a tariff raised the world price to $4 a shirt, how much deadweight loss would it create in millions of dollars? a. $5 b. $10 c. $120 d. $200 ANSWER: a 42. Figure: Shirts
Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 19
If a tariff raised the world price to $4 a shirt, how much consumer surplus would be lost in millions of dollars? a. $5 b. $10 c. $85 d. $30 ANSWER: c 43. Figure: Tariffs
Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 19
In the domestic market with no trade, the equilibrium price is _____ and the quantity traded is _____ units. a. $90; 1,150 b. $60; 650 c. $60; 1,150 d. $40; 1,800 ANSWER: a 44. Figure: Tariffs Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 19
In the domestic market with international trade and no tariffs, the price is _____ and the quantity purchased in the United States is _____ units. a. $90; 1,150 b. $60; 650 c. $60; 1,150 d. $40; 1,800 ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 19 45. Figure: Tariffs
When the domestic market opens to international trade without tariffs, domestic consumption of the good: a. increases by 250 units. b. decreases by 400 units. c. increases by 650 units. d. decreases by 250 units. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 19 46. Figure: Tariffs
In the domestic market with international trade and a $20 tariff, the price is _____ and the quantity purchased in the United States is _____ units. a. $90; 1,150 b. $60; 1,550 c. $60; 1,150 d. $40; 1,800 ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 19 47. Figure: Tariffs
In the domestic market with international trade and a $20 tariff, revenues collected from the tariff are: a. $18,000. b. $54,000. c. $31,000. d. $13,000. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 19 48. Figure: Tariffs
In the domestic market with international trade and a $20 tariff, domestic production after the tariff is imposed increases by: a. 650 units. b. 300 units. c. 350 units. d. 250 units. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 19 49. Figure: Tariffs
In the domestic market with international trade and a $20 tariff, domestic consumption after the tariff is imposed decreases by: a. 650 units. b. 300 units. c. 350 units. d. 250 units. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 19 50. Dividing the total tariff revenue in the trade diagram introduced in this chapter by the size of the tariff yields the: a. quantity of imports with free trade. b. quantity of imports with tariff. c. size of increase in domestic production. d. size of decrease in domestic consumption. ANSWER: b 51. Figure: Bananas
If there is a $3 tariff on bananas, domestic consumers buy _____ fewer bananas and domestic producers grow _____ additional bananas. a. 50,000; 10,000 b. 75,000; 10,000 c. 50,000; 20,000 d. 75,000; 20,000 ANSWER: a 52. Figure: Bananas Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 19
If there is a $3 tariff on bananas, approximately what percentage of banana consumption comes from imports? a. 8% b. 10% c. 90% d. 93% ANSWER: c 53. Figure: Bananas
Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 19
If there is a $3 tariff on bananas, what is the total tariff revenue? a. $135,000 b. $180,000 c. $270,000 d. $360,000 ANSWER: c 54. Figure: International Trade 2
Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 19
What is the size of the tariff in this figure? a. $8 b. $3 c. $5 d. $1 ANSWER: b 55. Figure: International Trade 2
Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 19
With the tariff in this figure, the domestic quantity demanded is _____ units, and the quantity supplied domestically is _____ units. a. 10; 8 b. 8; 8 c. 10; 10 d. 9; 7 ANSWER: a 56. Figure: International Trade 2
Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 19
At the tariff equilibrium in this figure, the quantity of imports is _____, which is _____ than at the free trade equilibrium. a. 2; 10 units fewer b. 2; 6 units fewer c. 10; 2 units more d. 10; 2 units fewer ANSWER: b 57. Figure: International Trade 2
Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 19
How much revenue does the tariff in this figure generate for the government? a. $30 b. $24 c. $6 d. $54 ANSWER: c 58. What is the difference between a tariff and a trade quota? a. A tariff is a tax on imported goods, and a trade quota is a quantity restriction on imported goods. b. A tariff is a cash payment to domestic exporters, and a trade quota restricts the quantity of domestically produced goods foreigners can buy. c. A tariff is a lump-sum tax on imported goods, and a trade quota is a sales tax on imported goods.
d. A tariff is a quantity trade restriction on imported goods, and a trade quota is a quantity tax on imported goods. ANSWER: a 59. A tariff _____ the amount of output produced by domestic firms and _____ the amount of goods bought by domestic consumers. a. increases; increases b. increases; decreases c. decreases; increases d. decreases; decreases ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 19 60. The U.S. price of sugar is higher than the world price of sugar due primarily to a: a. subsidy. b. quota. c. local content requirement. d. tariff. ANSWER: d 61. A tariff _____ the world supply of a good. a. reduces b. increases c. does not change d. has no measurable effect on ANSWER: a 62. Figure: Coffee Trade
Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 19 In the domestic market with no international trade, the wasted resources from domestic production are: a. $148.75. b. $297.50. c. $35.00. d. $17.50. ANSWER: a 63. Figure: Coffee Trade
In the domestic market with no international trade, the lost gains from trade from domestic production are: a. $148.75. b. $297.50. c. $35.00. d. $17.50. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 19 64. Figure: Trade
In the domestic market with no international trade, the lost gains from trade from domestic production are area: a. B. b. C. c. D. d. E. ANSWER: b 65. Figure: Trade
Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 19
In the domestic market with no international trade, the wasted resources from domestic production are area: a. B. b. C. c. D. d. E. ANSWER: a 66. Figure: Foreign Trade 2
Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 19
What is the dollar value of wasted resources as a result of prohibiting trade in this market? a. $30,000 b. $5,000 c. $2,500 d. $22,500 ANSWER: c 67. Figure: Foreign Trade 2
What is the dollar value of the deadweight loss created as a result of prohibiting trade in this market? a. $2,500 b. $10,000 c. $7,500 d. $5,000 ANSWER: c 68. Figure: Foreign Trade 2
Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 19
What is the dollar value of the producer surplus gained as a result of prohibiting trade in this market? a. $15,000 b. $30,000 c. $12,500 d. $22,500 ANSWER: d 69. Figure: Foreign Trade 2
What is the dollar value of the consumer surplus that consumers could gain if the trade restriction were removed? a. $35,000 b. $22,500 c. $30,000 d. $25,000 ANSWER: c 70. Figure: Foreign Trade Market
Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 19
What is the dollar value of wasted resources as a result of prohibiting trade in this market? a. $10,000 b. $4,000 c. $7,500 d. $6,000 ANSWER: d 71. Figure: Foreign Trade Market
What is the dollar value of the deadweight loss created by the loss of foreign trade? a. $10,000 b. $4,000 c. $36,000 d. $6,000 ANSWER: a 72. Figure: Foreign Trade Market
Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 19
What is the dollar value of the lost consumer surplus as a result of prohibiting trade in this market? a. $26,000 b. $28,000 c. $32,000 d. $36,000 ANSWER: d 73. If quotas on sugar were eliminated in the United States, domestic production of sugar would fall. Why would this be a benefit in economic terms for the United States? I. Resources would be freed up that could be used more efficiently elsewhere. II. It would be beneficial because it would allow foreign producers of sugar to earn income, and thus those countries would be better off. III. U.S. consumers would be able to enjoy increased consumer surplus because of the lower prices of imported sugar. a. I and II only b. I and III only c. II and III only d. I, II, and III ANSWER: b 74. Sugar costs more to grow in the United States than in Brazil for all of these reasons EXCEPT: a. the climate is less ideal for growing sugar in the United States than Brazil. b. the trade restrictions placed on Brazilian sugar by the United States. c. land is more expensive in parts of the United States than Brazil with the best climate for sugar. d. labor costs are higher in the United States than Brazil. ANSWER: b 75. Which, if any, of these conditions for efficient market functioning do tariffs and quotas violate? I. Demanders with the highest willingness to pay purchase the supply of goods. II. Producers with the lowest costs produce and sell the supply of goods. III. The sum of consumer and producer surplus is maximized. a. I only b. II and III only Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 19 c. I, II, and III d. III only ANSWER: b 76. Figure: A Tariff on Imports
Suppose the government intervenes with a $2 tariff; the total value of deadweight loss as a result of the tariff is: a. $150 million. b. $350 million. c. $400 million. d. $550 million. ANSWER: b 77. Figure: A Tariff on Imports
Suppose the government intervenes with a $2 tariff; the total cost of the tariff for the citizens in that country is: a. $350 million. b. $400 million. c. $550 million. d. $700 million. ANSWER: a 78. Economists consider tariffs to be: a. necessary. Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 19 b. beneficial to domestic consumers. c. harmful to domestic producers. d. obstacles that reduce gains from trade. ANSWER: d 79. Which of these decreases the volume of international trade? a. increasing tariffs b. decreasing quotas c. lower transportation costs d. stable monetary conditions ANSWER: a 80. One of the costs of protectionism is: a. increases in total national output. b. a reduction in the variety of goods in domestic markets. c. greater competition. d. lower opportunity costs of domestic production. ANSWER: b 81. Which of these statements is TRUE? I. If the United States bans the importation of bananas, consumer surplus will decrease. II. If the United States bans the importation of bananas, producer surplus will decrease. III. If the United States bans the importation of bananas, it will produce bananas at a cost exceeding their world purchase price. a. I, II, and III b. I and II only c. I and III only d. II and III only ANSWER: c 82. Figure: World Imports
The equilibrium for a country without trade restrictions is where the price and quantity are _____ units, Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 19 respectively. a. $20 and 4 b. $40 and 11 c. $20 and 11 d. $20 and 20 ANSWER: d 83. Figure: World Imports
An imposition of extreme trade restrictions that eliminated all trade in this market would generate wasted resources of: a. $70. b. $530. c. $90. d. $160. ANSWER: a 84. Figure: World Imports
The imposition of a $20 tariff would generate a value of lost gains from trade of: a. $45. b. $90. c. $70. d. $160. Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 19 ANSWER: b 85. Without trade restrictions, the price of tennis shoes is $30, and with trade restrictions the price of tennis shoes is $45. The difference in the two prices reflects: a. per unit profits. b. the value of the extra resources for domestic production of an additional pair of tennis shoes. c. the gain in consumer surplus from free trade. d. All of the answers are correct. ANSWER: b 86. As a result of tariffs: a. the opportunity cost of domestic production falls. b. domestic producers waste resources producing goods for which they are not low-cost producers. c. foreign producers gain additional profits at the expense of domestic consumers. d. both domestic producers and consumers are protected from international competition. ANSWER: b 87. Figure: Costs of Tariffs
In the figure representing the market for leather, domestic suppliers are the high-cost producers of leather. However, import restrictions push domestic prices up to $100. Which area represents the value of wasted resources? a. A b. B c. C d. D ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 19 88. Figure: Costs of Tariffs
In the figure representing the market for leather, domestic suppliers are the high-cost producers of leather. However, import restrictions push the domestic price up to $100. Which area represents the deadweight loss that results? a. A b. B c. C d. D ANSWER: d 89. Figure: Costs of Tariffs
Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 19
In the figure representing the market for leather, what price would consumers pay for leather in the absence of a tariff or other import restrictions? a. a price less than $50 b. $50 c. a price somewhere between $50 and $100 d. $100 ANSWER: b 90. As a result of U.S. quotas on sugar imports, all of these are true EXCEPT: a. the United States pays 50% to 100% more than the world price for sugar. b. the gains to American producers are greater than the losses to American consumers. c. foreign sugar producers—mostly in poor countries—suffer. d. a small group of domestic sugar producers benefit. ANSWER: b 91. Suppose that a tariff increases domestic production of a good from 25 million units to 75 million units and raises the domestic price by $1.50. Assuming a linear domestic supply curve and a perfectly elastic world supply curve, what is the value of the resources wasted by increased domestic production? a. $37.5 million b. $50 million c. $75 million d. $150 million ANSWER: a 92. If a tariff decreases domestic consumption of a good from 230 million units to 150 million units and raises the domestic price by $1.50, given a linear domestic demand curve and a perfectly elastic world supply curve, Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 19 what is the value of the unexploited gains from trade caused by decreased domestic consumption? a. $45 million b. $60 million c. $80 million d. $120 million ANSWER: b 93. When the world price is below the domestic price, the elimination of a tariff decreases domestic production and provides a benefit because: a. it causes unemployment when workers are laid off. b. it makes producers better off. c. no one is harmed by the decreased production, and everybody pays lower prices. d. it frees up resources that can be used to produce other goods and services. ANSWER: d 94. Whom does protectionism hurt? a. domestic producers only b. domestic consumers only c. international producers only d. international producers and domestic consumers ANSWER: d 95. In 1845, French economist Frédéric Bastiat satirically compared tariffs to blocking out the sun, since both low-priced imports and free sunlight hurt the domestic candle-making industry. What part of the trade diagram BEST describes the encouragement of domestic industry if Bastiat's "blockade" were taken seriously? a. deadweight loss b. fall in consumer surplus c. fall in producer surplus d. wasted resources ANSWER: d 96. The U.S. government's policies on foreign-made sugar: a. result in U.S. consumers paying 50% to 100% more than the world price of sugar. b. result in U.S. consumers paying less than half the world price of sugar. c. make it difficult for domestic sugar growers to compete with foreign-made sugar. d. result in U.S. consumers buying inefficiently large quantities of sugar. ANSWER: a 97. Figure: International Trade 3
Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 19
If the government in this diagram eliminates all imports with a tariff, the value of the wasted resources will be: a. $4.50. b. $81.00. c. $27.00. d. $36.00. ANSWER: a 98. Figure: International Trade 3
Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 19
If the government in this diagram eliminates all imports with a tariff, the value of the lost gains from trade is: a. $4.50. b. $81.00. c. $27.00. d. $36.00. ANSWER: a 99. When the government increases tariffs: a. production switches from low-cost foreign producers to high-cost domestic producers, causing resources to be wasted. b. domestic consumers buy more goods, increasing the gains from trade.
c. domestic producers produce more output, increasing the gains from trade. d. deadweight losses are eliminated because foreign producers sell their product below cost. ANSWER: a 100. Eliminating tariffs on imported sugar would: a. cause resources in the sugar industry to be allocated to inferior uses. b. allow U.S. producers to sell more sugar. c. cause resources to be reallocated from sugar production to higher-valued uses. d. harm domestic consumers. ANSWER: c 101. The losses from trade protection include: Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 19 a. deadweight loss only. b. wasted resources only. c. neither deadweight loss nor wasted resources. d. both deadweight loss and wasted resources. ANSWER: d 102. _____ have a similar effect on domestic consumption levels. a. Subsidies and tariffs b. Tariffs and quotas c. Quotas and subsidies d. Subsidies, tariffs, and quotas ANSWER: b 103. A tariff results in a higher: I. consumer surplus. II. producer surplus. III. government revenue. a. I and II only b. II and III only c. I and III only d. I, II, and III ANSWER: b 104. A trade quota on imports: a. benefits domestic producers and hurts domestic consumers. b. benefits domestic consumers and hurts domestic producers. c. benefits both domestic producers and domestic consumers. d. hurts both domestic producers and domestic consumers. ANSWER: a 105. Which of these statements is NOT a reason why free trade is beneficial for the United States? a. Free trade increases consumer surplus for imported goods that are cheaper than U.S. goods. b. Free trade directs U.S. resources to those goods and services for which the United States has a comparative advantage. c. Through specialization, the United States and its trading partners can use the same overall amount of resources to produce and consume a larger amount of goods. d. Free trade generates benefits for all segments of the economy, thus leading to large benefits and economic growth.
ANSWER: d 106. Restricting the importation of foreign automobiles will: a. raise the price of foreign automobiles but decrease the price of domestic automobiles. b. raise the price of both foreign and domestic automobiles. Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 19 c. cause domestic producers to sell their automobiles at lower prices because of reduced competition. d. lower the price of foreign automobiles but raise the price of domestic automobiles. ANSWER: b 107. Which statement provides an explanation for tariffs decreasing market efficiency? a. The supply of goods is not purchased by the buyers with the highest willingness to pay. b. The supply of goods is not produced by the lowest-cost suppliers. c. Prices are not equal to the equilibrium price. d. Deadweight loss is equal to zero. ANSWER: b 108. Figure: International Trade 4
If, in this figure, the government allowed free trade, consumer surplus would: a. increase by $118.00. b. increase by $31.50. c. decrease by $81.00. d. increase by $66.50. ANSWER: b 109. Figure: International Trade 4
Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 19
If, in this figure, the government eliminated free trade, producer surplus would: a. increase by $18.00. b. increase by $50.00. c. decrease by $36.00. d. increase by $22.50. ANSWER: d 110. In most cases, trade restrictions will: a. save jobs without any other costs. b. save some jobs and destroy other jobs. c. benefit both producers and consumers. d. benefit only the government. ANSWER: b 111. Why does economic growth require job destruction? a. Economic growth requires international trade, which has been proven to cause short-term job loss. b. Economic growth comes from creating and producing goods that use resources more productively, causing job loss in industries that use outdated technology. c. Excessive job creation can destroy economic growth.
d. When economic growth occurs, there are not enough resources left over for worker retraining and reeducation programs.
ANSWER: b 112. Which of these statements is TRUE about the removal of trade barriers? Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 19 a. Consumers are harmed while some suppliers benefit. b. Consumers benefit while some suppliers are harmed. c. Everyone benefits. d. Everyone is harmed. ANSWER: b 113. A tariff on washing machines will _____ in the United States. a. increase jobs b. decrease jobs c. increase jobs in the production of washing machines, but decrease jobs in other areas d. decrease jobs in the production of washing machines, but decrease jobs in other areas ANSWER: c 114. Protectionism can _____ jobs in industries that import and _____ jobs in industries that export. a. decrease; increase b. increase; increase c. increase; decrease d. decrease; decrease ANSWER: c 115. Trade restrictions: a. help to save jobs in the protected industry, which causes these workers to spend more money in other industries, netting increased output and job opportunities throughout the economy. b. are a very inexpensive way of saving jobs and are cheaper than job retraining programs.
c. may save jobs in one industry but at a cost of less job growth in other industries. d. often have little support from politicians, media, and the public. ANSWER: c 116. If the United States bans the importation of Japanese automobiles: a. U.S. consumers of cars will be better off because their consumer surplus will increase. b. there will likely be more U.S. auto workers but fewer Americans working in other industries. c. U.S. producers of cars will be worse off because their producer surplus will shrink. d. everyone in the United States will be much better off. ANSWER: b 117. Which of these is NOT true regarding job destruction due to trade? a. Trade does not destroy jobs; it simply moves jobs to different industries. b. Short-run worker transition may be hard, but in the long run the result is increased wages. c. Over the past 100 years, trade has led to decreased employment and lower living standards. d. Trade encourages workers to transition to industries that are low-cost producers of goods. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 19 118. During the COVID-19 pandemic, many workers lost their jobs. Amy, for example, lost her job as a pharmaceutical salesperson. After five months of unemployment, she spent $6,000 on a class that taught her the skills she would need to sell medical devices. Today Amy makes 25% more than she did in pharmaceutical sales and enjoys her new job much more than her old job. Which of these concepts BEST illustrates this scenario? a. Trade restrictions result in loss of jobs. b. Trade reallocates jobs across industries. c. Trade results in a misallocation of resources. d. Unemployment is a bad thing. ANSWER: b 119. Under free trade, some jobs will be lost, but increased consumer spending power means there will be more jobs in other industries. However, these new jobs are: a. less real than the lost jobs. b. more difficult to see than the lost jobs. c. not likely to be good jobs. d. not very patriotic. ANSWER: b 120. Trade: a. decreases the number of jobs. b. increases the number of jobs. c. moves jobs from export industries to import-competing industries. d. moves jobs from import-competing industries to export industries. ANSWER: d 121. Trade: a. destroys jobs in the short run but increases the standard of living in the long run. b. creates jobs in the short run but decreases the standard of living in the long run. c. cannot continue to increase forever. d. decreases the standard of living of the importing country. ANSWER: a 122. After a pair of wars in the late seventeenth and early eighteenth centuries, French–British relations decayed to the point that England began putting high tariffs on French wines. A large part of the support for this law came from British brewers and distillers who feared the return of French competition after the wars. These tariffs help explain why, to this day, the English prefer beer over wine. Of the arguments against free trade, which seems MOST likely to apply here, given the information provided? a. saving domestic jobs b. preventing child labor c. the importance of national security d. alcohol being a key industry Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 19 ANSWER: a 123. Which statement(s) is(are) TRUE? I. When U.S. consumers buy lower-priced imports, they have more money to buy other goods, leading to increased jobs in other industries. II. Free trade reduces total employment. III. When foreign producers receive U.S. dollars for their exports, some of these dollars are used to buy U.S. goods and assets, increasing employment in U.S. exporting industries. a. I only b. II only c. I and III only d. III only ANSWER: c 124. Which statement(s) is(are) TRUE regarding the washing machine tariffs of 2018? I. Tariffs on washing machines applied only to the first 1.2 million washing machines imported to the United States. II. The first 1.2 million washing machines were taxed at a rate of 20%, while the rest were taxed at 50%. III. The tariffs were put in place for three years, with declines in the tariffs in years 2 and 3. a. I only b. II only c. I and III only d. I, II, and III ANSWER: d 125. Before the 2018 tariffs on washing machines: a. prices for washing machines had been increasing for about 20 years. b. 1.2 million washing machines were imported every year. c. quotas prevented more than 1.2 million washing machines from being imported every year. d. prices for washing machines had been decreasing for about five years. ANSWER: d 126. Which of these statement(s) is(are) TRUE regarding the washing machine tariffs of 2018? I. The price of washing machines increased after tariffs were placed on washing machines. II. The price of dryers increased after tariffs were placed on washing machines. III. Producers increased the price of washing machines less than predicted, but increased the price of dryers to spread the tariff costs over both washing machines and dryers. a. I only b. II only c. I and II only d. I, II, and III ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 19 127. Which of these statement(s) is(are) TRUE? I. Protection is much more costly if other countries respond to U.S. tariffs with tariffs of their own. II. When President Trump increased tariffs on thousands of products in 2018, other countries retaliated with tariffs of their own. III. Retaliatory tariffs generally affect every industry in a country equally. IV. Retaliatory tariffs can be targeted to do political damage. a. I only b. II only c. All are true d. I and III only ANSWER: c 128. China retaliated to the tariffs placed on Chinese goods by President Trump in 2018 by: a. increasing tariffs on soybeans rather than aircrafts because it is easier to find substitute producers of
soybeans than aircrafts. b. decreasing tariffs on many good in the hopes that President Trump would also decrease tariffs on Chinese goods. c. increasing tariffs on soybeans and aircrafts.
d. decreasing tariffs on soybeans. ANSWER: a 129. Government sometimes supports protectionist tariffs because: a. the losses are spread over millions of consumers so the cost per consumer is small. b. producers always gain much more than what consumers altogether lose. c. producers lose less than what consumers gain. d. the losses are spread over millions of producers, so the cost per producer is small. ANSWER: a 130. The United States has a comparative advantage in: a. goods produced by unskilled workers. b. goods produced by skilled workers. c. all goods. d. no goods. ANSWER: b 131. The United States does NOT have a comparative advantage in: a. textiles. b. soybeans. c. higher education. d. technology goods. ANSWER: a 132. Which of these arguments is valid in the economics of international trade? Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 19 a. Trade restrictions are good ways to raise a country's employment. b. Protectionism increases the well-being of domestic consumers. c. Trade restrictions help to reduce child labor in poor countries. d. Trade can result in a net job gain in the whole country. ANSWER: d 133. Which of these is NOT an argument against international trade? a. It is wrong to trade with nations that use child labor. b. International trade reduces the number of jobs in the United States. c. International trade leads to lower prices for domestic consumers. d. Certain key industries should remain at "home" for the interest of national security. ANSWER: c 134. The paradox of trade restrictions on countries with child labor is that: a. these restrictions aim to reduce child labor, but because they make the countries poorer, they actually cause more child labor. b. children from those countries are actually more efficient than adults.
c. children can be hired at lower wages than adults. d. restrictions on trade cause losses in consumer surplus. ANSWER: a 135. History has shown that one of the most effective tools against child labor is: a. regulations. b. laws. c. economic growth. d. quotas. ANSWER: c 136. Studies show that more openness to trade _____ income and _____ child labor. a. increases; increases b. increases; decreases c. decreases; decreases d. decreases; increases ANSWER: b 137. Because of pressure from the United States, the garment industry in Bangladesh dismissed 30,000 to 50,000 child laborers. This action: a. was very beneficial, since most of the children returned to school full time. b. resulted in many of the children turning to prostitution and taking jobs with worse conditions and lower pay. c. led to a civil uprising in Bangladesh, claiming the lives of almost 4,000 of these children. d. None of the answers is correct. Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 19 ANSWER: b 138. Child labor is primarily a result of: a. increased demand for foreign goods. b. trade restrictions such as tariffs and quotas. c. absence of schools in developing nations. d. poverty in the child's circumstances. ANSWER: d 139. In poor countries, when child laborers get laid off, they: a. have more time to play on the playground. b. start attending school. c. take lower-quality jobs with worse pay. d. don't experience a serious impact. ANSWER: c 140. All of these reduce child labor EXCEPT: a. greater wealth. b. trade restrictions. c. openness to trade. d. a lower opportunity cost of education. ANSWER: b 141. Which economic concept BEST explains why poorer countries have higher concentrations of child labor? a. producer surplus b. opportunity cost c. deadweight loss d. marginal cost ANSWER: b 142. Restrictions on trade: a. reduce income, increasing the necessity of child labor. b. reduce child labor by making countries more reliant on adult labor. c. allow children to leave jobs in agriculture for higher-paying jobs in manufacturing. d. lead to higher income for developing countries but not industrialized countries. ANSWER: a 143. The real cause of child labor is: a. free trade agreements. b. impoverished circumstances in the child's life. c. multinational corporations that are concerned only about profit maximization. Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 19 d. poor enforcement of existing international child labor treaties. ANSWER: b 144. As GDP per capita increases, child labor tends to: a. increase. b. decrease. c. remain the same. d. change unpredictably. ANSWER: b 145. Consider the following two statements and select the BEST answer. I. The national security argument might be a valid argument for trade protection. II. Industries with spillover effects should be protected from foreign competition. a. I and II are both true. b. I and II are both false. c. I is likely to be true, and II is likely to be false. d. I is likely to be false, and II is likely to be true. ANSWER: c 146. Trade restrictions based on national security concerns: a. might be beneficial in certain cases, like vaccinations. b. have never been granted in the United States. c. have no merit and are always unwise. d. give little incentive for industry lobbyists to declare their product vital for national security purposes. ANSWER: a 147. You are a policymaker and a lobbyist comes to you, arguing that their industry is important for national security and has important spillover benefits. Why might you be suspicious of their claims? a. They may not know anything about the industry they represent. b. Their industry benefits from tariffs that decrease foreign competition. c. The lobbyist has the same interests as the rest of the country. d. Every industry is important for national security. ANSWER: b 148. The flu pandemic of 1918 provides an example of: a. a situation for which it makes sense to protect a domestic industry from international competition. b. how trade restrictions lead to deaths and suffering. c. how child labor affects trade flows between countries. d. strategic trade protectionism. ANSWER: a 149. Lobbyists for many industries argue each of these EXCEPT: Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 19 a. their industry is important for national security. b. competing workers in foreign countries are oppressed. c. their industry needs protection and subsidization. d. their industry should face more foreign competition. ANSWER: d 150. Some goods generate spillover benefits from production, but it is: a. difficult to know in advance which goods those are. b. in the government's interest to hear such arguments. c. not possible to encourage the production of those goods. d. not true that the spillover benefits are very large. ANSWER: a 151. It is possible for the United States to gain a larger slice of the gains from trade by imposing tariffs than if there was free trade if the: a. U.S. demand for the good is inelastic. b. international supply of the good is elastic. c. international supply of the good is relatively less elastic than demand. d. international supply of the good is relatively more elastic than demand. ANSWER: c 152. Enacting a tariff on a good for which the world supply is relatively inelastic and the local demand is relatively elastic results in: a. a small deadweight loss and relatively larger tax revenues. b. only a large deadweight loss. c. a large deadweight loss and relatively smaller tax revenues. d. relatively smaller tax revenues and no deadweight loss. ANSWER: a 153. Strategic trade protectionism makes: a. all countries better off. b. no one better off. c. foreign countries better off at the expense of the domestic country. d. the domestic country better off at the expense of foreign countries. ANSWER: d 154. Figure: Inelastic Foreign Supply
Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 19
When the United States enacts a tariff on imports of a good, the deadweight loss is area(s): a. A. b. BC. c. DE. d. CE. ANSWER: d 155. Figure: Inelastic Foreign Supply
Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 19
When the United States enacts a tariff on imports of a good, tax revenues are area(s): a. A. b. BD. c. DE. d. CE. ANSWER: b 156. The economics of international trade is substantially different from that of ordinary trade. a. True b. False ANSWER: b 157. The economics of international trade is substantially similar to that of ordinary trade. Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 19 a. True b. False ANSWER: a 158. International and intranational trade are very different in terms of economic analysis. a. True b. False ANSWER: b 159. Both domestic production and consumption increase because of tariffs. a. True b. False ANSWER: b 160. In the case of sugar, moving from a situation of no trade to free trade causes both domestic consumption and domestic production to increase. a. True b. False ANSWER: b 161. If, at a world price of $200, domestic consumers buy 900 units and domestic producers sell 600 units, imports equal 1,500. a. True b. False ANSWER: b 162. If, at a world price of $200, domestic consumers buy 900 units and domestic producers sell 600 units, imports equal 300. a. True b. False ANSWER: a 163. Trade makes people better off when preferences are the same. a. True b. False ANSWER: b 164. On average, trade makes people better off through specialization. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 19 165. On average, trade makes people worse off through job destruction. a. True b. False ANSWER: b 166. Protectionism protects domestic industries from the competitive forces exerted by foreign firms. a. True b. False ANSWER: a 167. Protectionism protects domestic consumers from the competitive forces exerted by foreign firms. a. True b. False ANSWER: b 168. With free trade, the domestic price of a good is equal to the world price of a good. a. True b. False ANSWER: a 169. If the United States imports teacups from other countries, then U.S. producers of teacups are better off, and U.S. consumers of teacups are worse off, as a result of trade. a. True b. False ANSWER: b 170. Economic benefits to tariffs and import quotas include more jobs in the protected industry, lower prices to consumers, and increased gains from trade. a. True b. False ANSWER: b 171. Trade increases competition for domestic producers and results in lower prices of domestic goods. a. True b. False ANSWER: a 172. Trade decreases competition for domestic producers and results in higher prices of domestic goods. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 19 173. A quota is a stated quality standard that an imported good must reach before it can be allowed into the borders of the importing country. a. True b. False ANSWER: b 174. In a demand and supply diagram, the effects of a tariff and a quota on the supply and demand curves are identical. a. True b. False ANSWER: b 175. If the world price of a good is greater than the domestic price in a country that can engage in international trade, then that country becomes an importer of that good. a. True b. False ANSWER: b 176. The tariff diagram illustrates that if the absolute values of the slopes of the demand and supply curves are equal, then the deadweight loss of any tariff always equals the wasted resources due to increased domestic production. a. True b. False ANSWER: a 177. Rising tariffs increase domestic production but reduce domestic consumption. a. True b. False ANSWER: a 178. Rising tariffs reduce domestic production but increase domestic consumption. a. True b. False ANSWER: b 179. Removing tariffs and quotas will ensure that goods are sold by low-cost producers and increase the sum of consumer and producer surplus. a. True b. False ANSWER: a 180. Imposing tariffs results in both wasted resources and lost gains from trade. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 19 b. False ANSWER: a 181. Imposing tariffs results in wasted resources but no lost gains from trade. a. True b. False ANSWER: b 182. The United States is the only government that engages in protectionist policies. a. True b. False ANSWER: b 183. Protectionism tends to create a society that pits one interest group against another and that seeds social discord. a. True b. False ANSWER: a 184. Protectionism restrains trade through price controls that burden foreign producers but not domestic producers. a. True b. False ANSWER: b 185. Protectionism encourages trade. a. True b. False ANSWER: b 186. A quota caps the quantity of an import. a. True b. False ANSWER: a 187. A tariff benefits domestic producers but hurts domestic consumers. a. True b. False ANSWER: a 188. Economic theory supports the existence of specialized majors in college. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 19 b. False ANSWER: a 189. Domestic consumers lose more than domestic producers gain because of import restrictions. a. True b. False ANSWER: a 190. Reducing tariffs causes consumer surplus to increase but producer surplus to decrease. a. True b. False ANSWER: a 191. There is strong evidence to support the idea that protectionism increases domestic job growth. a. True b. False ANSWER: b 192. We pay for our exports with our imports. a. True b. False ANSWER: b 193. Economic growth requires job destruction, since the destroyed jobs free up resources for more productive activities. a. True b. False ANSWER: a 194. Trade moves jobs from import-competing industries to export industries. a. True b. False ANSWER: a 195. Free trade has reduced the number of jobs in U.S. manufacturing as well as the overall number of jobs in the U.S. economy. a. True b. False ANSWER: b 196. The tariffs enacted on washing machines in 2018 increased the price of both washing machines and dryers. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 19 b. False ANSWER: a 197. China retaliated against U.S. tariffs by no longer buying American-made aircraft. a. True b. False ANSWER: b 198. The United States has a comparative advantage in products produced by relatively unskilled workers. a. True b. False ANSWER: b 199. The prevalence of child labor tends to increase as countries get richer. a. True b. False ANSWER: b 200. The total number of child laborers is usually smaller for middle-income countries than for very poor countries. a. True b. False ANSWER: a 201. With the aid of demand and supply curves, compare the amounts of imports and the prices of goods under (i) free trade, (ii) trade with a tariff, and (iii) a closed economy without trade. ANSWER: 202. Figure: Consumption with and Without Trade
Suppose this diagram represents the market for sugar in the United States. a. What is the equilibrium price of sugar before trade? b. What is the equilibrium quantity of sugar before trade? c. What is the price of sugar after trade is allowed? Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 19 d. What is the quantity of sugar imported after trade is allowed? e. By how much does consumer surplus increase after trade? f. What is the amount of producer surplus before trade? g. What is the amount of producer surplus after trade? ANSWER: a. 29 cents b. 20 c. 9 cents d. 23.6 e. [(29 – 9) × 20] + [(29 – 9) × (23.6 – 20) × ½)] = 436 f. (29 – 20) × 20 × ½ = 200 g. 0
203. Figure: Market Activity with and Without Trade
Using the diagram for market activity with and without trade to consider the effects of a trade restriction that eliminates foreign trade in an economy, answer the following questions. a. What is the dollar amount of deadweight loss created as a result of the trade restriction? b. What is the dollar value of wasted resources as a result of the trade restriction? c. What is the dollar gain in domestic producer surplus as a result of the trade restriction? ANSWER: a. (800 – 200) × (15 – 12) × ½ = 600 × 3 × ½ = 900 b. (500 – 200) × (15 – 12) × ½ = 300 × 3 × ½ = 450 c. (15 – 12) × [(500 + 200)/2] = 3 × 350 = 1050
204. What are the gains and losses of a trade restriction versus free trade? Explain carefully. ANSWER: Free trade increases consumer surplus, as consumers are able to buy larger quantities at lower prices. Free trade also reduces domestic producer surplus, as producers are not able to sell as much at the lower world price. Trade restrictions increase the domestic price, which reduces consumer surplus, increases producer surplus, and creates a deadweight loss, which is the value of the purchases domestic consumers can no longer make.
205. Briefly discuss any benefits of "protectionism." ANSWER: The benefits of protectionism is larger producer surpluses for domestic producers. This can mean stronger industries in key areas, which can be beneficial for national security purposes. It also generates higher tax revenue from the import tariffs.
206. Sugar production is highly protected in the United States. Sugar importers must pay such high tariffs that it is hardly profitable for them to sell any sugar in the United States. Who are the winners and losers from such protectionism? Is the resulting market economically efficient? Why? If not, why would the government continue import restrictions that promote economic inefficiency? ANSWER: Local sugar producers are the winners here, and local consumers and foreign sugar producers are the losers. The government gains some tariff revenue from any foreign sugar imported, but this will not be a large amount if the tariff is Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 19 so high that very little sugar will be imported. This is not an efficient use of resources. Consumers are paying too much and are able to buy too little sugar. Local resources would be better spent producing products for which the United States has a comparative advantage. And too few foreign resources are spent producing sugar. Such tariffs continue because sugar producers have the ear of government, while the loss to consumers to spread too thinly for there to be a large outcry against the tariffs.
207. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to most economists, do these arguments really justify trade restrictions? Explain. ANSWER: Arguments in favor of protectionism include: Protecting key industries for national security purposes (Very few industries really fit this criterion) Reducing child labor (The most effective way to reduce child labor is a general increase in GDP for the country, so the parents are better able to support the family without the children working) Saving domestic jobs (Trade restrictions tend to generate retaliation and higher tariffs against our exports, leading to a loss of jobs in those industries greater than the jobs saved in the protected industry)
208. During the recent economic slowdown, many jobs were lost in the Detroit area because of the high prices (and therefore low sales) of domestically produced cars. Domestic companies that have succeeded in weathering the storm, such as Ford Motor Company, have done so by cutting unprofitable car lines, moving production toward more fuel-efficient vehicles, and cutting wasteful spending. Still, many workers lost their jobs. In economic terms, explain whether the market is more or less efficient now than before the recession began. ANSWER: The market is more efficient now, because the lost jobs occurred because the least efficient plants closed. The economy is better off with those resources moving to other industries, producing goods for which we have a comparative advantage.
Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 20 1. Which is NOT one of the three key principles regarding international finance? a. The rate of savings is a key variable in understanding international trade and finance. b. Market equilibrium is where, at the margin, the gains from holding or spending one currency are equal to the
gains from holding or spending some other currency. c. Gains from trade apply to trade between countries with different currencies as well as trade within a country.
d. A trade surplus is better than a trade balance or a trade deficit. ANSWER: d 2. Market equilibrium in currencies occurs where: a. the amount of one currency that is in circulation equals the amount of some other currency that is in
circulation. b. at the margin, the gains from holding or spending one currency are equal to the gains from holding or spending some other currency. c. the price levels in countries are equal to each other.
d. the exchange rate is that one unit of one currency is equal in value to one unit of some other currency. ANSWER: b 3. The opportunity to obtain gains from trade based on comparative advantage applies to trade: a. between individuals, but not within or across national boundaries. b. across national boundaries, but not within national boundaries. c. within national boundaries, but not across national boundaries. d. within and across national boundaries. ANSWER: d 4. Table: Four Countries Country A Country B Item Dollar Item Dollar Values Values Exports $287M Exports $451M Imports $287M Imports $412M Which of these countries has a trade deficit? a. country A b. country B c. country C d. country D ANSWER: c 5. Table: Four Countries Country A Country B Item Dollar Item Dollar Values Values Exports $287M Exports $451M Imports $287M Imports $412M Which of these countries has a trade surplus? Copyright Macmillan Learning. Powered by Cognero.
Country C Item Dollar Values Exports $717M Imports $909M
Country D Item Dollar Values Exports $132M Imports $121M
Country C Item Dollar Values Exports $717M Imports $909M
Country D Item Dollar Values Exports $132M Imports $121M Page 1
Name:
Class:
Date:
Chapter 20 a. country A b. country C c. country A and country C d. country B and country D ANSWER: d 6. What occurs when the value of a country's exports exceeds the value of its imports? a. a trade deficit b. a trade surplus c. a payment imbalance d. a capital surplus ANSWER: b 7. When you shop at Old Navy, you run a private _____ with Old Navy. a. trade deficit b. trade surplus c. payment imbalance d. capital surplus ANSWER: a 8. A trade deficit occurs when the total: a. value of exports exceeds the total value of imports. b. value of imports exceeds the total value of exports. c. money payment to other countries exceeds the total money payment from other countries. d. money payment from other countries exceeds the total money payment to other countries. ANSWER: b 9. If the United States imports $100 billion worth of goods and services from Mexico and exports $75 billion worth of goods and services to Mexico, then the United States has a: a. $25 billion trade surplus with Mexico. b. $25 billion trade deficit with Mexico. c. $175 billion trade surplus with Mexico. d. $175 billion trade deficit with Mexico. ANSWER: b 10. A trade deficit occurs when: a. a government pays off a large part of its debt. b. a government spends less than it receives in tax revenue. c. the value of a country's imports exceeds the value of its exports. d. the value of a country's exports exceeds the value of its imports. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 20 11. A trade surplus occurs when: a. a government spends more than it receives in tax revenue. b. a government spends more servicing its debt because of rising interest rates. c. the value of a country's imports exceeds the value of its exports. d. the value of a country's exports exceeds the value of its imports. ANSWER: d 12. MOST people run a private trade: a. deficit with their employer and a trade surplus with the rest of the economy. b. surplus with their employer and a trade deficit with the rest of the economy. c. deficit with all players in the economy. d. surplus with all players in the economy. ANSWER: b 13. When a country's exports exceed its imports, that country experiences a: a. balance of payments. b. trade deficit. c. trade surplus. d. current account balance. ANSWER: c 14. A country's balance of trade is the difference between its: a. nominal and real exchange rates. b. monetary and fiscal policy. c. exports and imports. d. capital inflow and capital outflow. ANSWER: c 15. A trade deficit occurs when the value of a country's: a. imports exceeds the value of its exports. b. exports exceeds the value of its imports. c. inflow of foreign capital exceeds the value of its outflow of domestic capital. d. outflow of domestic capital exceeds the value of its inflow of foreign capital. ANSWER: a 16. A trade surplus occurs when the value of a country's: a. imports exceeds the value of its exports. b. exports exceeds the value of its imports. c. capital inflow exceeds the value of its outflow. d. capital outflow exceeds the value of its inflow. Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 20 ANSWER: b 17. A trade deficit occurs when the value of a country's: a. imports exceeds the value of its exports. b. exports exceeds the value of its imports. c. exports equals the value of its imports. d. imports exceeds the value of its total consumption. ANSWER: a 18. A trade _____ occurs when the value of a country's exports exceeds the value of its imports. a. balance b. shortage c. surplus d. deficit ANSWER: c 19. A trade _____ occurs when the value of a country's imports exceeds the value of its exports. a. balance b. shortage c. surplus d. deficit ANSWER: d 20. If country A exports $10 billion worth of goods to country B and imports $8 billion worth of goods from country B, then country A has a(n): a. $2 billion trade deficit with country B. b. $2 billion trade surplus with country B. c. $18 billion trade deficit with country B. d. $18 billion trade surplus with country B. ANSWER: b 21. A situation in which the value of a country's exports exceeds the value of its imports is called a(n): a. trade surplus. b. capital surplus. c. balance of payments surplus. d. exchange rate surplus. ANSWER: a 22. The United States currently has a net _____ with the rest of the world. a. trade deficit b. capital deficit Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 20 c. balance of payments deficit d. exchange rate deficit ANSWER: a 23. Table: Trade Data Country A Country B Country C Country D Value of imports $500 $450 $400 $350 Value of exports $400 $475 $400 $325 Which countries have a trade deficit? a. country A and country D b. country B and country C c. country C and country D d. country A and country D ANSWER: a 24. Trade Data Country A Country B Country C Country D Value of imports $500 $450 $400 $350 Value of exports $400 $475 $400 $325 Which country has a trade surplus of $25? a. country A b. country B c. country C d. country D ANSWER: b 25. Suppose a student earns $25,000 a year digging ditches for a landscaping company. The student's main expenditures are $13,000 for tuition, $6,000 to rent a room, and $5,000 for food and supplies. Which statement correctly identifies the student's trade deficits and surpluses? a. The student has a trade deficit with the landscaping company and has trade surpluses for tuition, rent, and food and supplies. b. The student has a trade surplus with the landscaping company and has trade deficits for tuition, rent, and food and supplies. c. Across all the listed purchases and sales, the student has a trade deficit.
d. Across all the listed purchases and sales, the student has balanced trade. ANSWER: b 26. When international trade occurs, every flow of goods and services has a corresponding and _____ flow of _____. a. opposite; money or financial claims b. identical; money or financial claims c. matching; goods and services d. comparative; goods and services Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 20 ANSWER: a 27. Which country has a trade surplus? a. country A: imports = $6.2 billion and exports = $6.2 billion b. country B: imports = $8.0 billion and exports = $9.0 billion c. country C: imports = $10.5 billion and exports = $10.0 billion d. country D: imports = $12.5 billion and exports = $12.0 billion ANSWER: b 28. Which country has a trade deficit? a. country A: imports = $6.2 billion and exports = $6.2 billion b. country B: imports = $8.0 billion and exports = $7.0 billion c. country C: imports = $9.5 billion and exports = $10.0 billion d. country D: imports = $12.0 billion and exports = $12.5 billion ANSWER: b 29. Table: Balance of Payment Accounts Item Dollar Value (millions) Exports $300 Imports 620 Net income on capital held abroad 35 Foreign aid received 100 Foreign direct investment 120 Portfolio investment 50 Other investment 50 According to the data in this table, what is the current account balance for this country? a. –$320 million b. –$185 million c. $135 million d. $1,055 million ANSWER: b 30. Table: Balance of Payment Accounts Item Dollar Value (millions) Exports $300 Imports 620 Net income on capital held abroad 35 Foreign aid received 100 Foreign direct investment 120 Portfolio investment 50 Other investment 50 According to the data in this table, what is the capital account balance for this country? a. $220 million Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 20 b. –$185 million c. $1,055 million d. $170 million ANSWER: a 31. Table: Balance of Payment Accounts Item Dollar Value (millions) Exports $300 Imports 620 Net income on capital held abroad 35 Foreign aid received 100 Foreign direct investment 120 Portfolio investment 50 Other investment 50 According to the data in this table, which statement is TRUE for this country? a. This country has a balance of trade surplus of $620 million. b. This country has a balance of trade deficit of $320 million. c. This country has a current account deficit of $320 million. d. This country has a current account surplus of $185 million. ANSWER: b 32. When Koreans buy stock on the NYSE, the: a. U.S. balance of trade increases. b. Korean capital account increases. c. U.S. capital account decreases. d. U.S. capital account increases. ANSWER: d 33. When Koreans buy stock on the NYSE: a. this immediately creates new investment in the United States. b. portfolio investment in the United States increases. c. the U.S. capital account decreases. d. foreign direct investment in the United States increases. ANSWER: b 34. We call the yearly summary of all the economic transactions between residents of one country and the rest of the world the: a. trade deficit. b. trade surplus. c. balance of payments. d. capital account. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 20 35. The trade deficit and the _____ surplus essentially balance out and offset each other. a. capital b. trade c. saving d. reserve ANSWER: a 36. Transactions included in the balance of payments are: a. foreign direct investment. b. exports. c. imports. d. foreign direct investment, exports, and imports. ANSWER: d 37. If this year's current account balance is –$100 billion and the capital account balance is $150 billion, then the amount of official reserves will: a. increase by $50 billion. b. decrease by $50 billion. c. increase by $250 billion. d. decrease by $250 billion. ANSWER: a 38. Which is a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world? a. the balance of trade b. the balance of the capital account c. the balance of the current account d. the balance of payments ANSWER: d 39. A situation in which foreign capital inflow exceeds domestic capital outflow to other nations is called a(n): a. trade surplus. b. capital surplus. c. balance of payments surplus. d. exchange rate surplus. ANSWER: b 40. Which is NOT a way that a country can finance a trade deficit? a. increased international borrowing b. sales of assets to foreign buyers Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 20 c. decreased exports d. reduction in cash reserves ANSWER: c 41. If a country is running a capital surplus, then the inflow of foreign: a. capital is less than the outflow of domestic capital abroad. b. capital is greater than the outflow of domestic capital abroad. c. goods and services is greater than the outflow of goods and services abroad. d. goods and services is less than the outflow of goods and services abroad. ANSWER: b 42. The balance of payments is: a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world. b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.
c. the price of one currency in another currency. d. a currency whose value is not pegged, but governments will intervene extensively in the market to keep the value within a certain range.
ANSWER: a 43. The balance of payments is: a. a summary record of a country's economic transactions with the rest of the world. b. a summary record of a country's purchases and sales of goods and services in the world market. c. the difference between a country's imports and its exports of goods and services. d. the total value of merchandise goods bought from the rest of the world. ANSWER: a 44. If foreign reserves are fixed, the balance of payments requires that a: a. country must have a capital deficit when it has a trade deficit. b. country must have a capital surplus when it has a trade deficit. c. country's capital account and trade account must be balanced separately. d. country must have a trade deficit the year after it has a trade surplus. ANSWER: b 45. When the inflow of foreign capital is greater than the outflow of domestic capital to other nations, a country runs a: a. dirty float. b. fixed exchange rate. c. capital surplus. d. capital deficit. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 20 46. If in a given year Rivendell invests 500 silver coins in the Shire, the Shire invests 300 silver coins in Rivendell, and neither invests in any other land, the Shire runs a capital: a. surplus of 200 silver coins. b. deficit of 200 silver coins. c. surplus of 800 silver coins. d. deficit of 800 silver coins. ANSWER: a 47. If there are no changes in official reserves, the current account deficit must be: a. greater than the capital account deficit. b. equal to the capital account deficit. c. equal to the capital account surplus. d. greater than the capital account surplus. ANSWER: c 48. If there are no changes in official reserves and a country has a trade surplus of $100 million, then it has a capital _____ so that the balance of payments is _____. a. surplus; –$100 million b. surplus; $100 million c. deficit; –$100 million d. deficit; balanced ANSWER: d 49. When a country's inflow of foreign capital is less than its outflow of domestic capital to other countries, then the country runs a: a. trade deficit. b. capital surplus. c. capital deficit. d. balance of payments. ANSWER: c 50. A country's balance of payments is: a. the difference between its exports and imports. b. the difference between its capital inflow and capital outflow. c. a summary of all of the economic transactions between its residents and residents of the rest of the world. d. the difference between its nominal and real exchange rates. ANSWER: c 51. A capital surplus occurs when the value of a country's: a. imports exceeds the value of its domestic consumption. b. exports exceeds the value of its imports. Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 20 c. inflow of foreign capital exceeds the outflow of its domestic capital. d. outflow of domestic capital exceeds its inflow of foreign capital. ANSWER: c 52. A capital deficit occurs when the value of a country's: a. imports exceeds the value of its exports. b. exports exceeds the value of its domestic consumption. c. foreign capital inflow exceeds the value of its domestic capital outflow. d. domestic capital outflow exceeds the value of its foreign capital inflow. ANSWER: d 53. A country is running a _____ when the inflow of foreign capital is greater than the outflow of domestic capital to other nations. a. trade surplus b. trade deficit c. capital surplus d. capital deficit ANSWER: c 54. Adding up the trade _____ and the _____ will net out the balance of payments to zero if there is no change in official reserves. a. surplus; capital surplus b. deficit; capital deficit c. surplus; trade deficit d. deficit; capital surplus ANSWER: d 55. If a country has $55 billion of net capital outflow and a $5 billion increase in its cash reserves and ownership of assets, then the country must be running a trade: a. deficit of $50 billion. b. deficit of $60 billion. c. surplus of $50 billion. d. surplus of $60 billion. ANSWER: d 56. A current account deficit in Kazakhstan could mean that: a. Kazakhstan is a terrible place in which to invest. b. Kazakhstan is a good place in which to invest. c. Kazakhs are saving too much. d. the rest of the world is saving too little. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 20 57. If the current account deficit indicates a problem with savings, a good way to deal with it is to: a. raise tariffs and other barriers to trade. b. tax foreign investment. c. ignore the problem. d. decrease the government's budget deficit. ANSWER: d 58. Which is NOT included in a country's current account? a. transfer payments abroad, such as foreign aid b. net income on capital held abroad c. net exports d. foreign direct investment ANSWER: d 59. The most important and volatile component of the current account in the U.S. balance of payments is: a. transfer payments abroad, such as foreign aid. b. net income on capital held abroad. c. net exports. d. foreign direct investment. ANSWER: c 60. Which would be recorded as a credit in the U.S. current account? a. The United States imports $1 million worth of tobacco from Mexico. b. British financial investments in the United States pay higher dividends. c. The United States sends $10 million in foreign aid to Somalia. d. The United States exports $5 million worth of corn to Canada. ANSWER: d 61. Which would be recorded as a debit in the U.S. current account? a. The United States buys $1 million in British government bonds. b. British financial investments in the United States pay higher dividends. c. American citizens go to sub-Saharan Africa to teach reading to young students. d. The United States exports $5 million worth of corn to Canada. ANSWER: b 62. The current account is: a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world. b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.
c. the price of one currency in another currency. d. a currency whose value is not pegged, but governments will intervene extensively in the market to keep the value within a certain range.
Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 20 ANSWER: b 63. Which is NOT a component of the current account? a. the trade balance b. the balance of foreign direct investment flows c. income on capital held abroad d. foreign aid ANSWER: b 64. Which is a U.S. current account transaction? a. selling a computer chip to a resident in Europe b. buying stock shares of a Canadian company c. selling U.S. dollars in exchange for euros d. a foreign investor's purchase of a manufacturing plant in the United States ANSWER: a 65. The current account: a. is the sum of the balance of trade, net income on capital held abroad, and net transfer payments. b. is the difference between exports and imports. c. measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds,
as well as physical assets. d. is a summary of all of the economic transactions between residents of one country and residents of the rest of the world.
ANSWER: a 66. The current account includes: a. the balance of trade. b. net income on capital held abroad. c. foreign aid. d. the balance of trade, net income on capital held abroad, and foreign aid. ANSWER: d 67. All else held constant, an increase in U.S. exports will cause the U.S. current account to: a. move in a positive direction. b. move in a negative direction. c. remain unchanged. d. become more volatile. ANSWER: a 68. All else held constant, an increase in U.S. imports will cause the U.S. current account to: a. move in a positive direction. b. move in a negative direction. Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 20 c. remain unchanged. d. become more volatile. ANSWER: b 69. The _____ is the sum of the balance of trade, net income on capital held abroad, and net transfer payments. a. capital account b. current account c. national account d. balance of payment ANSWER: b 70. Transactions in the current account include: a. changes in official reserves. b. portfolio investment. c. imports. d. foreign direct investment. ANSWER: c 71. Which is included in the current account? a. the capital account b. foreign direct investment c. net income on capital held abroad d. portfolio investment ANSWER: c 72. All current account transactions take place in: a. future periods only. b. the current period only. c. the current and future periods. d. the current and past periods. ANSWER: b 73. Which transaction qualifies as foreign direct investment for the United States? a. A Beijing antique dealer opens a store in downtown New York City. b. Someone purchases a Maserati GranTurismo from a Maserati dealer in New Jersey. c. A Korean businessman, living in South Korea, purchases stock on the NYSE. d. A Bangladeshi-American purchases a home in Dhaka, Bangladesh. ANSWER: a 74. Which summarizes the difference between foreign direct investment (FDI) and foreign aid? a. It is not significant, because both items are counted as part of the current account. Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 20 b. FDI refers to foreign businesses opening factories or operations, whereas foreign aid is monetary assistance. c. FDI earns interest, whereas foreign aid is a gift of money with no interest component. d. FDI is monetary aid, whereas foreign aid is the establishment of operations by foreign-owned businesses. ANSWER: b 75. When Chinese investors purchase U.S. commercial real estate, the _____ increases in the United States. a. trade deficit b. balance of payments c. capital account d. current account ANSWER: c 76. Foreign portfolio investment is included in the _____ account. a. current b. trade c. direct investment d. capital ANSWER: d 77. Which includes a foreign firm constructing a new manufacturing plant in the United States? a. foreign transfer payment b. current account surplus c. foreign direct investment d. foreign portfolio investment ANSWER: c 78. Which is a capital account transaction? I. foreign purchases of U.S. stocks II. foreign purchases of U.S. bonds III. foreign purchases of U.S. buildings a. I but not II or III b. II but not I or III c. II and III but not I d. I, II, and III ANSWER: d 79. Which transactions cause the U.S. capital account to increase? a. Japanese citizens purchase U.S. exports. b. American citizens purchase Japanese imports. c. Japanese citizens purchase real estate in the United States. d. Japan receives U.S. foreign aid. Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 20 ANSWER: c 80. Foreign direct investment takes place in the United States when foreigners: a. construct a new business plant in the United States. b. buy U.S. stocks and bonds. c. shift bank deposits into the United States from other countries. d. buy U.S. exports. ANSWER: a 81. Portfolio investment takes place in the United States when foreigners: a. construct new business plants in the United States. b. buy U.S. stocks and bonds. c. shift bank deposits into the United States from other countries. d. buy U.S. exports. ANSWER: b 82. "Other investment" takes place in the United States when foreigners: a. construct new business plants in the United States. b. buy U.S. stocks and bonds. c. shift bank deposits into the United States from other countries. d. buy U.S. exports. ANSWER: c 83. The U.S. capital account measures the: a. change in foreign ownership of domestic assets. b. net capital stock in the United States. c. size of the trade deficit in the United States. d. net income on capital held abroad. ANSWER: a 84. If the Chinese government purchases an additional $10 million worth of U.S. government bonds, this transaction is recorded as a _____ account in the U.S. balance of payments. a. credit in the capital b. credit in the current c. debit in the capital d. debit in the current ANSWER: a 85. Which would be recorded as a debit, that is, a negative, in the U.S. capital account? a. The United States buys $1 million in British government bonds. b. British financial investments in the United States pay higher dividends. Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 20 c. American citizens go to sub-Saharan Africa to teach reading to young students. d. The Chinese government increases its reserve holdings of U.S. dollars. ANSWER: a 86. Which is NOT a category of the capital account? a. foreign direct investment inflow b. portfolio investment outflow c. bank deposit inflow d. exports of goods and services ANSWER: d 87. Which is a transaction in the capital account? a. export of medical services b. import of foreign-made vehicles c. increase in foreign reserves d. purchase of a piece of land in a foreign country ANSWER: d 88. Foreign direct investment includes: a. the purchase of U.S. stocks by foreigners. b. the purchase of U.S. bonds by foreigners. c. spending by foreigners on the construction of a new plant in the United States. d. spending on U.S.-produced goods by foreigners. ANSWER: c 89. Which would lead to a capital account deficit? a. purchase of foreign capital by domestic residents b. sale of domestic capital to foreign residents c. an increase in imports d. an increase in official reserves ANSWER: a 90. If official reserves are zero, a current account deficit of $1 million will cause a: a. capital account deficit of $1 million. b. capital account deficit of more than $1 million. c. capital account surplus of $1 million. d. balance of payments of –$1 million. ANSWER: c 91. When a German automaker opens a new plant in Alabama: a. both the U.S. capital account surplus and the U.S. current account surplus increase. Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 20 b. the U.S. capital account surplus increases and the U.S. current account surplus decreases. c. the U.S. capital account surplus decreases and the U.S. current account deficit increases. d. both the U.S. capital account surplus and the U.S. current account surplus decrease. ANSWER: b 92. The capital account: a. is the sum of the balance of trade, net income on capital held abroad, and net transfer payments. b. is the difference between exports and imports. c. measures changes in foreign ownership of domestic assets, including financial assets like stocks and bonds,
as well as physical assets. d. is a summary of all of the economic transactions between residents of one country and residents of the rest of the world.
ANSWER: c 93. In general, when there is more investment going into a country than out of the country, the country will have a: a. current account deficit. b. current account surplus. c. capital account deficit. d. capital account surplus. ANSWER: d 94. When a foreign business buys stock in a U.S. company, the U.S. capital account will: a. move in a positive direction. b. move in a negative direction. c. remain unchanged. d. become more volatile. ANSWER: a 95. Foreign direct investment is part of the: a. current account. b. capital account. c. official reserves account. d. Treasury direct account. ANSWER: b 96. Currency held by governments is part of the: a. current account. b. capital account. c. official reserves account. d. Treasury direct account. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 20 97. The capital account measures: a. net income on capital held abroad and net transfer payments. b. changes in foreign ownership of domestic assets. c. the economic transactions between residents of one country and residents of the rest of the world. d. how the value of a country's exports exceeds the value of its imports. ANSWER: b 98. The capital account of the United States increases when: a. Japanese investors sell American assets. b. American investors buy Mexican assets. c. the American government buys British government bonds. d. the Chinese government buys American government bonds. ANSWER: d 99. _____ measures transactions that may result in future financial flows, whereas _____ measures current financial flows. a. The current account; the capital account b. The capital account; the current account c. Foreign direct investment; portfolio investment d. Portfolio investment; foreign direct investment ANSWER: b 100. When a Japanese investor buys Australian stock, the Australian capital account _____; when that same Japanese investor receives a dividend from the company, the Australian current account _____. a. increases; decreases b. increases; increases c. decreases; decreases d. decreases; increases ANSWER: a 101. Which is NOT a category of investments in the capital account? a. foreign direct investment b. portfolio investment c. issuance of government bonds d. movement of bank deposits ANSWER: c 102. A German automaker builds a factory in the United States. This is considered _____ investment. a. foreign direct b. foreign portfolio Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 20 c. capital account d. current account ANSWER: a 103. If changes in official reserves are zero, a country with a negative current account—that is, a trade deficit— has: a. a negative capital account. b. a positive capital account. c. no capital account. d. large budget deficits. ANSWER: b 104. Suppose a country's official reserves do not change. If it has a $20 billion deficit in its current account, then it must also have a $20 billion: a. surplus in its balance of payments. b. deficit in its balance of payments. c. surplus in its capital account. d. deficit in its capital account. ANSWER: c 105. Increases in the U.S. capital surpluses since the 1980s arose because of increases in: a. current account deficits. b. American saving rates. c. the balance of payments. d. U.S. official reserves. ANSWER: a 106. U.S. capital account surpluses are NOT related to: a. government deficits. b. high money supply growth. c. increases in the trade gap. d. the level of savings. ANSWER: b 107. When the United States has a current account deficit, the U.S. capital account: a. will have a deficit also. b. will be balanced. c. will have a surplus. d. must be falling. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 20 108. A trade deficit results in a: a. trade surplus. b. capital account surplus. c. capital account deficit. d. current account surplus. ANSWER: b 109. A low savings rate in the United States is one possible reason for the U.S.: a. current account deficit but not the trade deficit. b. capital account surplus but not the current account deficit. c. trade deficit and current account deficit but not the capital account surplus. d. current account deficit, capital account surplus, and trade deficit. ANSWER: d 110. A savings glut in other countries is one possible reason for the U.S.: a. current account deficit but not the trade deficit. b. capital account surplus but not the current account deficit. c. trade deficit and current account deficit but not the capital account surplus. d. current account deficit, capital account surplus, and trade deficit. ANSWER: d 111. A credit in the U.S. current account: a. means the United States is purchasing more foreign goods and services. b. must be offset with a credit in the capital account. c. is typically offset by a debit in the capital account. d. decreases the U.S. official reserve account. ANSWER: c 112. A country with a large current account surplus is also typically running a large: a. trade deficit. b. capital account deficit. c. capital account surplus. d. official reserve account deficit. ANSWER: b 113. Saying that the United States is running a large current account deficit is equivalent to saying that: a. exports exceed imports in the United States. b. the United States is running a large capital account surplus. c. the balance of payments is negative. d. the value of the current capital stock in the United States exceeds the value of future capital flows. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 20 114. Those who say the growing current account deficit in the United States is not a significant problem make the argument that the: a. current account deficit is offset by an equally large capital account deficit, which ultimately leads to appreciation of the U.S. dollar. b. large current account deficit will ultimately lead to a current account surplus.
c. current account deficit may hurt exporters, but American consumers gain as a result of lower relative prices. d. increased investment in the United States as a result of the current account deficit will ultimately lead to increases in wealth and economic growth in the United States.
ANSWER: d 115. Those who say the growing current account deficit in the United States is a significant problem make the argument that: a. the United States is financing current expenditures by borrowing from foreigners, and these debts will ultimately have to be paid off. b. the United States is investing too much in other countries and not enough domestically.
c. the large current account deficit will only lead to a depreciation of the U.S. dollar, and hence hurt domestic
exporters. d. lower investment in the United States as a result of the current account deficit will ultimately lead to decreases in wealth and economic growth in the United States.
ANSWER: a 116. In most cases, changes in the balance of payments come from changes in the: a. current and official reserves accounts. b. capital and official reserves accounts. c. current and capital accounts. d. government's required reserve accounts. ANSWER: c 117. If the United States has a capital account surplus and official reserves are zero, the current account must be: a. falling. b. in surplus. c. balanced. d. in deficit. ANSWER: d 118. Saying the United States is a good place for other countries to invest is consistent with _____ in the United States. a. higher capital accounts b. balanced trade c. lower trade deficits d. lower interest payments ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 20 119. A trade deficit might indicate a problem of: a. high currency value. b. low currency value. c. high savings. d. low savings. ANSWER: d 120. A trade deficit might signal a problem of: a. high unemployment. b. high taxes. c. low savings. d. low spending. ANSWER: c 121. Which is MOST likely to increase the U.S. savings rate significantly? a. import quotas b. import tariffs c. reducing the federal government deficit d. lower interest rates ANSWER: c 122. Overall, a country's balance of payments accounts: a. must balance out to zero. b. can have a surplus or a deficit. c. must balance out to zero, and each component account must balance to zero. d. need not balance to zero, but each component account must balance to zero. ANSWER: a 123. Suppose a student earns $15,000 during the year, spends $25,000 on tuition and living expenses, and borrows $10,000. Which statement is TRUE regarding this student's balance of payments? a. It shows a deficit with more flowing out of the household than flowing into the household during the year. b. It shows a surplus with more flowing into the household than flowing out of the household during the year. c. It shows an exact balance with the same amount flowing into the household as out of the household during the year. d. It shows an uneven balance with earnings, expenses, and loans being unequal.
ANSWER: c 124. A country has a capital surplus when: a. net exports are positive. b. there is a trade surplus. c. the inflow of foreign capital is greater than the outflow of foreign capital. Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 20 d. the outflow of foreign capital is greater than the inflow of foreign capital. ANSWER: c 125. Which is NOT a method used to finance a trade deficit in a given year? a. borrowing b. selling assets c. using savings d. increasing imports ANSWER: d 126. The equation for a person's balance of payments is: a. Changes in earning – Changes in spending = Changes in debt + Changes in ownership of assets + Changes in cash reserves. b. Changes in spending + Changes in earning = Changes in debt – Changes in ownership of assets – Changes in cash reserves. c. Earning – Spending = Changes in debt + Changes in ownership of assets + Changes in cash reserves.
d. Spending – Earning = Changes in debt + Changes in ownership of assets + Changes in cash reserves. ANSWER: c 127. The international balance of payments equation is: a. Current account + Change in official reserves = Capital account. b. Current account = (–) Capital account + Change in official reserves. c. Capital account = Current account + Change in official reserves. d. Capital account – Change in official reserves = Current account. ANSWER: b 128. Which is NOT included in a country's current account? a. net transfer payments b. net income on capital held abroad c. net international loans d. balance of trade ANSWER: c 129. What three items are summed to obtain a country's current account? a. foreign direct investment, portfolio investment, and other investments b. net income on capital held abroad, foreign direct investment, and the balance of trade c. net transfer payments, net income on capital held abroad, and the balance of trade d. the balance of trade, portfolio investment, and net transfer payments ANSWER: c 130. Table: Balance of Payments Data (in millions) Country A Country B Country C Country D Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 20 Trade balance $1,000 Change in official reserves Net income on capital held abroad 4,000 Net transfer payments –3,000 Foreign direct investment 2,000 Portfolio investments –3,000 Other investments 2,000 What is country A's change in official reserves? a. –$2,000 b. –$1,000 c. $2,000 d. $3,000 ANSWER: d
–$2,000 1,000 –3,000 4,000 –1,000
–$8,000 –2,000
5,000 2,000 –6,000
$3,000 –1,000 –1,000 9,000 –7,000 –4,000
131. Table: Balance of Payments Data (in millions) Country A Country B Country C Country D Trade balance $1,000 –$2,000 –$8,000 $3,000 Change in official reserves 1,000 –2,000 Net income on capital held abroad 4,000 –3,000 –1,000 Net transfer payments –3,000 4,000 –1,000 Foreign direct investment 2,000 5,000 9,000 Portfolio investments –3,000 2,000 –7,000 Other investments 2,000 –1,000 –6,000 –4,000 What is country D's change in official reserves? a. –$2,000 b. –$1,000 c. $2,000 d. $3,000 ANSWER: b 132. Table: Balance of Payments Data (in millions) Country A Country B Country C Country D Trade balance $1,000 –$2,000 –$8,000 $3,000 Change in official reserves 1,000 –2,000 Net income on capital held abroad 4,000 –3,000 –1,000 Net transfer payments –3,000 4,000 –1,000 Foreign direct investment 2,000 5,000 9,000 Portfolio investments –3,000 2,000 –7,000 Other investments 2,000 –1,000 –6,000 –4,000 What is country B's capital account balance? a. –$2,000 b. –$1,000 c. $2,000 d. $3,000 Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 20 ANSWER: c 133. Table: Balance of Payments Data (in millions) Country A Country B Country C Country D Trade balance $1,000 –$2,000 –$8,000 $3,000 Change in official reserves 1,000 –2,000 Net income on capital held abroad 4,000 –3,000 –1,000 Net transfer payments –3,000 4,000 –1,000 Foreign direct investment 2,000 5,000 9,000 Portfolio investments –3,000 2,000 –7,000 Other investments 2,000 –1,000 –6,000 –4,000 What is country C's current account balance? a. –$3,000 b. –$1,000 c. $1,000 d. $2,000 ANSWER: a 134. Which is NOT included in the U.S. current account? a. the net value of purchases and sales of international shares of stock b. the trade balance c. net stock dividends paid to Americans from abroad d. net foreign aid ANSWER: a 135. The transfer of an individual's bank deposit from one country to another country would show up in what part of the balance of payment accounts? a. current account b. capital account c. official reserve account d. payment account ANSWER: b 136. Which is NOT included in the official reserve account in a country's balance of payments? a. special drawing rights b. net government international loans c. foreign currencies d. gold reserves ANSWER: b 137. Which is NOT typically true of a country with a large trade deficit? a. Foreign debts have accumulated and will need to be repaid in the future. Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 20 b. Higher taxes are likely in the future. c. There is an excessive amount of savings. d. Foreigners are investing in the country's capital. ANSWER: c 138. Table: Exchange Rates Year Exchange Rates 2000 1 U.S. $ = 0.5 British £ 0.4 European € = 100 Japanese ¥ 2004 1 U.S. $ = 1.0 British £ 0.8 European € = 200 Japanese ¥ Based on the hypothetical exchange rate information in the table, which statement is correct? a. In 2004, the British pound had become stronger relative to the U.S. dollar. b. In 2004, the European euro had become stronger relative to the Japanese yen. c. In 2004, the U.S. dollar had become stronger relative to the British pound. d. In 2004, the Japanese yen had become stronger relative to the European euro. ANSWER: c 139. Table: Exchange Rates Year Exchange Rates 2000 1 U.S. $ = 0.5 British £ 0.4 European € = 100 Japanese ¥ 2004 1 U.S. $ = 1.0 British £ 0.8 European € = 200 Japanese ¥ Based on the hypothetical exchange rate information in the table, which statement is correct? a. In 2004, the Japanese yen had become stronger relative to the European euro. b. In 2004, the American dollar had become weaker relative to the British pound. c. In 2004, the price of one Japanese yen had doubled relative to the European euro. d. In 2004, the price of one Japanese yen had not changed relative to the European euro. ANSWER: d 140. Table: Exchange Rates Year Exchange Rates 2000 1 U.S. $ = 0.5 British £ 0.4 European € = 100 Japanese ¥ 2004 1 U.S. $ = 1.0 British £ 0.8 European € = 200 Japanese ¥ Based on the hypothetical exchange rate information in the table, which statement is correct? a. In 2004, the U.S. dollar had depreciated relative to the British pound. b. In 2004, the British pound had depreciated relative to the U.S. dollar. c. In 2004, the Japanese yen had appreciated relative to the European euro. d. In 2004, the European euro had appreciated relative to the Japanese yen. ANSWER: b 141. Table: Exchange Rates Year Exchange Rates 2000 1 U.S. $ = 0.5 British £ 0.4 European € = 100 Japanese ¥ 2004 1 U.S. $ = 1.0 British £ 0.8 European € = 200 Japanese ¥ Based on the hypothetical exchange rate information for the two years in the table, the price of 1 euro in terms Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 20 of Japanese yen in 2000 was: a. ¥0.004. b. ¥40. c. ¥100. d. ¥250. ANSWER: d 142. Table: Exchange Rates Year Exchange Rates 2000 1 U.S. $ = 0.5 British £ 0.4 European € = 100 Japanese ¥ 2004 1 U.S. $ = 1.0 British £ 0.8 European € = 200 Japanese ¥ Based on the hypothetical exchange rate information for the two years in the table, the price of 1 euro in terms of Japanese yen in 2004 was: a. ¥200. b. ¥100. c. ¥250. d. ¥400. ANSWER: c 143. Table: Exchange Rates Year Exchange Rates 2000 1 U.S. $ = 0.5 British £ 0.4 European € = 100 Japanese ¥ 2004 1 U.S. $ = 1.0 British £ 0.8 European € = 200 Japanese ¥ Based on the hypothetical exchange rate information for the two years in the table, the price of 1 Japanese yen in terms of European euros in 2004 was: a. €0.004. b. €0.1. c. €100. d. €40. ANSWER: a 144. What does knowing that $1.25 buys 1 euro tell you? a. the currency reserve ratio b. the exchange rate c. the foreign money replacement rate d. the capital index conversion rate ANSWER: b 145. If the exchange rate between the U.S. dollar and the Canadian dollar were U.S. $1.25 for Can $1, then a shirt that costs U.S. $20 would cost: a. Can $25. b. Can $21.25. Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 20 c. Can $18.75. d. Can $16. ANSWER: d 146. An exchange rate is the cost, or price, of: a. exporting goods. b. importing goods. c. borrowing in a foreign country. d. one currency in terms of another. ANSWER: d 147. An exchange rate is: a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world. b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.
c. the price of one currency in terms of another currency. d. a currency whose value is not pegged, but governments will intervene extensively in the market to keep the value within a certain range.
ANSWER: c 148. An exchange rate appreciation is: a. an increase in the price of one currency in terms of another currency. b. a decrease in the price of one currency in terms of another currency. c. the rate at which you can exchange one currency for another. d. the rate at which you can exchange the goods and services of one country for the goods and services of another.
ANSWER: a 149. An exchange rate depreciation is: a. an increase in the price of one currency in terms of another currency. b. a decrease in the price of a currency in terms of another currency. c. the rate at which you can exchange one currency for another. d. the rate at which you can exchange the goods and services of one country for the goods and services of another.
ANSWER: b 150. If the exchange rate between the U.S. dollar and the euro is $1 for €0.75, then the price of €1 is: a. $0.75. b. $1. c. $1.33. d. $1.75. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 20 151. The nominal exchange rate is: a. an increase in the price of one currency in terms of another currency. b. a decrease in the price of a currency in terms of another currency. c. the rate at which you can exchange one currency for another. d. the rate at which you can exchange the goods and services of one country for the goods and services of another.
ANSWER: c 152. The real exchange rate is: a. an increase in the price of one currency in terms of another currency. b. a decrease in the price of a currency in terms of another currency. c. the rate at which you can exchange one currency for another. d. the rate at which you can exchange the goods and services of one country for the goods and services of another.
ANSWER: d 153. If the current exchange rate between the U.S. dollar and the euro was $1 to €0.75 yesterday but is $1 to €0.85 today, the euro has: a. appreciated against the U.S. dollar. b. depreciated against the U.S. dollar. c. neither appreciated nor depreciated against the U.S. dollar. d. appreciated or depreciated against the U.S. dollar, depending on other currencies. ANSWER: b 154. Which results in an appreciation of the U.S. dollar? a. an increase in U.S. imports b. an increase in U.S. capital outflow c. an increase in foreign investment in the United States d. an increase in Americans' demand for foreign currencies ANSWER: c 155. At the equilibrium exchange rate, the quantity demanded of a currency is: a. unrelated to the quantity supplied. b. greater than the quantity supplied. c. less than the quantity supplied. d. equal to the quantity supplied. ANSWER: d 156. Consider the exchange rate between the U.S. dollar and the Japanese yen. If the yen appreciates, then the: a. dollar must appreciate also. b. dollar must depreciate. c. value of the dollar will remain constant. Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 20 d. value of the dollar can increase, decrease, or remain unchanged. ANSWER: b 157. An appreciation is a(n): a. decrease in the quantity of one currency in terms of another currency. b. increase in the quantity of one currency in terms of another currency. c. decrease in the price of one currency in terms of another currency. d. increase in the price of one currency in terms of another currency. ANSWER: d 158. If $1 buys 90 Japanese yen and a computer that costs $800 is priced at 90,000 Japanese yen, then the computer in Japan is: a. underpriced by 18,000 Japanese yen. b. overpriced by 18,000 Japanese yen. c. underpriced by 80,000 Japanese yen. d. overpriced by 80,000 Japanese yen. ANSWER: b 159. A decrease in the value of the domestic currency in terms of other currencies is called a(n) _____ of the domestic currency. a. parity b. discount c. appreciation d. depreciation ANSWER: d 160. Figure: Yuan Foreign Exchange Market for U.S. Dollars
Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 20
Based on this figure, which statement is correct? a. Moving up the y-axis, the Chinese yuan depreciates relative to all world currencies. b. Moving up the y-axis, the American dollar depreciates relative to the Chinese yuan. c. Moving down the y-axis, the Chinese yuan depreciates relative to the U.S. dollar. d. Moving up the y-axis, the Chinese yuan depreciates relative to the U.S. dollar. ANSWER: d 161. Figure: Yuan Foreign Exchange Market for U.S. Dollars
Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 20
Based on this figure, if Americans begin to import more from China, which is a possible outcome for the price of the dollar? a. 10 yuan per dollar b. 9 yuan per dollar c. 8 yuan per dollar d. 7 yuan per dollar ANSWER: d 162. Figure: Pound Foreign Exchange Market for Euros
Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 20
If the British became wealthier and began importing more goods from the European Union, which shift would occur in the foreign exchange market for euros? a. The demand for euros would shift to the right. b. The demand for euros would shift to the left. c. The supply of euros would shift to the right. d. The supply of euros would shift to the left. ANSWER: a 163. Figure: Rupee Foreign Exchange Market for U.S. Dollars
Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 20
Based on the figure, what will a decrease in the money supply by the Federal Reserve cause? a. the demand for dollars to shift to the right b. the demand for dollars to shift to the left c. the supply of dollars to shift to the right d. the supply of dollars to shift to the left ANSWER: d 164. Figure: Rupee Foreign Exchange Market for U.S. Dollars
Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 20
Based on the figure, what will a rise in real interest rates in the United States cause? a. the demand for dollars to shift to the right b. the demand for dollars to shift to the left c. the supply of dollars to shift to the right d. the supply of dollars to shift to the left ANSWER: a 165. If the exchange rate between the Japanese yen and the dollar was ¥110 = $1 in 2006 and ¥120 = $1 in 2009, then between 2006 and 2009: a. the yen appreciated against the dollar. b. the yen depreciated against the dollar. c. both the yen and the dollar appreciated. d. both the yen and the dollar depreciated. ANSWER: b 166. In the short run, with floating exchange rates, the exchange rate is determined by: a. the supply of the currency. b. the demand for the currency. c. both the supply of and demand for the currency. d. neither the supply of nor demand for the currency. ANSWER: c 167. Consider the exchange market for the U.S. dollar versus the Japanese yen. The supply of yen comes from: Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 20 a. the United States. b. Japan. c. both the United States and Japan. d. neither the United States nor Japan. ANSWER: b 168. Consider the exchange market for the U.S. dollar versus the Japanese yen. The demand for yen comes from: a. the United States. b. Japan. c. both the United States and Japan. d. neither the United States nor Japan. ANSWER: c 169. When the exchange rate is written as dollars per yen, the exchange rate represents the: a. official government price of the dollar. b. official government price of the yen. c. price of one yen in dollars. d. price of one dollar in yen. ANSWER: c 170. When the exchange rate is written as dollars per yen, an increase in the exchange rate means that: a. the yen is decreasing in value. b. the dollar is decreasing in value. c. both the yen and the dollar are decreasing in value. d. both the yen and the dollar are increasing in value. ANSWER: b 171. An appreciation of the Mexican peso would MOST likely be a result of a(n): a. decrease in Mexican imports by the United States. b. increase in the supply of pesos. c. increase of foreign investment in Mexico. d. decrease in Mexican exports to the United States. ANSWER: c 172. If U.S. producers export more wine to France, then the: a. demand for dollars will increase. b. supply of euros will increase. c. supply of both dollars and euros will increase. d. demand for both dollars and euros will increase. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 20 173. Figure: Foreign Exchange Market for U.S. Dollars
What would cause a shift of the demand curve from D1 to D2 in the figure? a. an increase in the export of U.S. beef to China b. a purchase of Japanese corporate bonds by Americans c. a sale of U.S. Treasury bonds by Chinese bondholders d. an increase of the dollar supply by the U.S. Federal Reserve ANSWER: a 174. What is an increase in the price of one currency in terms of another currency called? a. exchange rate b. elevation c. accumulation d. appreciation ANSWER: d 175. An increase in the demand for a country's exports will have what effect on its currency? a. Its value will not change. b. Its value will increase. c. Its value will decrease. d. Its value will depreciate. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 20 176. Higher interest rates, a stable government, and increased exports contribute to: a. high taxes. b. trade deficits. c. a strong currency. d. high GDP per capita. ANSWER: c 177. With a floating exchange rate, an increase in the U.S. demand for Japanese exports will cause the demand for yen to: a. decrease. b. increase. c. remain unchanged. d. become less elastic. ANSWER: b 178. With a floating exchange rate, an increase in the U.S. demand for Japanese exports will cause the supply of yen to: a. decrease. b. increase. c. remain unchanged. d. become less elastic. ANSWER: c 179. With a floating exchange rate, an increase in the U.S. demand for Japanese exports will cause the: a. yen to depreciate, the dollar to appreciate, and the number of dollars traded to fall. b. dollar to depreciate, the yen to depreciate, and the number of yen traded to remain unchanged. c. number of yen exchanged to decrease. d. yen to appreciate, the dollar to depreciate, and the number of yen exchanged to increase. ANSWER: d 180. When a country becomes more attractive for foreign investment, we would expect a(n): a. depreciation of the country's currency. b. appreciation of the country's currency. c. increase in the supply of that country's currency. d. decrease in the supply of that country's currency. ANSWER: b 181. With a floating exchange rate, an increase in the U.S. interest rate will cause: a. capital to flow out of the United States, an increase in the supply of dollars, and a depreciation of the dollar. b. a decrease in the supply of dollars and a depreciation of the dollar. Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 20 c. capital to flow into the United States, an increase in the demand for dollars, and a depreciation of the dollar. d. capital to flow into the United States, an increase in the demand for dollars, and an appreciation of the dollar. ANSWER: d 182. In the short run, a tighter monetary policy by the U.S. Federal Reserve leads to a(n): a. increase in the supply of dollars and a dollar depreciation. b. decrease in the supply of dollars and a dollar appreciation. c. increase in the demand for dollars and a dollar depreciation. d. decrease in the demand for dollars and a dollar appreciation. ANSWER: b 183. The increased supply of a currency will cause its: a. purchasing power parity to rise. b. value to depreciate. c. reserves to increase. d. value to appreciate. ANSWER: b 184. With a floating exchange rate, when the Federal Reserve increases the U.S. money supply, the U.S. dollar will: a. appreciate. b. depreciate. c. become more scarce. d. become more valuable. ANSWER: b 185. Which would increase the demand for U.S. dollars? a. American consumers begin to import more automobiles manufactured abroad. b. Japan increases its purchases of U.S. corn. c. The credit rating of U.S. government bonds is downgraded. d. More U.S. citizens begin to travel abroad. ANSWER: b 186. If the dollar per euro exchange rate rises, this means that: a. it takes more euros to purchase a dollar. b. the demand for euros must have fallen. c. the dollar has depreciated. d. the supply of euros must have also risen. ANSWER: c 187. China is the world's leading producer of rare earth metals. What will happen to the value of the yuan if Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 20 demand for rare earth metals increases and the government does not intervene? a. It will appreciate. b. It will depreciate. c. It will neither appreciate nor depreciate. d. It will disappear. ANSWER: a 188. All over the world, drug dealers keep their wealth in the form of U.S. dollar bills, which they bury in their backyards. What would happen to the value of the dollar if drug dealers decided to switch to euros instead of U.S. dollars? a. The dollar would appreciate. b. The dollar would depreciate. c. There would be no change, since the dollars that were buried were not circulating. d. There would be no change, since the euros that are to be buried won't circulate. ANSWER: b 189. Which increases the demand for the U.S. dollar in foreign exchange markets? a. an increase in the U.S. savings rate b. an increase in U.S. inflation c. an increase in U.S. capital outflow overseas d. an increase in U.S. exports ANSWER: d 190. An increase in Americans' demand for vehicles made in Europe: a. increases the demand for dollars, and so the euro depreciates. b. increases the demand for euros, and so the euro appreciates. c. increases the supply of euros, and so the euro depreciates. d. decreases the demand for euros, and so the euro appreciates. ANSWER: b 191. An increase in the demand for a country's exports will cause the demand for its currency to: a. remain unchanged. b. increase. c. decrease. d. become more unpredictable. ANSWER: b 192. An increase in the demand for a country's exports will cause its currency's value to: a. remain unchanged. b. appreciate. c. depreciate. Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 20 d. become more volatile. ANSWER: b 193. If the Central Bank of China decides to hold more dollars as reserves, the: a. dollar's value will remain unchanged. b. dollar will appreciate. c. dollar will depreciate. d. dollar's value will become more unpredictable. ANSWER: b 194. If the Federal Reserve made the decision to increase the money supply in the United States, this would lead to a(n): a. increase in the demand for U.S. dollars. b. decrease in the demand for U.S. dollars. c. appreciation of the U.S. dollar relative to other currencies. d. depreciation of the U.S. dollar relative to other currencies. ANSWER: d 195. If the Federal Reserve increases the U.S. money supply, the dollar's value will: a. remain unchanged. b. appreciate. c. depreciate. d. become more volatile. ANSWER: c 196. The nominal exchange rate in Kenya is 94 Kenyan shillings per U.S. dollar. A burger in the United States costs $2. A similar burger at Steers Restaurant in Kenya costs 94 shillings. The real exchange rate in terms of U.S. burgers for Kenyan burgers is: a. 1:1. b. 1:2. c. 1:1/2. d. 2:1. ANSWER: b 197. What is the rate at which you exchange the goods and services of one country for the goods and services of another? a. nominal exchange rate b. real exchange rate c. parity exchange rate d. monetary exchange rate ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 20 198. Which is NOT a constraint on trade that prevents prices from being fully equalized across borders? a. The qualities of goods sold in different countries vary. b. The costs of transportation for some goods can be significant. c. Some goods cannot be shipped at all. d. Governments may tax or otherwise restrict trade to an extent that hinders market exchange. ANSWER: a 199. Suppose the exchange rate between the euro and the U.S. dollar is €0.5 to $1. If a Big Mac costs $3 in the United States and €1.5 in Germany, then the real exchange rate is: a. 1:1. b. 2:1. c. 1:2. d. 1:3. ANSWER: a 200. According to the purchasing power parity theorem, if a dollar is converted into another currency and spent abroad, then the real purchasing power of the dollar is: a. lower at home than abroad. b. higher at home than abroad c. the same at home or abroad. d. can be higher or lower at home than abroad, depending on the exchange rate. ANSWER: c 201. For which goods or services does purchasing power parity MOST closely hold? a. haircuts b. massages c. computers d. real estate ANSWER: c 202. If every country in the world adopted an open borders immigration policy, which would happen? a. Purchasing power parity would cease to hold. b. Purchasing power parity would hold more closely. c. There would be no change in the degree of purchasing power parity. d. Currencies would depreciate. ANSWER: b 203. If a teleportation device were invented, which would happen? a. Purchasing power parity would cease to hold. b. Purchasing power parity would hold more closely. c. There would be no change in the degree of purchasing power parity. Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 20 d. Currencies would depreciate. ANSWER: b 204. If every country in the world adopted a policy of 100% free trade, which would happen? a. Purchasing power parity would cease to hold. b. Purchasing power parity would hold more closely. c. There would be no change in the degree of purchasing power parity. d. Currencies would depreciate. ANSWER: b 205. Which theorem states that exchange rates will adjust until the prices of goods in different countries approximate one another? a. purchasing power parity b. the law of multiple prices c. the principle of comparative advantage d. dollarization ANSWER: a 206. Which will NOT prevent purchasing power parity from occurring in the real world? a. high transportation costs b. nontradeable services c. trade restrictions d. speculation by foreign exchange traders ANSWER: d 207. If purchasing power parity holds and the nominal exchange rate is £1 for $2, then an iPhone that cost $450 in New York should cost _____ in London. a. £225 b. £450 c. £675 d. £900 ANSWER: a 208. Purchasing power parity is an application of the law of: a. supply and demand. b. exchange rates. c. one price. d. multiple prices. ANSWER: c 209. Purchasing power parity is limited by: Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 20 a. the disparity of economic environments between countries. b. the abundance of diverse resources. c. income inequality. d. the costs of trading, transacting, and shuffling resources. ANSWER: d 210. Suppose an increase in the demand for dollars has caused an appreciation of the dollar. According to the purchasing power parity theorem, the value of the dollar in the future will: a. appreciate more. b. depreciate. c. not change. d. be unpredictable. ANSWER: b 211. Assume that the initial real exchange rate for a country and its trading partner is 1:1. If there is inflation in the country, then PPP predicts that: a. the country's currency will appreciate. b. the real exchange rate will fall. c. the real exchange rate will rise. d. no significant long-run change in the real exchange rate will occur. ANSWER: d 212. If combine harvesters are cheaper in the United States than they are in Canada, the law of one price predicts that once exchange rates are taken into account: a. the prices of combine harvesters in the two countries will equalize in the long run if transportation costs and
tariffs are not a barrier. b. Canadian combine harvesters will be exported to the United States if transportation costs and tariffs are not a barrier. c. the United States will adopt voluntary restraint agreements with Canada.
d. the United States will erect tariffs against trade with Canada. ANSWER: a 213. In the long run, with a floating exchange rate, changes in _____ will have an impact on the real exchange rate. a. the U.S. money supply b. the foreign country's money supply c. both the U.S. money supply and the foreign country's money supply d. neither the U.S. money supply nor the foreign country's money supply ANSWER: d 214. If purchasing power parity holds and the nominal exchange rate is 1.5 U.S. dollars for 1 Canadian dollar, then a Big Mac that costs 2 Canadian dollars in Canada will cost _____ U.S. dollar(s) in the United States. Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 20 a. 1 b. 1.5 c. 2 d. 3 ANSWER: d 215. Which would NOT prevent purchasing power parity from holding? a. high transportation costs b. goods that are not tradeable c. fluctuations in foreign exchange rates d. tariffs and quotas ANSWER: c 216. Which prevents the purchasing power parity theorem from holding perfectly? a. transportation costs and floating exchange rates b. goods that cannot be shipped and monetary policy c. tariffs and quotas d. transportation costs, goods that cannot be shipped, and tariffs and quotas ANSWER: d 217. _____ are usually _____ in developing countries because of lower wages and immigration laws that prevent the free movement of labor. a. Goods; more expensive b. Goods; less expensive c. Services; more expensive d. Services; less expensive ANSWER: d 218. Which items are usually cheaper in poorer countries? a. services b. computers c. iPods d. Big Macs ANSWER: a 219. The exchange rate between the U.S. dollar and the yen changed from $0.010 per yen to $0.012 per yen. What is TRUE regarding both currencies? a. Both currencies remain equally strong. b. The yen strengthened and the dollar weakened. c. The dollar strengthened and the yen weakened. d. Both currencies have weakened. Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 20 ANSWER: b 220. Assume that the exchange rate is $0.032 to 1 Thai baht. If demand for the Thai baht increases, which will be a likely outcome? a. $0.03 to 1 Thai baht b. $0.32 to 1 Thai baht c. $0.34 to 1 Thai baht d. There is no likely outcome for an increase in demand for the Thai baht. ANSWER: c 221. Assume the exchange rate is $0.032 to 1 Thai baht. If demand for the Thai baht decreases, which will be a likely outcome? a. $0.03 to 1 Thai baht b. $0.32 to 1 Thai baht c. $0.34 to 1 Thai baht d. There is no likely outcome for a decrease in demand for the Thai baht. ANSWER: a 222. Which would cause a currency to depreciate? a. an increase in the demand for the currency b. a decrease in the supply of the currency c. loose monetary policy in the currency's country d. an increase in the demand for holding the currency in reserves ANSWER: c 223. Assume that the official exchange rate between the U.S. dollar and the Philippine peso is $0.021 to 1 Philippine peso. Buying a group of goods in the United States costs $50. Buying the same group of goods in the Philippines costs 2,500 Philippine pesos. What is the real exchange rate in dollars per Philippine peso? a. $0.0200 to 1 Philippine peso b. $0.0210 to 1 Philippine peso c. $0.5000 to 1 Philippine peso d. $0.2381 to 1 Philippine peso ANSWER: a 224. Assume that the official exchange rate between U.S. dollars and the Swiss franc is $1.10 to 1 Swiss franc. Buying a group of goods in the United States costs $50. Buying the same group of goods in Switzerland costs 70 Swiss francs. What is the real exchange rate in dollars per Swiss franc? a. $0.714 to 1 Swiss franc b. $1.100 to 1 Swiss franc c. $1.270 to 1 Swiss franc d. $1.400 to 1 Swiss franc ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 20 225. Purchasing power parity exists when: a. prices are the same in all countries. b. one unit of a given currency buys one unit of another currency. c. a given amount of currency in one country purchases the same bundle of goods and services in all countries. d. prices do not change but stay the same over time. ANSWER: c 226. Deviations from purchasing power parity tend to be larger for _____ than for _____. a. services; goods b. goods; services c. imports; exports d. exports; imports ANSWER: a 227. What is the relationship between an increase in money supply and net exports? a. A monetary expansion leads to a depreciation of the home currency and a decrease in net exports. b. A monetary expansion leads to a depreciation of the home currency and an increase in net exports. c. A monetary expansion leads to an appreciation of the home currency and a decrease in net exports. d. A monetary expansion leads to an appreciation of the home currency and an increase in net exports. ANSWER: b 228. Compared with a closed economy, an increase in the growth rate of the money supply in an open economy increases aggregate demand by a: a. larger amount only in the short run. b. smaller amount only in the short run. c. larger amount in both the short run and the long run. d. smaller amount in both the short run and the long run. ANSWER: a 229. In the long run, an increase in the domestic money supply: a. causes the country's real exchange rate to rise. b. causes the country's real exchange rate to fall. c. does not affect the country's real exchange rate. d. causes the country's real exchange rate to rise or fall, depending on purchasing power parity. ANSWER: c 230. If the Federal Reserve decided to decrease the money supply in the United States, this would lead to a(n): a. depreciation of the U.S. dollar. b. depreciation of the U.S. dollar and an increase in the relative price of U.S. exports. c. increase in aggregate demand. Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 20 d. appreciation of the U.S. dollar, an increase in the relative price of U.S. exports, and a decrease in aggregate demand.
ANSWER: d 231. A country currently experiencing a recession would benefit MOST from a(n): a. expansion in the money supply that leads to an appreciation of the domestic currency. b. expansion in the money supply that leads to a depreciation of the domestic currency. c. contraction in the money supply that leads to an appreciation of the domestic currency. d. contraction in the money supply that leads to a depreciation of the domestic currency. ANSWER: b 232. Contractionary monetary policy, assuming demand for the currency stays constant, tends to result in: a. a currency depreciation. b. a currency appreciation. c. no change in exchange rates. d. a change in only real, not nominal, exchange rates. ANSWER: b 233. Expansionary monetary policy lowers the: a. real exchange rate in the short run, but not in the long run. b. nominal exchange rate in the short run, but not in the long run. c. real exchange rate in the long run, but not in the short run. d. nominal exchange rate in the long run, but not in the short run. ANSWER: a 234. In the short run, an increase in the money supply tends to increase employment because: a. exports increase but imports do not. b. imports increase but exports do not. c. both exports and imports increase. d. government spending increases. ANSWER: a 235. Following an increase in the U.S. money supply, the U.S. real exchange rate tends to: a. increase continuously. b. decrease continuously. c. first increase and then decrease. d. first decrease and then increase. ANSWER: d 236. _____ of the U.S. dollar will cause U.S. _____ to _____ in the short run. a. Appreciation; aggregate demand; increase b. Depreciation; aggregate demand; increase Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 20 c. Appreciation; aggregate supply; decrease d. Depreciation; aggregate supply; decrease ANSWER: b 237. What happens to U.S. exports when the money supply is increased? a. Tariffs increase. b. Exports increase. c. Prices increase. d. Quality increases. ANSWER: b 238. What causes the economy's real growth rate to return to its long-run level after the money supply has been increased? a. unemployment b. currency appreciation c. inflation d. government spending ANSWER: c 239. An increase in the growth rate of the money supply in the short run causes a(n) _____ of the domestic currency and a(n) _____ in aggregate demand. a. depreciation; decrease b. depreciation; increase c. appreciation; decrease d. appreciation; increase ANSWER: b 240. In the long run, an increase in the growth rate of the money supply causes _____ in the real exchange rate and _____ in the real GDP growth rate. a. an increase; an increase b. a decrease; a decrease c. an increase; a decrease d. no change; no change ANSWER: d 241. How do budget deficits lead to trade deficits? a. Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency
appreciation, thus reducing net exports. b. Budget deficits lead to lower interest rates, which lead to net capital inflow, which leads to currency appreciation, thus reducing net exports. c. Budget deficits lead to higher interest rates, which lead to net capital outflow, which leads to currency appreciation, thus reducing net exports. d. Budget deficits lead to higher interest rates, which lead to net capital inflow, which leads to currency
Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 20 depreciation, thus reducing net exports.
ANSWER: a 242. Which explains why a budget deficit can cause a trade deficit? a. An increase in the budget deficit raises domestic interest rates, resulting in a current account surplus and an appreciation of the currency. b. An increase in the budget deficit lowers domestic interest rates, resulting in a current account deficit and a depreciation of the currency. c. An increase in the budget deficit raises domestic interest rates, resulting in a capital account surplus and an appreciation of the currency. d. An increase in the budget deficit lowers domestic interest rates, resulting in a capital account deficit and a depreciation of the currency.
ANSWER: c 243. If the U.S. government borrows to finance its budget deficits, then the dollar will: a. appreciate and U.S. imports will decrease. b. appreciate and U.S. imports will increase. c. depreciate and U.S. exports will decrease. d. depreciate and U.S. exports will increase. ANSWER: b 244. An increase in U.S. government spending tends to: a. increase U.S. interest rates and increase the U.S. capital account surplus. b. increase U.S. interest rates and decrease the U.S. capital account surplus. c. decrease U.S. interest rates and increase the U.S. capital account surplus. d. decrease U.S. interest rates and decrease the U.S. capital account surplus. ANSWER: a 245. The twin deficits refer to the case when a: a. trade deficit leads to a capital account deficit. b. capital account deficit leads to a trade deficit. c. trade deficit leads to a federal government budget deficit. d. federal government budget deficit leads to a trade deficit. ANSWER: d 246. Expansionary monetary policy in the United States tends to cause the dollar to: a. appreciate. b. depreciate. c. remain the same in value. d. fluctuate unpredictably in value. ANSWER: b 247. If a country's currency appreciates, in the short run, the country's _____ will increase and its _____ will Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 20 decrease. a. growth rate; aggregate demand b. aggregate demand; growth rate c. imports; exports d. exports; imports ANSWER: c 248. If a country's money supply decreases, in the long run, the country's imports will _____ and its exports will _____. a. increase; decrease b. decrease; increase c. decrease; decrease d. remain the same; remain the same ANSWER: d 249. Changes in the money supply and net exports tend to have a _____ relationship in the _____. a. positive; short run b. negative; short run c. positive; long run d. negative; long run ANSWER: a 250. Expansionary fiscal policy will cause the dollar to _____ and net exports to _____. a. appreciate; increase b. depreciate; increase c. appreciate; decrease d. depreciate; decrease ANSWER: c 251. Contractionary fiscal policy will cause the dollar to _____ and net exports to _____. a. appreciate; increase b. depreciate; increase c. appreciate; decrease d. depreciate; decrease ANSWER: b 252. A country can adopt a fixed exchange rate system by: a. allowing a freely functioning foreign exchange market. b. removing the asset backing of its currency. c. setting up a currency union. d. engaging in trade with other countries. Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 20 ANSWER: c 253. In which currency system is the exchange rate determined only by supply and demand in the currency market? a. floating exchange rate b. pegged exchange rate c. dollarization d. managed float ANSWER: a 254. A relatively loose commitment to a floating exchange rate produces a: a. dirty float. b. pegged exchange rate. c. real exchange rate. d. flexible substitution. ANSWER: a 255. A dirty or managed float is: a. a yearly summary of all the economic transactions between residents of one country and residents of the rest of the world. b. the sum of the balance of trade, net income on capital held abroad, and net transfer payments.
c. the price of one currency in another currency. d. a currency without a pegged exchange rate, but governments will intervene extensively in the market to keep the value within a certain range.
ANSWER: d 256. If a country applies dollarization to its currency, it has adopted: a. the U.S. dollar as its currency. b. a fixed exchange rate with the dollar. c. a managed float of its currency. d. a dirty float of its currency. ANSWER: a 257. An exchange rate determined primarily by market forces is called a: a. floating exchange rate. b. fixed exchange rate. c. managed float. d. forced market rate. ANSWER: a 258. An exchange rate system in which the government or central bank has agreed to convert its currency into another at a fixed rate is called a: Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 20 a. floating exchange rate. b. pegged exchange rate. c. managed float. d. forced market rate. ANSWER: b 259. An exchange rate system in which the exchange rate is allowed to fluctuate unless the exchange rate reaches certain bounds is called a: a. floating exchange rate. b. fixed exchange rate. c. managed float. d. forced market rate. ANSWER: c 260. When maintained by _____, a currency's value will see extensive intervention by the government in the foreign exchange to keep the value within a certain range. a. a floating exchange rate b. a pegged exchange rate c. a dirty float d. dollarization ANSWER: c 261. When countries dollarize their currencies, what becomes the source of their monetary policy? a. their prime minister b. the open market c. Parliament d. the U.S. Federal Reserve ANSWER: d 262. A system in which the exchange rate is determined primarily by market forces is called: a. a dirty float. b. a floating exchange rate. c. a fixed exchange rate. d. dollarization. ANSWER: b 263. When the government or central bank sells its currency at a constant price in terms of another currency, it has established: a. a dirty float. b. a floating exchange rate. c. a fixed exchange rate. Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 20 d. dollarization. ANSWER: c 264. A system in which a foreign government uses the U.S. dollar as its currency is called: a. a dirty float. b. a floating exchange rate. c. a fixed exchange rate. d. dollarization. ANSWER: d 265. When a country dollarizes, its monetary policy is controlled by the: a. country's central bank. b. country's federal government. c. U.S. Federal Reserve. d. country's central bank and the U.S. Federal Reserve together. ANSWER: c 266. _____ is a system in which the government intervenes extensively in the foreign exchange market to keep the exchange rate within certain bounds. a. A dirty float b. A floating exchange rate c. A fixed exchange rate d. Dollarization ANSWER: a 267. Which is NOT one of the methods used to fix or peg an exchange rate? a. backing up the currency with a high level of reserves and promising convertibility b. setting up a currency union c. using offsetting fiscal and monetary policies to maintain a constant exchange rate d. adopting another country's currency ANSWER: c 268. Which is considered the international lender of last resort? a. the U.S. Federal Reserve b. the International Monetary Fund c. the World Bank d. the U.S. government ANSWER: b 269. Which is NOT a function of the International Monetary Fund? a. prescribing macroeconomic recovery policies for countries in financial turmoil Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 20 b. providing monetary aid to countries that meet loan conditions c. monitoring the recovery process for countries that take its loans d. intervening in foreign currency markets to maintain a country's currency value ANSWER: d 270. The director of the IMF is traditionally: a. American. b. African. c. Asian. d. European. ANSWER: d 271. The IMF exists to: a. facilitate the flow of capital to poor countries. b. help expand the monetary base of the European Union. c. provide loans in a financial emergency. d. oversee new private investment in all nations. ANSWER: c 272. The president of the World Bank is historically from: a. the United States. b. Europe. c. India. d. China. ANSWER: a 273. What country is the World Bank's largest borrower? a. China b. India c. Iran d. Kenya ANSWER: a 274. Which is FALSE regarding the World Bank? a. It loans to governments of developing countries to fund specific projects. b. Its headquarters are near the United Nations offices in Geneva, Switzerland. c. It gives away money as aid. d. It was founded shortly after World War II. ANSWER: b 275. Which is FALSE regarding the International Monetary Fund? Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 20 a. Its revenue comes from member governments and earnings on the funds it loans out. b. Its headquarters are near the United Nations offices in New York City, New York. c. It is a lender of last resort to countries with financial crises. d. It was founded shortly after World War II. ANSWER: b 276. A trade deficit will be a problem for a country if the country: a. has low savings. b. invests carefully. c. seeks an inflow of foreign funds to increase capital investments. d. has a floating exchange rate. ANSWER: a 277. Can monetary policy impact real exchange rates? a. yes, in both the short run and the long run b. yes, but only in the short run c. yes, but only in the long run d. no, in neither the short run nor the long run ANSWER: b 278. A country's monetary policy will NOT: a. affect the country's real exchange rate in the short run. b. influence the country's aggregate demand. c. affect the flow of capital between it and other countries. d. affect the country's real exchange rate in the long run. ANSWER: d 279. Foreign aid is a net addition to the current accounts of many poor countries. a. True b. False ANSWER: a 280. Anyone who runs a persistent trade deficit with anyone else is likely to go bankrupt. a. True b. False ANSWER: b 281. Taken alone, the fact that the United States has a trade deficit with China is not special cause for worry. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 20 282. Since about 1980, the United States typically runs a net trade deficit with its trading partners. a. True b. False ANSWER: a 283. The balance of payments is an annual summary of the U.S. federal budget transactions. a. True b. False ANSWER: b 284. The balance of payments is always balanced. a. True b. False ANSWER: a 285. Holding official reserves constant, a deficit in the current account means a surplus in the capital account. a. True b. False ANSWER: a 286. If the United States imports $5 million worth of coffee from Peru, this is recorded as a debit, or negative, in the U.S. current account. a. True b. False ANSWER: a 287. The balance of trade, or exports minus imports, is the MOST important component of the current account in the U.S. balance of payments. a. True b. False ANSWER: a 288. A country that is a great place in which to invest will tend to run a current account deficit. a. True b. False ANSWER: a 289. A current account deficit decreases the balance of payments. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 20 290. If the Chinese government purchases $25 million worth of U.S. government bonds, this is recorded as a credit in the U.S. current account. a. True b. False ANSWER: b 291. The capital account is the sum of the balance of trade, net income on capital held abroad, and net transfer payments. a. True b. False ANSWER: b 292. A person engages in foreign direct investment when they buy the stocks of a foreign firm. a. True b. False ANSWER: b 293. Currently, the Chinese government and central bank have more than $1 trillion worth of U.S. dollars and dollar-denominated assets. a. True b. False ANSWER: a 294. The sum of the capital account and the official reserves account must exactly equal the balance in the current account. a. True b. False ANSWER: a 295. Since 1990, the U.S. current account has been rising in MOST years. a. True b. False ANSWER: b 296. Since 1990, the U.S. capital account has been rising in MOST years. a. True b. False ANSWER: a 297. A trade deficit always indicates that a country has a low level of savings. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 20 ANSWER: b 298. Most economists think that the U.S. trade deficit is a problem. a. True b. False ANSWER: b 299. Services tend to be cheaper in real terms in poor countries than in rich countries. a. True b. False ANSWER: a 300. An increase in the demand for U.S. goods by foreigners increases the demand for U.S. dollars. a. True b. False ANSWER: a 301. An increase in the demand for a country's exports tends to decrease the value of its currency. a. True b. False ANSWER: b 302. If the Bangladeshi taka depreciates against the Japanese yen, this means that the Japanese yen has appreciated against all currencies. a. True b. False ANSWER: b 303. If the Bangladeshi taka depreciates against the Japanese yen, this means that the Japanese yen has appreciated against the Bangladeshi taka. a. True b. False ANSWER: a 304. The Japanese yen is the main currency held in reserve by other nations. a. True b. False ANSWER: b 305. High interest rates in a country decrease the value of its currency. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 20 ANSWER: b 306. The Swiss franc is a global reserve currency. a. True b. False ANSWER: a 307. When a country reduces the property rights of foreign investors, we would expect its currency to appreciate. a. True b. False ANSWER: b 308. Many governments and central banks hold dollars as a reserve currency. a. True b. False ANSWER: a 309. An increase in domestic interest rates will lead to an appreciation of the domestic currency. a. True b. False ANSWER: a 310. An increase in the demand for foreign imports will ultimately lead to an increase in the value of the domestic currency. a. True b. False ANSWER: b 311. Ultimately, the value of a currency depends on the value of what it can purchase. a. True b. False ANSWER: a 312. Purchasing power parity holds BEST when prices are free to adjust and there are no trade barriers. a. True b. False ANSWER: a 313. The purchasing power parity theorem implies that changes in currency markets have no effect on real exchange rates. a. True Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 20 b. False ANSWER: a 314. The higher the tariffs between two countries, the less purchasing power parity will hold. a. True b. False ANSWER: a 315. Deviations from purchasing power parity are usually short-lived for services. a. True b. False ANSWER: b 316. Purchasing power parity is more likely to hold in the short run than in the long run. a. True b. False ANSWER: b 317. If purchasing power parity holds and the nominal exchange rate is £1 for $2, then a Big Mac that costs £2 in London should cost $4 in New York. a. True b. False ANSWER: a 318. The purchasing power parity theorem implies that the real exchange rate between two currencies equals 1:1. a. True b. False ANSWER: a 319. In the long run, the value of a currency depends on the value of what it can purchase. a. True b. False ANSWER: a 320. In the long run, an increase in the growth rate of the money supply leads to an increase in both the real exchange rate and the amount of exports. a. True b. False ANSWER: b 321. Expansionary fiscal policy financed by borrowing is more effective in affecting real growth in a closed economy than in an open economy. Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 20 a. True b. False ANSWER: a 322. The boost to domestic aggregate demand resulting from new government spending will, to some extent, be offset by the greater difficulty of importing at the new and lower real exchange rate. a. True b. False ANSWER: b 323. A currency union is a bad idea if the economies that compose it require different monetary policies. a. True b. False ANSWER: a 324. When a country has a pegged exchange rate, its government or central bank has promised to convert its currency into another currency at a fixed rate. a. True b. False ANSWER: a 325. Today, most countries in the world peg their currency exchange rates. a. True b. False ANSWER: b 326. Pegging exchange rates has become more popular over time. a. True b. False ANSWER: b 327. If a country does not have as sound an economy as the United States, in the long run it should peg to the U.S. dollar. a. True b. False ANSWER: b 328. Only underdeveloped countries are eligible to borrow from the IMF. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 20 329. The World Bank is the primary force behind global capitalism. a. True b. False ANSWER: b 330. Which statement is FALSE? a. Purchasing power parity will not hold when countries let their currencies float. b. A fixed exchange rate requires the central bank to be more active in foreign exchange markets than a dirty float does. c. Most countries around the world use floating exchange rates.
d. The law of one price holds, at least approximately, internationally as well as domestically. ANSWER: a 331. Which statement is TRUE? a. A currency union creates a fixed exchange rate among a group of nations. b. The effect of dollarization is to fix your exchange rate with all of the United States' trading partners. c. A dirty float means the foreign exchange market is so messy the central bank no longer takes part in it. d. Floating exchange rates force the prices of services to conform to purchasing power parity. ANSWER: a 332. After a currency appreciates, exports _____, imports _____, and the balance of payments _____. a. fall; rise; remains balanced b. rise; fall; becomes imbalanced c. fall; fall; does not change d. do not change; fall; rises ANSWER: a 333. What follows a currency depreciation if official reserves do not change? a. Exports rise, imports fall, the current account rises, and the capital account falls. b. Exports and imports rise, and current and capital accounts both fall. c. The current account rises, but the capital account does not change. d. Exports fall, imports rise, the current account falls, and the capital account falls. ANSWER: a 334. Suppose U.S. demand for the euro increases significantly. Which would MOST likely follow? a. The euro would appreciate, and the balance of payments would still balance, but the impact on the current and capital accounts is unclear. b. The euro would appreciate, the current account would rise, and the capital account would fall.
c. The euro would appreciate, the current account would fall, and the capital account would rise. d. The euro would depreciate, the balance of payments would balance, and the capital and current accounts would both rise.
ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 64
Name:
Class:
Date:
Chapter 20 335. Suppose a country's currency appreciates, its current account becomes more negative, and its capital account becomes more positive. What is a possible cause? a. The government begins running a budget deficit. b. The country's citizens increase their desire to import goods and services. c. The country's main trading partner pegs its currency. d. International investors lose confidence in the financial stability of the country. ANSWER: a 336. Table: Balance of Payment Accounts Item Dollar Value (millions) Exports $300 Imports 620 Net income on capital held abroad 35 Foreign aid received 100 Foreign direct investment 120 Portfolio investment 50 Other investment 50 Use the data in the table to answer the question. Is there a change in this country's official reserves account? a. Yes, it went up by $35 million. b. Yes, it went down by $35 million. c. No, because the balance of payments must balance. d. No, because the current account deficit is balanced by a capital account surplus. ANSWER: a 337. Table: Balance of Payment Accounts Item Dollar Value (millions) Exports $300 Imports 620 Net income on capital held abroad 35 Foreign aid received 100 Foreign direct investment 120 Portfolio investment 50 Other investment 15 Use the data in the table to answer the question. Is there a change in this country's official reserves account? a. Yes, it went up by $35 million. b. Yes, it went down by $35 million. c. No, because the balance of payments must balance. d. No, because the current account deficit is balanced by a capital account surplus. ANSWER: d 338. When people from the euro-zone vacation at Disneyworld, they: a. demand dollars and people in the United States supply dollars. b. supply dollars and people in the United States demand dollars. Copyright Macmillan Learning. Powered by Cognero.
Page 65
Name:
Class:
Date:
Chapter 20 c. use euros to pay for things so have no need for dollars. d. probably use credit cards, so there is no currency exchanged. ANSWER: a 339. When a Canadian citizen living in Ottawa buys shares of a U.S. corporation listed on the S&P 500, there is a: a. positive entry in the U.S. capital account and a negative entry in the Canadian capital account. b. positive entry in the U.S. current account and a negative entry in the Canadian current account. c. negative entry in the U.S. capital account and a positive entry in the Canadian capital account. d. negative entry in the U.S. current account and a positive entry in the Canadian current account. ANSWER: a 340. What is the difference between a trade surplus and a capital surplus? If there is no change in official reserves, is it possible to have both a trade surplus and a capital surplus at the same time? ANSWER: A trade surplus occurs when exports of goods and services are greater than imports of goods and services. A capital surplus occurs when the inflow of foreign capital is greater than the outflow of domestic capital. If official reserves are constant, the trade balance must equal the opposite of the capital balance. The country with a trade surplus has foreign money which they do not use to buy foreign goods, which would eliminate the surplus. With no change in official reserves, the only other possibility is that the surplus country uses the foreign currency to buy assets in foreign countries, which results in a capital account deficit.
341. "Despite increasing trade deficits, the U.S. balance of payments is always balanced." Explain this statement. ANSWER: The balance of payments has three components: the current account, which is the sum of the balance of trade, net income on capital held abroad, and net transfer payments; the capital account, which measures changes in foreign ownership of domestic assets including financial assets likes stocks and bonds as well as physical assets; and the official reserves account. If a country runs a trade deficit, it can finance the deficit by selling domestic assets—a capital surplus—or drawing down official reserves. Some combination of the capital surplus and changes in official reserves will offset the current account deficit, so the balance of payments will balance.
342. What are the sources of a capital surplus? A capital deficit? How does a capital surplus or deficit show up in the official balance of payments accounts? ANSWER: A capital surplus occurs when foreign capital flows into a country more than domestic capital flows out. A deficit occurs when domestic capital flows out more than foreign capital flows in. Assuming there is no change in official reserves, in the balance of payments, a capital account surplus or deficit will offset a current account deficit or surplus.
343. Explain how each scenario will affect the current account, capital account, and official reserve accounts of each country. a. Walmart buys toys from a Chinese toymaker, and the toymaker uses the proceeds to purchase shares of GE's stock in the United States. b. Toyota exports cars to Malaysia and deposits the sales revenue in a Japanese bank. c. An American tourist takes a vacation at a resort hotel in Italy, and the hotel uses the revenue to purchase wines from California. ANSWER: a. Importing the toys will move the U.S. current account into deficit and the Chinese current account into surplus. The portfolio investment in GE stock will move the U.S. capital account into surplus and the Chinese capital account into deficit. There is no change in official reserves. b. Japan's current account balance will increase and Malaysia's will decrease. Japan's official reserves will increase and Malaysia's will decrease. There are no changes in the two countries' capital accounts. Copyright Macmillan Learning. Powered by Cognero.
Page 66
Name:
Class:
Date:
Chapter 20 c. The vacation represents an American import from Italy, so the U.S. current account balance will fall and Italy's will rise. The wine purchase is an Italian import and a U.S. export, so the Italian current account balance falls and the U.S. balance rises. There are no changes in the capital accounts or official reserves.
344. Would you worry about a trade deficit with one country? Why or why not? How would a trade deficit with the rest of the world be different? ANSWER: It would be virtually impossible to have a trade surplus with every country in the world, so having a deficit with one country is not concerning. For example, China may have trade deficits with some countries, but its overall trade balance is strongly in surplus. A global trade deficit may not necessarily be a matter of concern, either. It may be that the country with a current account deficit is very attractive to investors, creating a capital account surplus. Or, it could be a matter of concern because it reveals a national savings rate that is too low.
345. If the United States becomes a worse place in which to invest, what will happen to the current and capital accounts? ANSWER: If U.S. investments become less attractive to foreign investors, the resulting decline in capital inflows will put downward pressure on our capital account surplus. Assuming unchanged official reserves—or looking ahead to when reserves are exhausted—without a capital account surplus, we would no longer be able to maintain the current account deficit. U.S. savings rates would have to increase, which would require painful choices about how to balance the federal budget.
346. In 2005, Federal Reserve governor Ben Bernanke said in a speech: "Over the past decade a combination of diverse forces has created a significant increase in the global supply of saving—a global saving glut—which helps to explain the increase in the U.S. current account deficit." Is this statement consistent with the economic theory in this chapter? That is, would a "global saving glut" be able to explain the growing U.S. current account? Explain. ANSWER: The glut of savings would search for attractive investment opportunities. Many of those are in the United States, so domestic investment is funded in part with foreign capital. This frees domestic income, that might have been saved at higher interest rates, for spending on imports. The high level of imports, indirectly funded by foreign capital, produces a current account deficit.
347. How would a monetary contraction in China affect the yuan–dollar exchange rate? Use a graph showing the supply and demand for yuan with the exchange rate measured in dollars per yuan.
Copyright Macmillan Learning. Powered by Cognero.
Page 67
Name:
Class:
Date:
Chapter 20 ANSWER:
Copyright Macmillan Learning. Powered by Cognero.
Page 68
Name:
Class:
Date:
Chapter 20 348. The initial exchange rate between the U.S. dollar and the Chinese yuan is $0.15/yuan in the yuan foreign exchange market when Americans decide to import more goods from China. What effect will this have on the yuan foreign exchange market? Show your answer graphically using the supply and demand for yuan with the exchange rate measured in dollars per yuan.
Copyright Macmillan Learning. Powered by Cognero.
Page 69
Name:
Class:
Date:
Chapter 20 ANSWER:
Copyright Macmillan Learning. Powered by Cognero.
Page 70
Name:
Class:
Date:
Chapter 20 349. The U.S. dollar is considered a safe haven currency. What does this do to the value of the dollar? ANSWER: Safe haven currencies are those considered likely to retain or increase their value during times of political or economic uncertainty. If people have low confidence in their domestic currencies, they will store some of their liquid assets in safe haven currencies like the dollar, propping up their value. In stressful times, there will be even more demand for safe haven currencies, leading to their appreciation.
350. Standard & Poor's (S&P) is a United States-based financial services company. One of the services S&P provides is to issue credit rankings for the debt of all public and private corporations. The highest credit ranking it issues is AAA, which indicates a very high level of confidence and a very low level of risk in investments. In August 2011, S&P downgraded the credit rating on U.S. government bonds from AAA to AA. What impact would this likely have had on the value of the U.S. dollar in foreign exchange markets? Explain. ANSWER: Any increase in perceived risk will move investors away from an asset. The credit downgrade shifted the demand curve for U.S. government bonds to the left, which meant the demand for dollars also shifted to the left. Everything else equal, the dollar would have lost value against most other currencies.
351. Explain the law of one price. ANSWER: The law of one price says that identical goods sold in different places would sell at the same price when a common currency is used in each place. If prices were different, goods would flow from the location with the lower price to that with the higher price. The law fails to hold to the extent that markets are imperfect, prices are not flexible, or there are trade restrictions. The law would also fail to hold for goods that cannot be easily traded, like real estate and many services.
352. The United States and Kenya are trading partners for a variety of goods and services, and the nominal exchange rate between the United States and Kenya is $1 = 80 Kenyan shillings. If a burger in the United States costs $1 and a burger in Kenya costs 80 shillings: a. What is the real exchange rate? b. Suppose there is inflation in Kenya and the cost of the same burger rises to 160 Kenyan shillings so that $1 can now purchase only half a burger in Kenya. Can you explain how PPP will hold in the long run? (Ignore transportation costs, tariffs, etc.) ANSWER: a. The $1 needed to buy a burger in the United States can also buy 80 Kenyan shillings, which is the amount needed to buy a burger there. The real exchange rate is, therefore, 1:1. b. The inflation in Kenya will lower the value of the shilling. Eventually, the nominal exchange rate will rise to $1 = 160 Kenyan shillings, restoring the real exchange rate and PPP.
353. Explain the difference between the nominal exchange rate and the real exchange rate. ANSWER: The nominal exchange rate is the rate at which you can exchange one currency for another. The real exchange rate is the rate at which you can exchange the goods and services of one country for the goods and services of another. The nominal exchange rate reflects the supply of and demand for different currencies in foreign exchange markets. The real exchange rate, after adjusting for the costs of trading goods and services, should be about 1:1, reflecting the law of one price. This may not hold when it is difficult to trade certain goods or in the presence of trade barriers.
354. What would the purchasing power parity theorem predict about the real purchasing power of the U.S. dollar in Mexico? Why does this theorem not appear to hold in this case? ANSWER: The purchasing power parity theorem predicts that the real purchasing power of the dollar and the peso will be equal in the long run. The reality is that services are difficult to import and export, and there are restrictions on labor movement. The wage disparity between the two countries means services are cheaper in Mexico. There is free trade between the countries as far as tariffs and quotas are concerned, but there are still transportation barriers that can prevent full equalization of prices. Copyright Macmillan Learning. Powered by Cognero.
Page 71
Name:
Class:
Date:
Chapter 20 355. Why is it unreasonable to expect purchasing power parity to be fully achieved? ANSWER: At least three constraints on trade prevent prices from being fully equalized across borders. If transportation costs are high, disparities in prices may continue. Some goods, for instance real estate, cannot be shipped at all, so similar houses in two countries may have very dissimilar prices. Finally, tariffs and quotas prevent arbitrageurs from moving goods around and eliminating price differences.
356. Explain how an exchange rate effect enhances the effectiveness of expansionary monetary policy but limits the effectiveness of expansionary fiscal policy. ANSWER: Expansionary monetary policy will depreciate the domestic currency, lowering the price of domestically produced goods and services for foreign customers. Exports rise and the aggregate demand curve shifts to the right. Short-run equilibrium is at a higher output level. Expansionary fiscal policy means either more government borrowing or less government savings. Either will raise domestic interest rates, which makes the capital account more positive as foreign investors take advantage of the higher rates. This leads to an appreciation of the currency, with the current account going more negative to offset the capital surplus. It is possible that the change in net exports equals the change in government spending in magnitude, with the two canceling each other out.
357. Figure: AD–AS Diagram
The country in this diagram begins in equilibrium as shown and experiences a decrease in money supply. a. What is the short-run effect on net exports and the overall economy? Show your answer graphically. b. If this country does not subsequently engage in monetary policy to counter the effects of the initial decrease in money supply, what will happen to the economy in the long run? Show your answer graphically.
Copyright Macmillan Learning. Powered by Cognero.
Page 72
Name:
Class:
Date:
Chapter 20 ANSWER:
Copyright Macmillan Learning. Powered by Cognero.
Page 73
Name:
Class:
Date:
Chapter 20 358. Suppose an aggregate demand shock has led to a recession. The government decides to use either monetary policy or fiscal policy to deal with the recession. Which policy tends to be more effective in an open economy: monetary policy or fiscal policy? Explain your answer. ANSWER: Monetary policy would be more effective. An increase in the money supply would lead to a depreciation of the dollar, boosting net exports and shifting the aggregate demand curve to the right. A fiscal stimulus would lead to more government borrowing or less government saving, either of which would raise interest rates. That would lead to higher demand for the dollar, capital inflow, and appreciation. Appreciation would reduce net exports, offsetting or negating the fiscal stimulus.
359. Using an AD–AS diagram, explain how an increase in the money supply by the Federal Reserve will cause the value of the U.S. dollar to change and affect the economy in both the short run and the long run.
Copyright Macmillan Learning. Powered by Cognero.
Page 74
Name:
Class:
Date:
Chapter 20 ANSWER:
Copyright Macmillan Learning. Powered by Cognero.
Page 75
Name:
Class:
Date:
Chapter 20 360. "Expansionary monetary policy can be used to reduce a country's trade deficit in the short run, but not in the long run." Explain this statement. ANSWER: Expansionary monetary policy depreciates the currency, leading to increased exports, which are now cheaper for foreign buyers, and decreased imports, which are now more expensive for domestic buyers. This drop in the trade deficit is a short-run phenomenon since the increase in the money supply will also fuel inflation. As inflation rises, the nominal exchange rate may not change, but inflation will push the real exchange rate back to its original level and the trade deficit will return.
361. What can explain the positive relationship between a country's high government budget deficits and high trade deficits? ANSWER: A government budget deficit typically means the government will borrow more, which pushes interest rates up. This attracts foreign investors and increases the demand for the dollar, resulting in appreciation. This lowers the price of imports and raises the price of exports, the result being a higher trade deficit.
362. Beginning in 1995, many European nations gave up their own currencies and adopted the euro as a common currency under the supervision of the European Union. Explain one major advantage and one major disadvantage to a group of countries adopting a common currency and setting up a currency union. ANSWER: Answers will vary, but the most obvious benefit is the elimination of currency exchange charges. The disadvantages include the loss of an independent monetary policy and tensions stemming from the possibility of different situations in euro-zone countries in which one group of countries wants loose monetary policies and another group wants tighter policies.
363. Explain the difference between a floating exchange rate, a fixed exchange rate, and a dirty float. ANSWER: A floating exchange rate, the most common choice, relies on the market forces of supply and demand to determine the price of one currency in terms of another. There are typically minor fluctuations in the price each day, but daily volatility is usual low. If the currency is truly floating, the central bank plays no role in determining its value. A central bank can determine a fixed, or pegged, exchange rate, which is not necessarily reflective of the supply or demand of the currency. With a peg, the central bank must be prepared to buy or sell the currency if market forces affect its value. There must be sufficient reserve currencies available to support a fixed rate if markets push its value down. If the currency cannot be supported at the fixed rate, there will eventually be a—usual painful—devaluation. A dirty float is a float designed to stay within a certain range. Central banks will intervene if the exchange rate moves outside this range but will typically play no active role if the currency's value is fairly stable.
364. What are some of the concerns regarding the International Monetary Fund (IMF) and the World Bank? ANSWER: Critics claim that the IMF has encouraged contractionary macroeconomic policies when expansionary policies were called for. Defenders of the IMF have argued that the advice is more subtle than is often portrayed, that tough fiscal reforms are sometimes needed, or that borrowing countries do not in fact follow the advice, regardless of whether it is good advice or not. Critics of the World Bank claim that the Bank does not pay enough attention to results because it has a commercial incentive to make many loans. The lent funds first go to governments and then they often are used to purchase goods and services from Western companies. The World Bank makes money off its loans, so perhaps not enough attention is paid to whether those projects deliver their promised benefits. Defenders note that the Bank has responded to criticism in the past, improved its environmental record, and avoided many previous mistakes. The IMF and the World Bank attract so much attention because they are seen as icons of global capitalism. Furthermore, both groups hire many technocrats, and neither is subject to direct accountability through democratic rule. They seem to stand above national borders and make decisions, while reporting to no one. They encourage poor countries to borrow money, and those debts cannot always be repaid.
Copyright Macmillan Learning. Powered by Cognero.
Page 76
Name:
Class:
Date:
Chapter 21 1. Which of these statements is FALSE? a. Economists support free and competitive markets. b. Economists are skeptical about price controls and tariffs. c. Economists favor command and control regulation. d. Economists oppose superhigh inflation rates. ANSWER: c 2. Which of these statements is TRUE? a. Rational ignorance exists only in politics. b. Rational ignorance still leads to an efficient outcome. c. It never makes sense for individuals to be rationally ignorant. d. Rational ignorance is bad because it leads to uninformed voters making decisions. ANSWER: d 3. Which of these statements is FALSE? a. The root cause of mass starvation is a lack of food. b. Most mass starvations have been intentional. c. Mass starvation is less likely in democracies. d. Greater political competition is associated with higher levels of food distribution. ANSWER: a 4. Which of these statements is TRUE? a. Small groups are less likely to favor efficient policies than large groups are. b. The larger the group, the more likely it will favor special interests rather than economic growth. c. Quasi-democracies prefer a highly educated population because they are more accepting of the leadership's policies. d. Oligarchies tend to use the print media to inform public debate and encourage political competition.
ANSWER: a 5. Which of these statements is FALSE? a. Democracies have a good record for economic growth. b. Small nondemocratic elites are more likely to consider the welfare of larger groups. c. Democracies tend to uphold private property rights and rule of law. d. The incentives of small nondemocratic elites may help to keep their nations poor. ANSWER: b 6. What is a reason that markets should be free and unregulated? a. bad incentives b. some people ignoring ethical values in making market decisions c. politicians' election agendas d. good incentives Copyright Macmillan Learning. Powered by Cognero.
Page 1
Name:
Class:
Date:
Chapter 21 ANSWER: d 7. An abstract from a recent economics paper reads as follows: We explore whether presidential and congressional influences affect the rate of disaster declaration and the allocation of FEMA (Federal Emergency Management Agency) disaster expenditures across states. We find that states politically important to the president have a higher rate of disaster declaration by the president (which is necessary to receive FEMA funding). This research is an example of: a. political economics. b. civil reasoning. c. public choice. d. myopic rationality. ANSWER: c 8. Public choice is a field of study that: a. looks at the consumption choices made by people who are near retirement. b. uses economic tools to examine political behavior. c. uses mathematics and statistics to infer relationships between two or more variables of public interest. d. analyzes trends in population growth and other structural changes in the population. ANSWER: b 9. Public choice is the study of: a. how choices are made without economic theory. b. how the general public is affected by government policies. c. the irrational behavior of individuals. d. political behavior in the context of economics. ANSWER: d 10. Behavior symmetry is the idea that: a. institutions are the same, but people differ. b. government agencies behave the same. c. institutions differ, but people are the same. d. politicians behave the same. ANSWER: c 11. The study of political behavior using the tools of economics is: a. public policy. b. public choice. c. regulatory economics. d. political economics. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 2
Name:
Class:
Date:
Chapter 21 12. Rational ignorance occurs when: a. full information is not available. b. the benefit of becoming fully informed is lower than the cost. c. the cost of information is low. d. there is no benefit to gathering additional information. ANSWER: b 13. Which of these is an example of rational ignorance? a. Glenda chooses to purchase a new CD at the store 1 mile from her home instead of driving all over town to see if she can find a lower price. b. Bob chooses not to vote, since his vote will never swing the outcome of an election.
c. ABC Corporation chooses to hire local workers instead of outsourcing jobs to another country. d. Jane decides not to study for her test tomorrow even though studying could raise her grade significantly. ANSWER: a 14. When the costs of being informed are higher than the benefits of being informed, this is known as: a. informed ignorance. b. negative net benefits. c. irrational ignorance. d. rational ignorance. ANSWER: d 15. Which of these is an example of rational ignorance? a. Richard buys the same kind of toilet paper every week at the grocery store regardless of its price. b. Bella spends hours researching presidential candidates to improve the quality of her vote. c. Jerrod does not study for his economics test because it is only worth 20% of his grade. d. Gracella commutes 30 minutes to work because her wage is $5 per hour higher than if she worked closer to home.
ANSWER: a 16. Arguably, one of the BEST ways to explain why Americans seemingly know very little about current government policies or the state of the economy is that: a. the quality of American education is poor. b. this information is not readily available to the general public. c. the time and resources it costs to attain and process this information is more than the benefit received from having this information. d. people are irrationally ignorant.
ANSWER: c 17. Which of these is one of the smallest parts of the U.S. budget? a. defense b. interest on the federal debt Copyright Macmillan Learning. Powered by Cognero.
Page 3
Name:
Class:
Date:
Chapter 21 c. foreign aid d. welfare ANSWER: c 18. Which of these is one of the largest parts of the U.S. budget? a. defense b. interest on the federal debt c. foreign aid d. welfare ANSWER: a 19. Which is one of the smallest parts of the U.S. budget? a. defense b. interest on the federal debt c. Social Security d. welfare ANSWER: d 20. Which is one of the largest parts of the U.S. budget? a. foreign aid b. interest on the federal debt c. Social Security d. welfare ANSWER: c 21. A woman approached Senator Adlai Stevenson when he was running for president, saying, "Senator, you have the vote of every thinking person!" The senator is often credited with responding, "That's not enough, madam, we need a majority!" Which concept does this quip BEST reflect? a. rational ignorance b. opportunity cost c. diffuse costs and concentrated benefits d. median voter theorem ANSWER: a 22. Rational ignorance is important to understand because: a. uninformed voters are highly likely to make good voting decisions. b. voters who are rationally ignorant are more likely to vote. c. political decisions may be made based on the information known by those who have a vested interest in the decision. d. voters who are rationally ignorant will make decisions based on high-quality, reliable, and accurate information.
ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 4
Name:
Class:
Date:
Chapter 21 23. In 2010, an unemployed U.S. Army veteran named Alvin Greene won the Democratic primary for the South Carolina Senate race. At the time of his victory, Greene had raised no money, had done no visible campaigning, had no website, and had not attended the state party's convention. There was no evidence of fraud. Two explanations for his victory involve his name: (1) Greene is a popular last name among African Americans, which encouraged African American voters to support him at the ballot, and (2) Greene's name appeared above his opponent's name, Vic Rawl, which encouraged voters uninformed about either candidate to vote for Greene. How does Greene's victory illustrate rational ignorance? a. Greene did not make it easy for voters to learn about him. b. Voters supported the candidate that they knew the least about. c. Voters had little incentive to learn about either candidate. d. Voters strongly empathize with an army veteran, though that has little to do with being a senator. ANSWER: c 24. In The Distinguished Gentleman, Eddie Murphy plays a con man with a name similar to that of a longrunning congressional representative. When the politician dies, Murphy runs for office using the politician's name: Jeff Johnson. He's careful not to go on camera but uses taglines in commercials such as "Johnson: The name you trust." He eventually achieves a slim victory. How does Murphy's character use voter ignorance to win the election? (Hint: The answer is only slightly different than the way most politicians use voter ignorance to win elections.) a. He's expecting most voters not to know that their congressman died. b. He's expecting most voters not to investigate him too much. c. He's expecting that most people won't remember his campaign promises. d. He's expecting most voters to neither investigate him too much nor know that their congressman died. ANSWER: d 25. Why do some voters choose to be rationally ignorant? a. The cost of informing themselves about candidates and policies is greater than the benefits. b. They get distracted with life and never get around to searching for the relevant information. c. Their parents and peers largely influence voters' preferences. d. Reduced public school funding has meant less money spent on teaching civic classes. ANSWER: a 26. The incentive to inform oneself before an election is: a. high because every vote counts, especially in a democracy. b. high because it's important for a civil society to be civically engaged. c. low because one's own vote has virtually no chance of affecting the outcome of an election. d. high because the outcome of an election has lasting consequences. ANSWER: c 27. Which of these government programs is the largest in terms of spending? a. health care b. defense Copyright Macmillan Learning. Powered by Cognero.
Page 5
Name:
Class:
Date:
Chapter 21 c. foreign aid d. welfare ANSWER: b 28. Ignorance is: a. rational only in extreme cases. b. never rational. c. always rational. d. sometimes rational. ANSWER: d 29. If the benefits of informing oneself are greater than the costs, then ignorance is: a. rational. b. irrational. c. not beneficial. d. not costly. ANSWER: b 30. If the costs of informing oneself are greater than the benefits, then ignorance is: a. rational. b. irrational. c. not beneficial. d. not costly. ANSWER: a 31. Rational ignorance occurs when people are not knowledgeable of something because: a. those people have no incentives to learn anything. b. the benefits of being informed are less than the cost of becoming informed. c. they are simply irrational. d. they are self-centered and lack the ability to learn. ANSWER: b 32. According to public choice theory, people do not always make informed choices because: a. the incentives to become informed are low compared with the costs of being informed. b. they are ignorant by nature. c. they are irrational, so their decisions are not predictable. d. they believe that making informed choices is a task only for the government. ANSWER: a 33. According to the text, popular surveys about government programs show evidence that the majority of American voters are: Copyright Macmillan Learning. Powered by Cognero.
Page 6
Name:
Class:
Date:
Chapter 21 a. perfectly rational. b. irrational. c. rationally ignorant. d. well informed about all government programs. ANSWER: c 34. In which of these decisions is a person likely to be rationally ignorant? a. deciding which car to buy b. deciding where to live c. deciding which mayoral candidate to vote for d. deciding which television show to watch ANSWER: c 35. It is rational to be ignorant when: a. the benefits of the information outweigh the costs of acquiring the information. b. the costs of becoming informed are greater than the benefits of being informed. c. one has limited mental capacity. d. dollars or profits do not matter. ANSWER: b 36. The government spends more on foreign aid than on: a. health care. b. welfare. c. Social Security. d. None of the answers is correct. ANSWER: d 37. The two largest sources of government spending are: a. defense and foreign aid. b. welfare and foreign aid. c. interest on debt and Social Security. d. defense and Social Security. ANSWER: d 38. Rational ignorance cannot be seen in which of these scenarios? a. A student has a final exam in exactly three hours. He knows from past experience that without at least some
sleep he will be useless on the exam. In spite of the fact that he still has four chapters to read for the exam, he decides to sleep for 2.5 hours. b. You are a worker looking for work in a recessionary environment. You get a phone interview after which you are offered a job and have to start the next day. To secure a paycheck, you accept without doing any further research on the company. c. You have to fly urgently. You buy the first ticket available and it is expensive, but you pay anyway because you do not have time to research other flights.
Copyright Macmillan Learning. Powered by Cognero.
Page 7
Name:
Class:
Date:
Chapter 21 d. You have to fly urgently; however, you do extensive research for over an hour to find the best deal. ANSWER: d 39. Which of these BEST explains the term "rational ignorance"? a. It is the decision to search for and acquire information only if there is enough time. b. It is the decision to stay uninformed on certain topics because of the prohibitive cost of gathering information. c. It is the decision to ignore free information that is vital in making the correct decision. d. It is the rational weighing of costs versus benefits. ANSWER: b 40. Why do you think voters choose to be rationally ignorant even when it is time to elect a new president? a. Voters are not presented with enough information to make a rational decision. b. Voters often believe that their vote will make more of a difference in the political process than it actually will. c. The process of understanding the electorate system and the candidates' platforms and critically assessing the candidates' policies takes up more of the voter's time than it is worth. d. The process of understanding the electorate system and the candidates' platforms and critically assessing the candidates' policies is a worthwhile use of the voter's time.
ANSWER: c 41. Which of these statements seems to be that of a rationally ignorant person? a. I am not sure which of the soups are more nutritious and I'm in a hurry, so I will opt for the one with more vegetables in it. b. I always compare prices and buy the good at the store where it has been priced the cheapest.
c. I don't know much about the candidate's views on defense, but he has better charisma than she does and so I will vote for him. d. The male candidate has a much softer defense strategy than the female candidate, so I have decided to vote for her.
ANSWER: a 42. Let's check on whether you are rationally ignorant. Which of these items is the biggest expenditure in the federal government's budget? a. Social Security b. welfare c. foreign aid d. health care ANSWER: a 43. Let's check on whether you are rationally ignorant. Which of these items is the smallest in terms of government expenditure? a. Social Security b. welfare c. foreign aid d. health care Copyright Macmillan Learning. Powered by Cognero.
Page 8
Name:
Class:
Date:
Chapter 21 ANSWER: c 44. Let's check on whether you are rationally ignorant. Which of these items is the biggest in terms of government expenditure? a. defense b. welfare c. foreign aid d. health care ANSWER: a 45. Rational ignorance in voting comes from: a. externalities that lead to an excess supply of information. b. the limited incentive of the news media to cover political campaigns. c. the expectation of individual voters that their vote will not be decisive. d. the lack of a college education on the part of most voters in the United States. ANSWER: c 46. MOST voters will tend to be concerned with: a. most issues, since most issues have some impact, however slight, on each citizen. b. most issues, since information on most issues can be obtained at a low cost. c. only a few special issues (those that have the most impact on the voters' personal welfare). d. the views of a particular political candidate on all issues. ANSWER: c 47. Rational ignorance refers to the: a. lack of incentive voters have to become well informed about candidates and issues because their vote is
unlikely to affect the outcome of an election. b. problem of not enough information being supplied to voters because politicians are not spending enough on campaign ads to inform voters of their positions on issues. c. fact that most people choose to become just as well informed when making choices as consumers as they do when making choices as voters. d. lack of rational analysis on the part of voters when they choose not to become informed about candidates and issues even though this knowledge would produce great personal benefit to them.
ANSWER: a 48. People who spend more time and effort investigating the advantages and disadvantages of different smartphones than they do investigating the strengths and weaknesses of presidential candidates are saying, in effect, that: a. they do not think it matters who is elected president. b. they are irrational because the choice of a president is obviously far more important than the choice of a smartphone. c. a good smartphone is more important to their well-being than a good president.
d. they expect to use the information on the merits of smartphones to a greater personal advantage than they could the information on the merits of alternative presidential candidates.
Copyright Macmillan Learning. Powered by Cognero.
Page 9
Name:
Class:
Date:
Chapter 21 ANSWER: d 49. People who spend more time and effort investigating the advantages and disadvantages of different nutritional supplements than they do investigating the strengths and weaknesses of candidates for the Senate are saying, in effect, that: a. they do not think it matters who is elected senator. b. they are irrational because the choice of a senator is obviously far more important than the choice of alternative nutritional supplements. c. a good nutritional supplement is more important to their well-being than a good senator.
d. they expect to use the information on the merits of alternative nutritional supplements to a greater personal advantage than they could the information on the merits of alternative senatorial candidates.
ANSWER: d 50. Which of these will be the MOST likely outcome if a college professor awards grades based on average test scores and assigns the same grade to everyone in the class? a. Students will collaborate to get better grades and achieve higher payoff. b. Students will study more because studying has a higher payoff. c. Students will study less because studying has a lower payoff. d. Students will study the same amount as they did before because their scores will still impact the average scores.
ANSWER: c 51. Ignorance is rational when the benefits of being informed are: a. greater than the costs of becoming informed. b. less than the costs of becoming informed. c. equal to the costs of becoming informed. d. likely to be quite large but information is costless. ANSWER: b 52. Studying politics doesn't pay because the outcome of any election: a. is mostly determined by what other people do, not by what you do. b. is mostly determined by what you do, not by what other people do. c. is always inconsistent with the expectation. d. can be manipulated by politicians. ANSWER: a 53. Economists say that voters are rationally ignorant about politics because: a. the procedure of learning politics is too cumbersome. b. politics is too complicated. c. the opportunity cost of studying politics is too high. d. the incentives to be fully informed are low. ANSWER: d Copyright Macmillan Learning. Powered by Cognero.
Page 10
Name:
Class:
Date:
Chapter 21 54. Which of these programs are the two largest sources of the U.S. government budget? a. welfare and foreign aid b. defense and interest on the federal debt c. health care and Social Security d. defense and Social Security ANSWER: d 55. Rational ignorance: a. makes it difficult for voters to make informed decisions regarding government intervention in the economy. b. may cause voters to give credit to or blame politicians for things not under their control. c. may allow special interest groups to take advantage of the uninformed. d. All of these possibilities are correct. ANSWER: d 56. Why is rational ignorance important from an economic standpoint? a. Voters will always make informed choices. b. Voters will make decisions based on accurate and complete information c. Special interest groups lack control of economic outcomes, even if they are the only ones who are not rationally ignorant. d. Voters might not make informed choices and might make decisions based on incorrect or incomplete information.
ANSWER: d 57. Which of these is MOST likely the result of rational ignorance? a. Democrats get elected more often than Republicans. b. Older people tend to vote more often than younger people. c. Better-looking candidates tend to get more votes. d. More candidates tend to enter the political race when there is not an incumbent running. ANSWER: c 58. Which of these statements is TRUE? a. Rationally ignorant people may favor price controls because they receive biased information. b. Rationally ignorant people can take advantage of the rationally informed by supporting policies that transfer wealth from the informed to the ignorant. c. Rational ignorance never leads voters to have mistaken beliefs about the state of the economy.
d. Rationally ignorant people always receive unbiased information. ANSWER: a 59. Ignorance about political matters is important for the economy for each of these reasons EXCEPT: a. ignorance makes it easier for special interest groups to affect government policy outcomes. b. ignorance makes it difficult for voters to make informed economic decisions. c. rationally ignorant voters tend to make economic decisions on the basis of poor or biased information. Copyright Macmillan Learning. Powered by Cognero.
Page 11
Name:
Class:
Date:
Chapter 21 d. everyone is rationally ignorant, so no one in society will make appropriate economic decisions. ANSWER: d 60. Which of these is NOT the reason why ignorance about political matters is important? a. It is difficult for voters to make informed choices if they are not well informed. b. Voters who are rationally ignorant will often make decisions for irrational reasons. c. Voters who are well informed perceive politics as entertainment. d. Rational ignorance matters because not everyone is rationally ignorant. ANSWER: c 61. Which of these statements is TRUE? a. Special interest groups lack power because voters are always well informed about how laws designed to help special interest groups are harmful to everyone else. b. Special interest groups lack power because they have social interest in passing favorable legislation.
c. Special interest groups are powerful both because voters are rationally ignorant about how laws designed to help special interest groups are harmful to everyone else, and because they have self-interest in passing favorable legislation—they stand to gain millions of dollars, while each taxpayer loses only several dollars. d. Special interest groups are powerful, even though they stand to gain very little.
ANSWER: c 62. Sugar quotas: a. are not an issue in the United States despite rationally ignorant voters. b. harm U.S. sugar farmers at the benefit of the candy and soda industry. c. cost the typical family about $6 per year but provide millions of dollars of benefits to Florida sugar producers. d. lead to lower prices and increased output, and thus are opposed by the sugar industry. ANSWER: c 63. Sugar quotas are an example: a. of sugar producers being rationally ignorant. b. showing that special interests have an incentive to be informed. c. of special interests being political. d. showing that sugar producers are wealthy. ANSWER: b 64. The Fanjuls are: a. sugar barons who give considerable money to politicians who make decisions on sugar quotas. b. a consumer advocacy group attempting to ban special interest groups. c. a new political party based on the opposition to special interest politics. d. free traders who propose doing away with all tariffs. ANSWER: a 65. The Fanjul brothers are: Copyright Macmillan Learning. Powered by Cognero.
Page 12
Name:
Class:
Date:
Chapter 21 a. both Democrats. b. a Democrat and a Republican. c. both Republicans. d. both registered as Independents. ANSWER: b 66. The Fanjul brothers donate to the: a. Democratic Party. b. Democratic Party and the Republican Party. c. Republican Party. d. American Independent Party only. ANSWER: b 67. Special interest groups have an incentive to be: a. rationally ignorant. b. rationally informed. c. free riders. d. forced riders. ANSWER: b 68. Suppose the government is considering a proposal for a new chicken subsidy. Growers of chickens stand to gain approximately $25 million in government funds over the next year if the proposal passes. The money, however, will come from increased taxes on consumers of chicken (a new "chicken tax"). If there are approximately 100 million consumers in the chicken market each year, how much would each be willing to spend, on average, to contest the chicken tax? a. $25 million b. $100 c. $25 d. $0.25 ANSWER: d 69. Which of these statements is TRUE? a. Sugar producers are rationally informed and sugar consumers are rationally ignorant, because the quota
system has a large effect on sugar industry profits. b. Sugar producers know less about sugar quotas than do sugar consumers because the quota system has only a small effect on sugar industry profits. c. When it comes to sugar trade policy, sugar producers are rationally ignorant and sugar consumers are rationally informed. d. Sugar consumers pay higher prices because of sugar quotas, a sufficient incentive for them to campaign against politicians that favor quotas.
ANSWER: a 70. In September 2009, President Obama placed high tariffs on imported tires from China. Why did he do this? Copyright Macmillan Learning. Powered by Cognero.
Page 13
Name:
Class:
Date:
Chapter 21 a. Reducing imports from China would make America more prosperous. b. The costs of the tariffs would be small compared with the benefits of saving American jobs. c. Tariffs would lower tire prices, which was especially important with the high unemployment at the time. d. Although the policy harmed the consumers of tires, the policy directly benefited the United Steelworkers, a
special interest group that provides political support to the Democratic Party, of which President Obama was a member.
ANSWER: d 71. Corn producers are lobbying to Congress for a price floor on the price of corn that will cost each American $3 each year in higher grocery prices. Corn producers expect to gain $66,000,000 each year due to the price floor. If there are 330,000,000 people in the United States, each American would be willing to pay _____ to oppose the price floor. a. $3.00 b. $2.00 c. $0.20 d. $1.00 ANSWER: a 72. The U.S. federal government _____ the amount of sugar entering the country. a. increases b. does not influence c. reduces d. does not track ANSWER: c 73. The primary policy affecting the U.S. sugar market is a(n): a. import quota. b. subsidy. c. local content requirement. d. tariff. ANSWER: a 74. Who will likely have the most incentive to be rationally informed about the effect of government policy on the price of sugar? a. sugar consumers b. sugar producers c. the president of the United States d. taxpayers ANSWER: b 75. An issue that generates substantial benefits to a small group of individuals while imposing a small cost on many others is called a: Copyright Macmillan Learning. Powered by Cognero.
Page 14
Name:
Class:
Date:
Chapter 21 a. nonissue. b. special interest issue. c. popular issue. d. minority issue. ANSWER: b 76. Which of these statements is NOT true about the sugar quota imposed by the U.S. government? a. Although sugar consumers are harmed by the quota, few of them even know of the quota's existence. b. Sugar consumers wouldn't spend much time or effort to oppose the sugar quota even if they know about it. c. Sugar producers are rationally informed and would seek to sustain the quota. d. The quota is imposed to protect both sugar consumers and producers. ANSWER: d 77. Special interest groups have a large incentive to be _____ about legislation that benefits them directly, whereas voters tend to be _____ regarding these issues. a. rationally informed; irrationally informed b. rationally ignorant; irrationally ignorant c. rationally informed; rationally ignorant d. irrationally informed; rationally ignorant ANSWER: c 78. Special interest groups tend to be able to influence legislation that is beneficial to them because: a. voters have an incentive to oppose the legislation. b. the costs for voters opposing the legislation are higher than the benefits. c. special interest groups have rational ignorance. d. special interest groups have an incentive to educate voters. ANSWER: b 79. Which of these BEST explains why special interest groups maintain so much power in the U.S. political process? a. Special interest groups typically represent the largest U.S. companies, so they get a lot of media attention. b. Special interest groups stand to gain millions if particular laws are passed and lobby very hard for them, whereas voters stand to lose only a little and don't find opposing them worth their effort. c. Both special interest groups and voters lobby politicians hard regarding certain legislation; however, special interest groups typically win out because they have more money. d. Special interest groups have been powerful in the past because of their ties to wealth; however, their power has been dwindling in recent years.
ANSWER: b 80. One way to achieve political success is to: a. concentrate costs and diffuse benefits. b. concentrate benefits and costs. Copyright Macmillan Learning. Powered by Cognero.
Page 15
Name:
Class:
Date:
Chapter 21 c. concentrate benefits and diffuse costs. d. diffuse costs and benefits. ANSWER: c 81. Policy A adversely affects 50 million people at a cost of $1 per person. But policy A also benefits 1,000 people at $30,000 per person. Which of these statements is TRUE? a. Policy A will not become law because it hurts more people than it helps. b. Policy A concentrates all the costs among a small group of people and all the benefits among a large group of people. c. Policy A is likely to be supported by politicians even though it makes society worse off.
d. Because policy A negatively affects many people, rational ignorance will not be a problem. ANSWER: c 82. With respect to the sugar quota, the people who are harmed are _____, and the people who benefit are _____. a. rationally informed; rationally ignorant b. rationally informed; irrationally ignorant c. rationally ignorant; rationally informed d. rationally ignorant; irrationally informed ANSWER: c 83. The political power of farmers _____ as the share of farmers in the population decreased because the benefits from farm subsidies became _____ concentrated. a. increased; less b. increased; more c. decreased; less d. decreased; more ANSWER: b 84. The costs of many government projects (such as bridges, roads, and museums) create: a. external costs because taxpayers around the country pay for the construction. b. internal costs because taxpayers around the country pay for the construction. c. internal benefits because all taxpayers benefit from the construction. d. external benefits because taxpayers around the country benefit from the construction. ANSWER: a 85. The "Bridge to Nowhere": a. cost the local community about $35,000 per person. b. is a special case in which special interests can maximize society's well-being. c. would have created large external costs, an example of the inefficient projects proposed by self-interested politicians. d. connects Key West, Florida to the mainland.
Copyright Macmillan Learning. Powered by Cognero.
Page 16
Name:
Class:
Date:
Chapter 21 ANSWER: c 86. The diffusion of costs and concentration of benefits: a. leads to rationally informed voters. b. does not apply to the sugar industry. c. does not affect the political process. d. leads to rational ignorance on the part of the voters, is the formula to which the sugar quota owes its existence, and is a formula for reelection to political office.
ANSWER: d 87. In the public sector, politicians: a. pursue primarily the general public interest, since competition is less intense in the public sector. b. pursue primarily the general public interest, since they are concerned mostly with the collective good. c. act in the narrow self-interest of their constituents and contributors to remain in office. d. respond to the broader active political interests even though they choose to be rationally ignorant. ANSWER: c 88. Which of these provides the MOST reasonable explanation for why agricultural interests lobby for higher farm subsidies and price supports? a. Agricultural interests seek a redistribution of income favoring themselves. b. Price support programs reduce food costs, which helps the poor. c. Subsidies promote the efficient use of agricultural resources. d. Without the farm subsidies, food shortages would result. ANSWER: a 89. The key formula for political success behind the sugar quota is: a. diffused costs and concentrated benefits. b. diffused benefits and concentrated costs. c. diffused costs and diffused benefits. d. concentrated costs and concentrated benefits. ANSWER: a 90. Which of these explains why the sugar quota is a winning policy for politicians? a. The people who are harmed by the quota are rationally informed. b. The people who are harmed by the quota have strong incentive to oppose the policy. c. The people who benefit from the quota are rationally ignorant. d. The people who benefit from the quota have strong incentive to support the policy. ANSWER: d 91. The political power of farmers has _____ as the share of farmers in the population has _____. a. decreased; increased b. decreased; decreased Copyright Macmillan Learning. Powered by Cognero.
Page 17
Name:
Class:
Date:
Chapter 21 c. increased; increased d. increased; decreased ANSWER: d 92. Which of these explains why the sugar quota is a winning policy for politicians? a. The people who are harmed by the quota are rationally ignorant. b. The people who are harmed by the quota have strong incentive to oppose the policy. c. The people who benefit from the quota are rationally ignorant. d. The people who benefit from the quota are too small in number to influence the outcome of elections. ANSWER: a 93. Which of these public policies does NOT fit the diffused costs and concentrated benefits story? a. agricultural subsidies b. minimum wage c. price supports d. trade quota and tariffs ANSWER: b 94. As part of the American Recovery and Reinvestment Act, $7 million was earmarked to build a bridge over a railroad crossing so that 168 Nebraska town residents wouldn't have to wait for the trains to pass. Which of these BEST explains why this proposal was passed? a. The benefits were highly diffused, while the costs were very concentrated. b. The costs were highly diffused, while the benefits were very concentrated. c. The costs were external, while the benefits were internal. d. The total benefit of the bridge was greater than the total cost. ANSWER: b 95. When benefits are highly concentrated but costs are diffused across a large number of people: a. the market tends to overproduce these goods. b. the market tends to underproduce these goods. c. the government tends to overproduce these goods. d. the government tends to underproduce these goods. ANSWER: c 96. In 2011, police in Appleton, Wisconsin, shut down a lemonade stand run by two young girls. The girls, who live near the venue for the annual Appleton Old Car Show, were subject to a recent ordinance that barred anyone from selling products within a two-block radius of local events. Local alderman Peter Stueck defended the law, saying, "It's certainly not that Appleton is against little girls setting up their cookie and lemonade stands. But the overall intent of the ordinance was to protect the vendors at these events." Which concept BEST explains why this law had support to begin with? a. diffuse costs and concentrated benefits b. median voter theorem Copyright Macmillan Learning. Powered by Cognero.
Page 18
Name:
Class:
Date:
Chapter 21 c. voter myopia d. rational ignorance ANSWER: a 97. Much to the chagrin of some Americans, conventional light bulbs were effectively banned in 2014, leaving only compact florescent lights (CFLs) on store shelves. The ban was encouraged, in part, by the makers of the more expensive CFLs. Which concept is BEST captured in this story? a. rational ignorance b. opportunity cost c. diffused costs and concentrated benefits d. median voter theorem ANSWER: c 98. Although many people, from economists to environmentalists, oppose ethanol subsidies on the grounds that ethanol is inefficient and harms the environment, politician Mitt Romney once said, "I support the subsidy of ethanol. I believe it's an important part of our energy solution in this country." Why does Mr. Romney support ethanol subsidies? a. Mr. Romney's support of ethanol subsidies is not only in his self-interest but also in the public's interest. b. Most of the people harmed by the subsidies are rationally ignorant and thus do not oppose the policy. c. Mr. Romney's support of ethanol subsidies is not only in his self-interest but also in the public's interest. d. The benefits of the subsidy are spread out over thousands of producers. ANSWER: b 99. Politicians have a strong incentive to support projects even when their costs outweigh their benefits if: a. the costs are concentrated among a small group and the benefits are widely dispersed across taxpayers. b. the costs of the project are spread widely across taxpayers and the benefits are spread widely across taxpayers. c. all voters and taxpayers are perfectly informed.
d. the costs of the project are spread widely across taxpayers and the benefits are concentrated on a small group.
ANSWER: d 100. Policies with _____ benefits but _____ costs will often not be funded even if the benefits are greater than the costs. a. diffused; concentrated b. diffused; diffused c. concentrated; concentrated d. concentrated; diffused ANSWER: a 101. Policies with _____ benefits but _____ costs will often be funded even if the benefits are less than the costs. a. diffused; concentrated Copyright Macmillan Learning. Powered by Cognero.
Page 19
Name:
Class:
Date:
Chapter 21 b. diffused; diffused c. concentrated; concentrated d. concentrated; diffused ANSWER: d 102. The "Bridge to Nowhere": a. is a fictional account of a drawbridge that was made out of gold coins collected from Roman tax collectors. b. was a bridge proposed to be built in Alaska that would have cost taxpayers $320 million, despite the
availability of a ferry service that charged $6 per automobile. c. refers to the inherent difficulty for Democrats and Republicans to bridge their differences with bipartisan legislation. d. was an overturned law that required bridges to be paid for by people who benefited the most from their use.
ANSWER: b 103. Representative John Murphy has secured around $200 million of federal government money for a small airport near Juneburg, Pennsylvania, that averages about 30 passengers a day. The costs of this government support: a. represent an external cost paid mostly by taxpayers who will never use the airport. b. are well justified given that the benefits of the airport are locally concentrated. c. are well justified given that the residents near the airport will pay little of the cost. d. represent an external cost paid mostly by taxpayers who will begin to use the airport once it is completed. ANSWER: a 104. Ten farmers, in a society with 100 people, would collectively gain $100,000 from a farm subsidy. All 100 people would pay the $300,000 cost of the subsidy program. Are the farmers willing to lobby the government in support of the subsidy? a. No, the benefits of $100,000 are less than the cost of $300,000. b. No, the benefits of $10,000 per farmer are less than the costs of $300,000. c. Yes, the benefits of $10,000 per farmer exceed the costs of $3,000 per person. d. Yes, regardless of the cost, the farmers are supportive of any subsidy with benefits. ANSWER: c 105. The fall of the Roman Empire was partially attributable to: a. low taxes, low government spending, and unregulated markets. b. high taxes that were used to finance projects with benefits that were less than their costs. c. an overreliance on private property. d. debtors who successfully petitioned Roman senators for deflation. ANSWER: b 106. High taxes used to finance projects with benefits less than their costs contributed to which of these? a. The fall of the Roman Empire b. World War II Copyright Macmillan Learning. Powered by Cognero.
Page 20
Name:
Class:
Date:
Chapter 21 c. The Peloponnesian War d. Brexit ANSWER: a 107. Special interest groups are rationally: a. ignorant. b. informed. c. concerned. d. cooperative. ANSWER: b 108. The American Crystal Sugar PAC is rationally: a. ignorant. b. informed. c. concerned. d. cooperative. ANSWER: b 109. The acronym "PAC" stands for: a. politically active committee. b. political agent coordinator. c. politically active coordinator. d. political action committee. ANSWER: d 110. Political contributions suggest that PACs are rationally: a. ignorant. b. informed. c. concerned. d. cooperative. ANSWER: b 111. According to the text, one formula for political success is to: a. diffuse benefits and diffuse costs. b. diffuse benefits and concentrate costs. c. concentrate benefits and concentrate costs. d. concentrate benefits and diffuse costs. ANSWER: d 112. In the case of the sugar quota, costs are _____ and benefits are _____. a. diffused; diffused Copyright Macmillan Learning. Powered by Cognero.
Page 21
Name:
Class:
Date:
Chapter 21 b. concentrated; diffused c. diffused; concentrated d. concentrated; concentrated ANSWER: c 113. In the case of the sugar quota, those harmed are rationally _____ and those benefited are rationally _____. a. ignorant; informed b. ignorant; ignorant c. informed; ignorant d. informed; informed ANSWER: a 114. The self-interest of politicians _____ with the social interest. a. always aligns b. never aligns c. sometimes aligns d. aligns only under direct democracy ANSWER: c 115. When the costs of a good are paid for by nonconsumers, _____ of the good is produced. a. an inefficiently small amount b. an efficient amount c. an inefficiently large amount d. none ANSWER: c 116. According to public choice theory, the main reason for some politicians' ability to build support for policies that generate more costs than benefits is that: a. the public is always ignorant about the costs and benefits of any policy. b. rational ignorance is higher in the situation of concentrated benefits and diffuse costs. c. the government always misleads the public with biased information. d. the political process has flaws, so the public is always misinformed. ANSWER: b 117. The main reason that government legislation on sugar quotas passes is that: a. a large number of consumers bear small economic costs, while a small number of domestic sugar producers receive its benefits. b. a small number of consumers bear its economic costs, while a large number of domestic sugar producers receive its benefits. c. its economic benefits totally offset its economic costs.
d. both consumers and producers are rationally ignorant. ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 22
Name:
Class:
Date:
Chapter 21 118. If a special interest group represents 10% of society and gets a public policy passed that costs society $1 million and benefits that special interest group $1 million, the net payoff for the special interest group will be: a. $100,000. b. $0. c. $900,000. d. $1,000,000. ANSWER: c 119. If a special interest group represents 10% of society and there is a proposed public policy that will cost society $1 million and benefit that special interest group $1 million, which of these is the MOST likely outcome according to public choice theory? a. The special interest group will not lobby for the proposed policy because the policy will cost the group more than it will benefit it. b. The special interest group will lobby for the proposed policy because the policy will benefit the group more than it will cost it. c. The special interest group will not be able to make any decision on the proposed policy because its benefits equal its costs. d. This policy will never be passed because the total costs and benefits are the same.
ANSWER: b 120. When government makes it possible to externalize the cost of a good: a. there will be an optimal quantity of the good. b. there will be an insufficient quantity of the good. c. there will be too much of the good. d. the good will not be produced at all. ANSWER: c 121. When benefits are concentrated and costs are diffused: a. resources get devoted to projects with high benefits and low costs. b. resources get wasted on projects with low benefits and high costs. c. more projects with high benefits and low costs get developed. d. fewer projects with low benefits and high costs get developed. ANSWER: b 122. Which three variables have been shown to have strong predictive power for election results? a. whether the country is at war, productivity, and the divorce rate b. education status, life expectancy, and corporate profits c. disposable income, the inflation rate, and years in office for the party in power d. the savings rate, the trade deficit, and the unemployment rate of single mothers ANSWER: c 123. Voter decisions seem to depend greatly on: Copyright Macmillan Learning. Powered by Cognero.
Page 23
Name:
Class:
Date:
Chapter 21 a. economic conditions in the year of an election. b. the beauty of the candidates. c. the weather. d. the amount of campaign contributions. ANSWER: a 124. Over the past 100 years, voters have tended to vote _____ the party in power when the _____. a. for; economy is doing well b. against; economy is doing well c. for; unemployment rate is high d. against; unemployment rate is low ANSWER: a 125. Just before the 1972 election, _____ sent a letter to 24 million Social Security recipients informing them of increased payment benefits. a. Richard Nixon b. Jimmy Carter c. Ronald Reagan d. John F. Kennedy ANSWER: a 126. Just before the 1972 election, _____ sent a letter to 24 million Social Security recipients informing them of automatic cost of living increases in the future. a. Richard Nixon b. Jimmy Carter c. Ronald Reagan d. John F. Kennedy ANSWER: a 127. During election years, personal disposable income _____ more than at other times, while inflation tends to _____. a. falls; rise b. grows; rise c. grows; fall d. falls; fall ANSWER: c 128. Presidents have an easier time changing _____ than _____ during an election year. a. GDP; taxes and transfer payments b. the overall economy; GDP c. taxes and transfer payments; GDP Copyright Macmillan Learning. Powered by Cognero.
Page 24
Name:
Class:
Date:
Chapter 21 d. GDP; overall economy ANSWER: c 129. Data for the United States show that the incumbent party tends to win the election if: a. personal disposable income is shrinking. b. the inflation rate is high. c. the political party has been in power for many continuous terms. d. personal disposable income is growing, the inflation rate is low, and the political party has not been in power for too many continuous terms.
ANSWER: d 130. In the context of economics, the word "myopic" BEST means: a. perfect rationality. b. acting with complete information. c. thinking only about the long run. d. thinking only about the short run. ANSWER: d 131. Why are voters generally considered myopic? a. They vote based only on the economic policies of the candidates and not on their normative political policies. b. They focus on economic conditions in the year of the election, not over the entire term of the presidency. c. They educate themselves thoroughly on the economic policies of the candidates in the election, but not on the political agendas. d. They educate themselves on issues that influence them personally, but not on issues that influence the larger society.
ANSWER: b 132. Voters focus on economic conditions in the year of an election and not over the entire term of one's presidency. This makes them: a. uneducated. b. myopic. c. responsive to changes in the economy. d. concerned about the overall health of the economy. ANSWER: b 133. President Nixon increased his popularity just before the 1972 election by: a. lowering income taxes before the election. b. lowering taxes after the election. c. increasing Social Security benefits. d. removing all price controls from the markets. ANSWER: c 134. Two weeks before the November 1972 election, incumbent President Richard Nixon announced that he Copyright Macmillan Learning. Powered by Cognero.
Page 25
Name:
Class:
Date:
Chapter 21 was: a. increasing taxes following the election. b. lowering taxes after the election. c. increasing Social Security benefits immediately, but did not announce the tax increase that came in January. d. increasing both Social Security benefits and taxes. ANSWER: c 135. Over the past 100 years the American voter has voted for the party of the _____ when the economy is doing _____. a. incumbent; well b. incumbent; poorly c. left; well d. right; poorly ANSWER: a 136. Which of these variables is the LEAST helpful in predicting presidential elections? a. growth in personal income in the year of the election b. inflation in the year of the election c. the charisma of the president d. the length of time the incumbent party has been in power ANSWER: c 137. Voter myopia refers to the fact that voters: a. are rationally ignorant. b. respond to incentives. c. primarily consider economic conditions in the year of the election. d. look at economic conditions over a president's term. ANSWER: c 138. The incumbent party tends to win elections when: a. inflation is high. b. consumers' disposable income is high. c. the incumbent party has not been in power for very long. d. unemployment is high. ANSWER: b 139. Inflation tends to _____ during an election year and _____ after the election is over. a. increase; increase more b. decrease; increase c. decrease; decrease more d. increase; decrease Copyright Macmillan Learning. Powered by Cognero.
Page 26
Name:
Class:
Date:
Chapter 21 ANSWER: b 140. Which of these is MOST likely to happen just before an election? a. higher taxes b. lower unemployment c. lower inflation d. higher government spending ANSWER: d 141. When voters are myopic, politicians will prefer policies that generate: a. small benefits now and large costs later. b. small costs now and large benefits later. c. higher taxes now but more economic growth later. d. lower unemployment but higher inflation. ANSWER: a 142. The incumbent president is MORE likely to win reelection if: a. the interest rate policy remains stable. b. voters are rationally ignorant. c. unemployment decreases in the summer prior to the election in November. d. four-year inflation is lower than the four-year inflation rate under the previous president. ANSWER: c 143. What explains the close connection between the economic boost just before election day and a politician winning reelection? a. diffuse costs and concentrated benefits b. median voter theorem c. voter myopia d. rational ignorance ANSWER: c 144. When it comes to deciding on whether to vote for the incumbent party, voters: a. are more likely to vote out the incumbent party after strong growth in disposable income. b. prefer incumbents the longer they have been in power. c. focus on the state of the economy in the year of the election. d. are farsighted and consider the impact of the incumbent party's future policies. ANSWER: c 145. Two weeks before the 1972 election, Richard Nixon: a. sent a letter to Social Security recipients informing them that their payments had been increased by 20%. b. sent a letter to all persons in the military informing them that their pension payouts would be 33% higher. Copyright Macmillan Learning. Powered by Cognero.
Page 27
Name:
Class:
Date:
Chapter 21 c. sent a letter to all unemployed persons informing them about his intent to extend unemployment benefits. d. made a national radio address to discuss his plan for a four-day workweek. ANSWER: a 146. Increases in government spending prior to elections followed by decreases in government spending after the election represents: a. economic dystopia. b. the political business cycle. c. the consumer price index. d. the Lewis–Mondell model. ANSWER: b 147. Political business cycles are due primarily to _____ voters. a. rationally informed b. rationally ignorant c. myopic d. forward-looking ANSWER: c 148. Economic conditions are a _____ predictor of U.S. presidential election outcomes. a. good b. poor c. fair d. volatile ANSWER: a 149. All of these are reasons that incumbents get reelected EXCEPT: a. personal disposable income is falling. b. the inflation rate is low. c. unemployment is low. d. the political party has not been in power for too many continuous terms. ANSWER: a 150. Voters are most responsive to economic performance _____ when deciding whether a president should be reelected. a. on average over the entire term b. in the first 100 days of the first term c. in the last year of the first term d. in the first year of the first term ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 28
Name:
Class:
Date:
Chapter 21 151. Personal disposable income: a. is even throughout the political business cycle. b. grows most quickly during nonelection years. c. grows most quickly during election years. d. does not follow any sort of predictable pattern. ANSWER: c 152. The political business cycle is: a. more apparent in GDP data than in personal disposable income data. b. less apparent in GDP data than in personal disposable income data. c. equally apparent in GDP data as in personal disposable income data. d. not apparent in either GDP data or personal disposable income data. ANSWER: b 153. Political business cycles occur when: a. economic conditions tend to improve immediately before elections but then worsen afterward. b. economic conditions tend to worsen immediately before elections but then improve afterward. c. the economy becomes more stable between elections. d. economic conditions become less stable and show more random patterns over time. ANSWER: a 154. Political business cycles occur because voters are: a. irrational and always vote for the wrong politicians. b. rational during election years, but politicians always deviate from what they promise. c. rationally ignorant and do not look at economic conditions over a president's entire term. d. rational and vote for politicians that improve economic conditions at least some of the time. ANSWER: c 155. An incumbent president can take advantage of voters' myopia to win reelection by: a. applying policies with small immediate gains but large costs in the future. b. applying policies with small immediate costs but large gains in the future. c. applying only policies that have the same amount of gains as costs, so there is no net benefit. d. doing nothing. ANSWER: a 156. What does the evidence from 60 years of U.S. data show regarding the growth rate in personal income in each quarter of a president's term in office? a. The growth rate holds steady at approximately 1.8%. b. The growth rate increases in the quarters just after the election. c. The growth rate decreases in the quarters just before the election. d. The growth rate increases in the quarters just before the election. Copyright Macmillan Learning. Powered by Cognero.
Page 29
Name:
Class:
Date:
Chapter 21 ANSWER: d 157. Evidence suggests that voters will vote for a political party based on the economic conditions that prevail in the year of the election. This behavior is known as: a. economic dependence. b. political response. c. rational ignorance. d. voter myopia. ANSWER: d 158. When the battle of presidential elections is done, historians mark one personality and set of issues as having won the day and reflected the will of the: a. incumbent candidate. b. challenging candidate. c. voters. d. government. ANSWER: c 159. A simple logic underlying the apparent chaos of seemingly unique and momentous elections is that: a. voters are so unresponsive to economic conditions that the winner of a presidential election cannot be
predicted with any accuracy. b. voters are so responsive to economic conditions that the winner of a presidential election can be predicted with considerable accuracy. c. pundits scrutinize the daily chronicle of events to divine how the candidates advance and retreat in public opinion. d. personalities and leadership qualities of the candidates loom large and are reckoned to swing voters one way or another.
ANSWER: b 160. Which of these conditions BEST predicts when the incumbent party will NOT win the presidential election? a. Personal disposable income is growing. b. The inflation rate is low. c. The unemployment rate is low. d. The incumbent party has been in power for too many terms in a row. ANSWER: d 161. Evidence suggests that voters are myopic, meaning they are responsive to economic conditions: a. before the year of an election. b. in the year of an election. c. after the year of an election. d. over the president's entire term. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 30
Name:
Class:
Date:
Chapter 21 162. If voters are myopic, which of these would we expect to see? a. Government benefits increase before an election, while taxes increase only after an election. b. Government benefits increase after an election, while taxes hardly ever do. c. Government benefits decrease after an election, while taxes increase only before an election. d. Government benefits decrease before an election, while taxes decrease only after an election. ANSWER: a 163. When a policy is highly visible, appears often in the newspapers, and has a major effect on the lives of millions of Americans, very often: a. special interests get their way. b. voters get their way. c. politicians get their way. d. government gets its way. ANSWER: b 164. When a policy is specialized in its impact, difficult to understand, and affects a small part of the country, it is more likely that: a. special interests get their way. b. voters get their way. c. politicians get their way. d. government gets its way. ANSWER: a 165. Politicians have a greater interest in serving the voters' will when: a. voters are well informed. b. special interest groups are nonexistent. c. the media do not get involved. d. the policy is highly visible. ANSWER: d 166. Which of these theories works to explain which voters will get their way in a democratic election? a. the theory of rational ignorance b. the median voter theorem c. the special interests theory d. the political business cycle theory ANSWER: b 167. Figure: Kidney Trade Ban Policy Spectrum
Copyright Macmillan Learning. Powered by Cognero.
Page 31
Name:
Class:
Date:
Chapter 21
If there are only two candidates, A and B, and an open market for kidney trading is the only issue being debated in this election, which one of the voters is the median voter? a. Mariska b. Tuppence c. Tommy d. Agatha ANSWER: b 168. Figure: Kidney Trade Ban Policy Spectrum
If there are only two candidates, A and B, and an open market for kidney trading is the only issue being debated in this election, which candidate will win the election? a. A b. B c. Neither A nor B will win this election. d. A and B will receive an equal number of votes. ANSWER: a 169. Figure: Kidney Trade Ban Policy Spectrum
Copyright Macmillan Learning. Powered by Cognero.
Page 32
Name:
Class:
Date:
Chapter 21
If A, B, and C are all candidates in the election and an open market for kidney trading is the only issue being debated, based on the median voter theorem, which candidate will win the election? a. A b. B c. C d. A, B, and C will each receive an equal number of votes. ANSWER: c 170. Figure: Smoking Ban Policy Spectrum
If there are only two candidates, A and B, and a smoking ban is the only issue being debated in this election, which one of the voters is the median voter? a. Victoria b. Edward c. O'Rourke d. Abdul ANSWER: a 171. Figure: Smoking Ban Policy Spectrum
Copyright Macmillan Learning. Powered by Cognero.
Page 33
Name:
Class:
Date:
Chapter 21
If there are only two candidates, A and B, and a smoking ban is the only issue being debated in this election, based on the median voter theorem, which candidate will win the election? a. A b. B c. Neither A nor B will win this election. d. A and B will receive an equal number of votes. ANSWER: b 172. Figure: Smoking Ban Policy Spectrum
If A, B, and C are all candidates in the election and a smoking ban is the only issue being debated, based on the median voter theorem, which candidate will win the election? a. A b. B c. C d. A, B, and C will each receive an equal number of votes. ANSWER: c 173. Figure: Medicare Spending
Copyright Macmillan Learning. Powered by Cognero.
Page 34
Name:
Class:
Date:
Chapter 21
If L and M are candidates in an upcoming election and an increase in Medicare spending is being debated, based on the median voter theorem, which candidate will win the election? a. L b. M c. Neither L nor M d. L and M will each receive an equal number of votes. ANSWER: b 174. Figure: Medicare Spending
L and M are candidates in an upcoming election, and an increase in Medicare spending is being debated. In this election, voters will not vote if they do not find a candidate who believes the level of Medicare spending should be close to what voters believe it should be. In this case, _____ is more likely to win the election. a. L b. M c. Neither L nor M d. L and M will each receive an equal number of votes. ANSWER: b 175. In many presidential elections, candidates nominated by their political parties will move toward the center Copyright Macmillan Learning. Powered by Cognero.
Page 35
Name:
Class:
Date:
Chapter 21 of voters' opinions about a certain subject matter. This reflects: a. the median voter theorem. b. the myopic nature of voters. c. democracy. d. the failure of the median voter theorem. ANSWER: c 176. The basic concept behind the median voter theorem is that: a. the majority of other voters want a policy to the left of the median voter's preference. b. when voters vote, regardless of whether they vote closest to their preferences or not, the preference of the
median voter is sure to win in a majority win election. c. half of the other voters want a policy to the left of the median voter's preference and half of the voters want a policy to the right. d. if voters vote closest to their preferences, then their preferences are sure to win in a majority win election.
ANSWER: c 177. The theory of the median voter may not work if: a. every voter votes. b. voters only vote for the policy closest to their own positions. c. voters do not vote and/or voters do not vote for the policy closest to their own positions. d. there is only a single dimension over which the voting occurs. ANSWER: c 178. The theory of the median voter may not work if: a. every voter votes. b. all voters vote for the policy closest to their own positions. c. there is only a single dimension over which the voting occurs. d. voters do not vote for the policy closest to their own positions and/or there are multiple dimensions over which the voting occurs.
ANSWER: d 179. According to the median voter theorem, when do political outcomes change? a. when the consensus changes b. as a result of a compromise c. when the median voter changes their preferences d. when there is new technology to account for proper voting ANSWER: c 180. If voters care about two issues, such as taxes and war, then politicians: a. will form a stable policy on these issues. b. can pose a policy that will never lose against another policy. c. must assume that there is no median voter. Copyright Macmillan Learning. Powered by Cognero.
Page 36
Name:
Class:
Date:
Chapter 21 d. may never converge on a stable outcome. ANSWER: d 181. The median voter theorem holds that the: a. policy that caters to the median voter will beat any other policy in a majority rule election. b. policy that adjusts to the left of the median voter will beat any policy further to the right. c. policy that adjusts to the right of the median voter will beat any policy further to the left. d. median voter's preferences cannot be met. ANSWER: a 182. The MOST important assumption of the median voter theorem is that: a. voters vote for the policy furthest from their ideal. b. voters vote for the policy closest to their ideal. c. half the voters vote for their ideal, but the other half do not. d. there are several voting dimensions. ANSWER: b 183. Which of these explains why extreme candidates rarely win political elections? a. rational ignorance b. median voter theorem c. special interest groups d. myopic voters ANSWER: b 184. The median voter theorem implies that politicians: a. have a strong incentive to listen to the wishes of special interest groups. b. have to satisfy only a small number of voters. c. should never associate too strongly with one party. d. have the incentive to listen to voters on issues that voters care about. ANSWER: d 185. Figure: Median Voter 1
Suppose the figure represents the preferences of five voters and two candidates regarding defense spending. Who is the median voter, and which candidate will win the election? a. The median voter is Neil, and the winning candidate is A. b. The median voter is Mary, and the winning candidate is A. Copyright Macmillan Learning. Powered by Cognero.
Page 37
Name:
Class:
Date:
Chapter 21 c. The median voter is Neil, and the winning candidate is B. d. The median voter is Tina, and the winning candidate is B. ANSWER: a 186. Figure: Median Voter 2
If taxes are the only issue and the candidates' names are Jack Johnson and John Johnson, who votes for John Jackson? a. Jeri and Ajay b. Jeri, Ajay, Andrea, and Eugena c. Andrea, Jeri, and Ajay d. Eugena, Andrea, and Jeri ANSWER: c 187. Figure: Median Voter 2
What tax level could Jack Johnson support to ensure a victory in the election? a. 5% b. 6% c. 7% d. 8% ANSWER: b 188. Imagine a beach with beachgoers evenly distributed throughout. It's a hot day and there are two ice cream vendors who start out far away from each other. They quickly discover that if they move closer to the center of the beach, they keep customers on their far side of the beach while poaching customers near their rival. Eventually, both vendors end up right next to each other in the middle of the beach. Which concept predicts the conclusion of this story? a. rational ignorance b. opportunity cost Copyright Macmillan Learning. Powered by Cognero.
Page 38
Name:
Class:
Date:
Chapter 21 c. diffuse costs and concentrated benefits d. median voter theorem ANSWER: d 189. Table: Government Spending Voter Preferred Level of Government Spending (trillions) Amy $0.5 Bob 1 Cal 2 Dan 3 Eli 4 According to the median voter theorem and the data in this table, candidates will position their ideal level of spending at: a. $3 trillion. b. $1 trillion. c. $2 trillion. d. $2.5 trillion. ANSWER: c 190. The median voter theorem states that: a. the median voter tends to be the most informed voter. b. candidates whose policies reflect the preferences of the median voter are more likely to win an election. c. political success depends on candidates taking positions that are either to the right or to the left of the political center. d. politicians choose policies that, on average, generate more benefits than costs for the average voter.
ANSWER: b 191. Democracy tends to push politicians toward the ideal point of the _____ voter. a. median b. first c. representative d. final ANSWER: a 192. There are three voters and two representatives in a democracy. Voter 1 supports government spending of $30. Voter 2 supports government spending of $50. Voter 3 supports government spending of $90. According to the median voter theorem, politicians will converge upon a spending bill of: a. $30. b. $50. c. $60. d. $90. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 39
Name:
Class:
Date:
Chapter 21 193. There are three voters and two representatives in a democracy. Voter 1 supports government spending of $20. Voter 2 supports government spending of $60. Voter 3 supports government spending of $70. According to the median voter theorem, politicians will converge upon a spending bill of: a. $20. b. $50. c. $60. d. $70. ANSWER: c 194. There are three voters and two representatives in a democracy. Voter 1 supports government spending of $51. Voter 2 supports government spending of $52. Voter 3 supports government spending of $56. According to the median voter theorem, politicians will converge upon a spending bill of: a. $51. b. $52. c. $53. d. $56. ANSWER: b 195. There are three voters in a democracy. Voter 1 supports government spending of $100. Voter 2 supports government spending of $300. Voter 3 initially supported government spending of $200, but now supports government spending of $250. According to the median voter theorem, politicians will converge upon a spending bill of: a. $100. b. $200. c. $250. d. $300. ANSWER: c 196. According to the median voter theorem, policy changes only when the ideal point of: a. a voter changes. b. the median voter changes. c. a random voter changes. d. the last voter changes. ANSWER: b 197. In a democratic society, the idea that there is a tendency for a given policy to reflect the middle view of all political ideals is called the: a. voting paradox. b. arrow impossibility theorem. c. median voter theorem. d. public choice theorem. ANSWER: c Copyright Macmillan Learning. Powered by Cognero.
Page 40
Name:
Class:
Date:
Chapter 21 198. According to the median voter theorem, what percentage of tax dollars will be spent on the military under these conditions? 25% of voters want to spend 20% of their tax dollars on the military; 20% of voters want to spend 15% of their tax dollars on the military; 15% of voters want to spend 10% of their tax dollars on the military; 10% of voters want to spend 5% of the tax dollars on the military; and 30% of voters do not want to spend any tax dollars on the military. a. 0% b. 5% c. 10% d. 20% ANSWER: c 199. There are three critical concerns for voters in an upcoming election: government spending, income taxes, and access to health care. What is the likely result of this election? a. The candidate who is closest to the median voter on income tax policy will win. b. The candidate who is closest to the median voter on government spending policy will win. c. The candidate who is closest to the median voter on access to health-care policy will win. d. It is not clear that there will be a stable outcome in this election because voters care about all of these policy positions.
ANSWER: d 200. The median voter theorem does not accurately predict an election outcome if: a. the election is dictated by a simple majority rule. b. voters become rational about their election decisions. c. voters always vote for the policy that is closest to their ideal point. d. voters do not vote for the policy that is closest to their ideal point. ANSWER: d 201. Control of the media has exactly the effects that we would expect from our study of _____ in democracies. a. rationally informed voters b. irrationally informed voters c. irrational ignorance d. rational ignorance ANSWER: d 202. How are democracy and wealth related? a. Once people's basic needs have been met, there is an increased demand for democracy and political
participation. b. Democracy is associated with institutions (free press, private property rights, lower levels of corruption) that are favorable toward growth and wealth accumulation. c. Neither of these statements is true.
Copyright Macmillan Learning. Powered by Cognero.
Page 41
Name:
Class:
Date:
Chapter 21 d. Both of these statements are true. ANSWER: d 203. Government ownership of the media: a. is uncommon in African countries. b. causes an even greater degree of rational ignorance than private ownership. c. reduces rational ignorance because governments usually require a greater number of news broadcasts. d. decreases the effectiveness of special interest groups. ANSWER: b 204. Evidence from an important study of media ownership concludes that: a. private ownership of the press restricts information flows to the public, which reduces the quality of the
government. b. public ownership of the press increases information flows to the public, which increases the quality of the government. c. government ownership of the press restricts information flows to the public, which reduces the quality of the government. d. there is little correlation between media ownership and the efficiency of government.
ANSWER: c 205. Democracy typically brings about more efficient outcomes because: a. democracies create a demand for wealth. b. democracies are common practice in developed countries. c. citizens in democracies are rationally ignorant. d. citizens in democracies are better informed and have the power to vote. ANSWER: d 206. There is a strong correlation between economic freedom and: a. personal freedom. b. religious freedom. c. living standards. d. economic instability. ANSWER: c 207. As countries become wealthier: a. they tend to have higher taxes. b. their citizens tend to become more rationally ignorant. c. they tend to become more democratic. d. the median voter becomes more important. ANSWER: c 208. Higher standards of living are associated with: Copyright Macmillan Learning. Powered by Cognero.
Page 42
Name:
Class:
Date:
Chapter 21 a. a closed economy that allocates resources based on a centralized industrial policy. b. a high ratio of government spending to GDP. c. tightly regulated labor and capital markets. d. greater economic freedom. ANSWER: d 209. _____ is associated with lower levels of political rights and civil liberties, worse regulation, higher levels of corruption, and a greater risk of property confiscation. a. Greater government ownership of the press b. Having more than two active political parties c. Less government ownership of the press d. Having only one or two active political parties ANSWER: b 210. In general, democracies are the: a. wealthiest countries around the world but the least free economically. b. wealthiest countries around the world and have the highest levels of economic freedom. c. poorest countries around the world but have the highest levels of economic freedom. d. poorest countries around the world and the least free economically. ANSWER: b 211. Which of these statements is TRUE? a. A rising standard of living decreases the demand for democracy. b. Democracy is associated with worse institutions that lead to a low standard of living. c. The public is usually better informed about policies in nondemocracies. d. Democracy is associated with better institutions that lead to economic growth and a high standard of living, which increases demand for democracy.
ANSWER: d 212. Which of these is TRUE about cross-country evidence on the relationship between economic freedom, standard of living, and democracy? a. There is no clear relationship between economic freedom, the standard of living, and the level of democracy. b. Economic freedom, the standard of living, and the level of democracy are positively related. c. Economic freedom and the standard of living are positively related, but they are not related to the level of democracy. d. Economic freedom is higher in countries that are less democratic, but lower in countries that are more democratic.
ANSWER: b 213. Which of these is TRUE about public ignorance in democratic and nondemocratic countries? a. Public ignorance exists in most countries, but it is generally higher in democratic countries than in nondemocratic countries. b. Public ignorance exists only in democratic countries.
Copyright Macmillan Learning. Powered by Cognero.
Page 43
Name:
Class:
Date:
Chapter 21 c. Public ignorance exists in democratic countries, but it is typically higher in nondemocratic countries. d. Public ignorance does not exist in democratic or nondemocratic countries because people are rational. ANSWER: c 214. Public ignorance is generally higher in less democratic countries because: a. the public is mostly irrational in those countries. b. there is no incentive for the public to be informed in those countries. c. the public receives too much information about how the country runs. d. the public is not well informed because of government control or censorship of the media. ANSWER: d 215. Mass starvation in Ukraine in the 1920s was the result of: a. bad weather conditions that destroyed more than 45% of the crops. b. Soviet leader Joseph Stalin's deliberate policies to eliminate potential political threats. c. the majority of Ukrainians voting for collectivized farms. d. the democratic policies voted on by the Russian people. ANSWER: b 216. Which of these statements is TRUE? a. Increased newspaper circulation is associated with worse and slower political responses to a crisis in food availability. b. Governments provide lower levels of food distribution when there is more political competition.
c. Amartya Sen claims that no famine has ever taken place in a functioning democracy. d. Political competition leads to nondemocratic policies and famine. ANSWER: c 217. Government ownership of the press and of radio: a. increases the quality of government. b. decreases the quality of government. c. increases the degree of economic freedom. d. decreases social corruption. ANSWER: b 218. Figure: Economic Freedom and Living Standards
Copyright Macmillan Learning. Powered by Cognero.
Page 44
Name:
Class:
Date:
Chapter 21
Based on the data in this chart, the country with the lowest level of economic freedom is: a. Angola. b. Venezuela. c. Hong Kong. d. Haiti. ANSWER: a 219. Figure: Economic Freedom and Living Standards
Copyright Macmillan Learning. Powered by Cognero.
Page 45
Name:
Class:
Date:
Chapter 21
Based on the data in this chart, two countries that have about the same level of economic freedom but very different standards of living are: a. Venezuela and Niger. b. Congo and Luxembourg. c. Haiti and Niger. d. Luxembourg and the United States. ANSWER: a 220. Figure: Economic Freedom and Living Standards
Copyright Macmillan Learning. Powered by Cognero.
Page 46
Name:
Class:
Date:
Chapter 21
Based on this chart, we can conclude that: a. greater economic freedom causes a higher standard of living. b. there is a positive relationship between economic freedom and GNI per capita. c. higher GNI per capita raises the level of democracy. d. the wealthiest countries in the world are all democracies. ANSWER: b 221. Stalin: a. instituted democratic reforms, leading to widespread prosperity. b. took government control of the farms in Ukraine, leading to the starvation of millions of people. c. increased the provision of public goods, which had a positive effect on lowering the unemployment rate. d. tried unsuccessfully to expand voting rights in 1924 Russia. ANSWER: b 222. Governments are more responsive to food crises: Copyright Macmillan Learning. Powered by Cognero.
Page 47
Name:
Class:
Date:
Chapter 21 a. when there is little to no newspaper circulation. b. if they are not democracies. c. when there is little political competition. d. if they are democracies with widespread newspaper circulation and high political competition. ANSWER: d 223. _____ argues that _____. a. Amartya Sen; famines don't happen in democracies b. Rico Raines; starvation in many parts of the world could be avoided with adequate price controls c. Amartya Sen; famines are more likely to occur where there are unfettered newspapers and political competition d. David Ricardo; mass starvations are more likely in democracies
ANSWER: a 224. Why do studies show that food distribution is better in economies with higher political competition? a. Higher political competition always ensures better food production in farming areas. b. Increased competition between political parties leads voters to educate themselves on the availability of such distribution systems. c. The threat of failure to get reelected spurs government into providing better food distribution systems.
d. Studies show that food distribution is better in economies with higher political competition. ANSWER: b 225. Why is public food distribution better in election and preelection years? a. Higher political competition always ensures better food production in farming areas. b. The threat of failure to get reelected spurs government into providing better food distribution systems. c. There is a lag of about four years between refurbishment of most food production systems. d. Increased competition between political parties leads voters to educate themselves on the availability of such distribution systems.
ANSWER: b 226. According to Amartya Sen, the MOST powerful way to reduce the likelihood of famine is through: a. enhancement of food production. b. improvement of distribution. c. introduction of new technologies. d. enhancement of democratic practices. ANSWER: d 227. Which of these was the main cause of the 1974 famine in Bangladesh? a. floods b. lack of food c. lack of economic and political freedoms d. high rice prices Copyright Macmillan Learning. Powered by Cognero.
Page 48
Name:
Class:
Date:
Chapter 21 ANSWER: c 228. According to Nobel Prize–winning economist Amartya Sen, famine would never take place in a: a. nondemocracy. b. functioning democracy. c. socialist state. d. state in which the government has ultimate control of food distribution. ANSWER: b 229. Economists Besley and Burgess found that a government is more responsive to food crises when there is (are): a. more political competition. b. more newspapers. c. either more political competition or more newspapers. d. both more political competition and more newspapers. ANSWER: d 230. Much of public choice argues that what the public wants isn't reflected in elected officials' actions. Yet there is a strong connection between famine prevention and democracy (more democracy means less famine), and this "exception" is completely consistent with ideas from public choice. Why? a. because the median voter doesn't want to starve b. because voters have a strong incentive to be informed c. because voters have strong memories about times they don't eat d. because the costs of corruption are concentrated rather than diffuse ANSWER: b 231. According to the text, the 1974 famine in Bangladesh was largely a result of: a. a lack of food supply. b. rapid population growth. c. an earthquake. d. bad government policies. ANSWER: d 232. Nobel Prize–winning economist Amartya Sen argued that famine in the history of the world could have been eliminated by: a. raising foreign aid to countries with famine. b. strong government control over food distribution. c. introducing democracy. d. censoring the media. ANSWER: c 233. Democracies typically become richer because: Copyright Macmillan Learning. Powered by Cognero.
Page 49
Name:
Class:
Date:
Chapter 21 a. rational ignorance is eliminated. b. special interest groups expand the role of government. c. they garner more foreign aid from other democracies. d. it is in the self-interest of their citizens to support policies that increase economic growth. ANSWER: d 234. Suppose that a special interest group makes up 10% of the overall population. If a new proposal stands to generate $2 million in additional benefits to the group, the group will: a. always support this proposal, since the costs are diffused over the entire population. b. never support this proposal if the costs are greater than $2 million. c. support this proposal only if the costs are less than $2 million. d. support this proposal only if the costs are less than $200,000. ANSWER: d 235. Which of these do democracies usually support? a. institutions that are bad for economic growth b. free markets, property rights, and the rule of law c. policies that hurt their own citizens d. highly regulated markets ANSWER: b 236. Which of these is TRUE about the relationship between democracy and economic growth? a. Democracy and economic growth are unrelated for most countries. b. Democracy generally leads to institutions that promote economic growth. c. Economic growth leads to democracy, but democracy does not lead to economic growth. d. Democracy leads to economic growth only when a country's special interest groups represent a very small part of society.
ANSWER: b 237. Public choice theory suggests that larger special interest groups will: a. have fewer incentives to take into account the social costs of inefficient policies. b. have more incentives to take into account the social costs of inefficient policies. c. have the same incentives as smaller groups to take into account the social costs of inefficient policies. d. consider only the benefits of policies but not the costs. ANSWER: b 238. According to public choice theory, a more democratic country: a. can eliminate rational ignorance so that politicians can focus on policies that promote economic growth. b. will have a higher living standard without policies to promote economic growth. c. will have more policies that promote economic growth because a larger share of population is brought into
power. d. will have more policies that promote economic growth because a small elite is more efficient in making policy
Copyright Macmillan Learning. Powered by Cognero.
Page 50
Name:
Class:
Date:
Chapter 21 decisions.
ANSWER: c 239. Which of these is TRUE about the effects of democracy? a. Democracy can perfectly align self-interest with the social interest. b. Because of democracy, there is no incentive for the public to align self-interest with the social interest. c. Democracy leads to good institutions that help align self-interest with the social interest. d. Democracy has no effect on the alignment between self-interest and the social interest. ANSWER: c 240. Suppose that a special interest group makes up 0.5% of the population. If a policy transfers $600 to the special interest at a cost of $100,000 to society, will the special interest group lobby for this policy? a. Yes, the benefits of $600 outweigh the costs of $500. b. No, the benefits of $30 are less than the costs of $100,000. c. No, the benefits of $30 are less than the costs of $50,000. d. They'll be indifferent, since the benefits equal the costs. ANSWER: a 241. Suppose that a special interest group makes up 0.5% of the population. If a policy transfers $600 to the special interest at a cost of $200,000 to society, will the special interest group lobby for this policy? a. Yes, the benefits of $600 outweigh the costs of $500. b. No, the benefits of $30 are less than the costs of $100,000. c. No, the benefits of $600 are less than the costs of $1,000. d. They'll be indifferent, since the benefits equal the costs. ANSWER: c 242. Suppose that a special interest group makes up 0.5% of the population. If a policy transfers $1,000 to the special interest at a cost of $200,000 to society, will the special interest group lobby for this policy? a. Yes, the benefits of $600 outweigh the costs of $500. b. No, the benefits of $30 are less than the costs of $100,000. c. No, the benefits of $600 are less than the costs of $1,000. d. They'll be indifferent, since the benefits equal the costs. ANSWER: d 243. Suppose that a special interest group makes up 2% of the population. If a policy transfers $600 to the special interest at a cost of $100,000 to society, will the special interest group lobby for this policy? a. Yes, the benefits of $700 outweigh the costs of $42. b. No, the benefits of $600 are less than the costs of $2,000. c. They'll be indifferent, since the benefits equal the costs. d. No, the benefits of $600 are less than the costs of $100,000. ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 51
Name:
Class:
Date:
Chapter 21 244. Suppose that a special interest group makes up 2% of the population. If a policy transfers $3,000 to the special interest at a cost of $100,000 to society, will the special interest group lobby for this policy? a. Yes, the benefits of $3,000 outweigh the costs of $2,000. b. No, the benefits of $600 are less than the costs of $2,000. c. They'll be indifferent, since the benefits equal the costs. d. No, the benefits of $600 are less than the costs of $100,000. ANSWER: a 245. _____ groups tend to favor more efficient policies. a. Small b. Large c. Elite d. Oligarchical ANSWER: b 246. One reason for the strong relationship between democracies and economic growth is that: a. people can become rich by gaining economic resources in their favor. b. people can become rich by competing for the limited economic resources. c. the public as a whole can become rich by equally dividing the economic resources. d. the public as a whole can become rich by supporting efficient policies that generate economic growth. ANSWER: d 247. If a policy transfers $100 to a special interest group at a cost of $4,000 to society, the group will lobby: a. for the policy no matter how large the special interest group is. b. for the policy if the group makes up more than 5% of the population. c. for the policy if the group makes up less than 1% of the population. d. against the policy if the group makes up less than 2% of the population. ANSWER: c 248. The greater the share of the population that is brought into power, the: a. less likely that policies will offer something for everyone in the society. b. more likely that policies will offer something for everyone in the society. c. less likely that policies will be efficient. d. more likely that policies will impede economic growth. ANSWER: b 249. Economists tend to favor policies such as price controls and tariffs. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 52
Name:
Class:
Date:
Chapter 21 250. Some people argue that mainstream economics ignores important ethical values. a. True b. False ANSWER: a 251. A good incentive system aligns self-interest with the social interest. a. True b. False ANSWER: a 252. Private choice is the study of political behavior using the tools of economics. a. True b. False ANSWER: b 253. Voters have a strong incentive to be well informed about the positions of political candidates—after all, every vote counts. a. True b. False ANSWER: b 254. Sometimes it is rational to be ignorant. a. True b. False ANSWER: a 255. It is never rational to be ignorant. a. True b. False ANSWER: b 256. Saying that voters are rationally ignorant is the same as saying voters are irrational. a. True b. False ANSWER: b 257. One of the largest federal spending programs is foreign aid. a. True b. False ANSWER: b 258. Voters are rationally ignorant because the incentives to being informed are low. Copyright Macmillan Learning. Powered by Cognero.
Page 53
Name:
Class:
Date:
Chapter 21 a. True b. False ANSWER: a 259. Rational ignorance may cause voters to make irrational decisions, such as judging a politician based on the level of oil prices, even though markets set oil prices. a. True b. False ANSWER: a 260. Rational ignorance may cause voters to make uninformed decisions; however, the outcomes tend to be the same as if voters had full information. a. True b. False ANSWER: b 261. Economists would generally agree with this quote: "There are many things of which a wise man might wish to be ignorant." a. True b. False ANSWER: a 262. Rational ignorance in politics is the idea that obtaining information about candidates has little benefit because one's own vote has almost no chance of changing the outcome of an election. a. True b. False ANSWER: a 263. It is always irrational to be ignorant. a. True b. False ANSWER: b 264. It is always rational to be ignorant. a. True b. False ANSWER: b 265. It is sometimes rational to be ignorant. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 54
Name:
Class:
Date:
Chapter 21 266. It is sometimes irrational to be ignorant. a. True b. False ANSWER: a 267. Rational ignorance occurs when a person chooses to be misinformed when there is a large benefit related to being informed. a. True b. False ANSWER: b 268. Rational ignorance still leads to an efficient outcome, since the decision itself is rational. a. True b. False ANSWER: b 269. Sugar consumers are likely to oppose sugar quotas because the widespread costs, although small, fall on all households in the form of higher prices. a. True b. False ANSWER: b 270. Sugar consumers likely won't do much to oppose a law that reduces the supply of sugar and raises prices. a. True b. False ANSWER: a 271. Sugar producers likely won't do much to oppose a law that reduces the supply of sugar and raises prices. a. True b. False ANSWER: a 272. Special interest groups are so powerful because the costs of their policies are widely disbursed across the population and hence largely unopposed. a. True b. False ANSWER: a 273. Voter myopia is the notion that voters are largely swayed by current economic conditions when casting their vote. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 55
Name:
Class:
Date:
Chapter 21 ANSWER: a 274. Special interest groups effectively lower the price of sugar for U.S. consumers. a. True b. False ANSWER: b 275. Special interest groups effectively raise the price of sugar for U.S. consumers. a. True b. False ANSWER: a 276. The smaller a special interest group is in terms of percentage of the overall population, the more political power it typically has. a. True b. False ANSWER: a 277. A special interest project that costs 200 million citizens $1 each but benefits 100 citizens a total of $100 million is an inefficient use of government funds. a. True b. False ANSWER: a 278. Special interest groups have a greater chance to succeed when benefits are more concentrated and costs are more diffuse. a. True b. False ANSWER: a 279. With certain political policies, the people who are harmed are rationally ignorant and have little incentive to oppose the policy. a. True b. False ANSWER: a 280. With certain political policies, the people who benefit are rationally ignorant and have little incentive to oppose the policy. a. True b. False ANSWER: b 281. The political power of farmers has increased as the share of farmers in the population has decreased. Copyright Macmillan Learning. Powered by Cognero.
Page 56
Name:
Class:
Date:
Chapter 21 a. True b. False ANSWER: a 282. When government makes it possible to push the costs of a good onto other people, we get too much of the good. a. True b. False ANSWER: a 283. When government makes it possible to push the costs of a good onto other people, we get too little of the good. a. True b. False ANSWER: b 284. Suppose that a special interest group makes up 1% of society, and a proposed law would give it $10,000 of benefits but cost society $900,000. The special interest group will oppose this policy because the costs exceed the benefits. a. True b. False ANSWER: b 285. Politicians can often use the concept of rational ignorance on the part of voters to their advantage. a. True b. False ANSWER: a 286. When benefits are concentrated and costs are diffused, resources often get wasted on projects with high benefits and low costs. a. True b. False ANSWER: b 287. At one time, even coffee roasting was defined as a form of manufacturing. a. True b. False ANSWER: a 288. An incumbent is MORE likely to win reelection if average unemployment during his first four-year term is less than unemployment in the last year of that term. a. True b. False Copyright Macmillan Learning. Powered by Cognero.
Page 57
Name:
Class:
Date:
Chapter 21 ANSWER: b 289. The incumbent party will MOST likely get reelected when economic conditions are worsening in an economy. a. True b. False ANSWER: b 290. Voters are myopic, so they MOST likely focus on economic conditions over a president's entire term. a. True b. False ANSWER: b 291. When a policy is highly visible, appears often in the newspapers, and has a major effect on the lives of millions of Americans, lobbies and special interests very often get their way. a. True b. False ANSWER: b 292. The median voter is the person/voter who is exactly in the middle of the population, when one is counting the population in numbers. a. True b. False ANSWER: b 293. When a policy is specialized in its impact, is difficult to understand, and affects a small part of the economy, it is likely that lobbies and special interest groups will get their way. a. True b. False ANSWER: a 294. The median voter is the voter such that half of the voters are on one side of the issue and the other half of the voters are on the other side of the issue. a. True b. False ANSWER: a 295. If the median voter theory holds in the first election, come reelection time, the candidates will reposition themselves closer to the median voter. a. True b. False ANSWER: a Copyright Macmillan Learning. Powered by Cognero.
Page 58
Name:
Class:
Date:
Chapter 21 296. The median voter is defined as the voter such that half the other voters are on one end of the spectrum and half are on the other. a. True b. False ANSWER: a 297. The median voter theorem says that candidates whose policy is closest to the middle of the spectrum will win. a. True b. False ANSWER: b 298. The median voter theorem tells us that, in a democracy, what counts are the number of voters and not their position per se. a. True b. False ANSWER: a 299. If the theory of the median voter holds, then extremes in political or economic positions cannot be maintained. a. True b. False ANSWER: a 300. As a predictive theory of politics, the median voter theorem is applicable to almost all circumstances in politics. a. True b. False ANSWER: b 301. According to the median voter theorem, the politician with a platform closest to the ideals of the median voter will win an election. a. True b. False ANSWER: a 302. The median voter theorem predicts that the politician who ignores the median voters' wants will be elected. a. True b. False ANSWER: b 303. In general, there is a high positive correlation between per capita income and economic freedom across countries. Copyright Macmillan Learning. Powered by Cognero.
Page 59
Name:
Class:
Date:
Chapter 21 a. True b. False ANSWER: a 304. Democracies usually have lots of economic freedom, but economic freedom is a poor predictor of a country's standard of living. a. True b. False ANSWER: b 305. Public choice theory implies that democracy is a perfect system to serve the social interest. a. True b. False ANSWER: b 306. The association between democracy and wealth occurs because democracy creates a demand for wealth. a. True b. False ANSWER: b 307. Rational public ignorance tends to be voluntary in democracies, but public ignorance tends to be more involuntary in nondemocracies. a. True b. False ANSWER: a 308. When we look around the world, democracies tend to be the wealthiest countries and tend to be the countries with the best record for supporting markets. a. True b. False ANSWER: a 309. When citizens have NOT satisfied their basic needs for food, shelter, and security, they still demand more cerebral goods. a. True b. False ANSWER: b 310. Control of the media does not enable special interest groups to control the government for their own ends. a. True b. False ANSWER: b Copyright Macmillan Learning. Powered by Cognero.
Page 60
Name:
Class:
Date:
Chapter 21 311. According to Nobel Prize–winning economist Amartya Sen, lack of democracy is the main reason for the occurrence of famine throughout world history. a. True b. False ANSWER: a 312. Larger groups tend to favor more inefficient policies. a. True b. False ANSWER: b 313. The greater the share of the population that is brought into political power, the MORE likely it is that policies will favor economic growth. a. True b. False ANSWER: a 314. The free flow of ideas helps both the market and government to function better. a. True b. False ANSWER: a 315. Large special interest groups tend to favor less efficient policies because these groups make up a large fraction of society. a. True b. False ANSWER: b 316. When a larger share of the population has power, it's MORE likely that policies will offer something for virtually everybody. a. True b. False ANSWER: a 317. Many people are concerned about voter apathy. Use economics to explain why there is a lack of interest in voting and politics. ANSWER: Economists say that voters are rationally ignorant about politics because the incentives to be informed are low. Rational ignorance occurs when the benefits of being informed are less than the costs of becoming informed.
318. Why do people tend to be rationally ignorant about presidential candidates? ANSWER: Voters tend to be rationally ignorant about presidential candidates because the incentives to be informed are low. Any single individual's vote is very unlikely to change the outcome of an election.
319. If policies like sugar quotas and tariffs have benefits that are concentrated among few people, why do Copyright Macmillan Learning. Powered by Cognero.
Page 61
Name:
Class:
Date:
Chapter 21 taxpayers who pay for the costs of these policies remain rationally ignorant? ANSWER: Even though consumers as a whole pay more than a billion dollars, the costs are diffused over millions of consumers, costing each consumer very little each year.
320. Is saying that a voter is rationally ignorant the same thing as saying the voter is irrational? ANSWER: No. Rational ignorance occurs when the benefits of being informed are less than the costs of becoming informed. An irrational voter would act counter to the costs and benefits.
321. Explain why economists say that voters are rationally ignorant about politics. ANSWER: Economists say that voters are rationally ignorant about politics because the incentives to be informed are low. 322. Briefly specify the three reasons why ignorance about political matters is important. ANSWER: Ignorance about politics is important because: 1. If voters are not informed or misinformed, then they are likely to make different choices than if they were informed. 2. Voters who are rationally ignorant will often make decisions on the basis of low-equity, unreliable, or potentially biased information. 3. Not everyone is rationally ignorant (such as special interest groups).
323. Explain how politicians can use the concept of rational ignorance to their benefit. ANSWER: Rational ignorance means that special interests can dominate parts of the political process. By concentrating benefits and diffusing costs, politicians can often build political support for themselves even when their policies generate more costs than benefits.
324. If consumers are hurt by quotas and tariffs such as the sugar quota, why do they remain rationally ignorant about these policies? ANSWER: Although sugar consumers are harmed by quotas and tariffs, the cost are diffused over millions of consumers, costing each person very little each year.
325. Why are incentives so important in the decision to remain rationally ignorant about something? ANSWER: Rational ignorance occurs when the benefits of being informed are less than the costs of becoming informed. 326. Suppose you are in the middle of your senior year at school. An election comes up for the new student representatives to the school senate. The candidates are mostly sophomores. If elected, these students will have powerful votes in the senate on matters that affect the student body. Do you have an incentive to be rationally informed? ANSWER: No, you are about to graduate, and so you would not receive any of the benefits of the new student representatives. 327. How are rational ignorance, special interest groups, and economic inefficiency related? ANSWER: While sugar consumers have an incentive to be rationally ignorant, special interest groups have a lot of money at stake, so they have a strong incentive to be rationally informed. Because of these opposing incentives, inefficient policies can result.
328. How do special interests affect tax policy in the United States? ANSWER: The federal tax code is more than 60,000 pages long, and it grows every year as politicians add special interest provisions. Every year Congress inserts many thousands of special spending projects, exemptions, regulations, and tax breaks into major bills.
329. Part of the American Recovery and Reinvestment Act allocated $3.8 million in stimulus funds to build an artwork project in Rochester, New York. Funds were included for building decorative sidewalks, art in the sidewalks, interactive plazas with private art, and other amenities. Was this an efficient use of government Copyright Macmillan Learning. Powered by Cognero.
Page 62
Name:
Class:
Date:
Chapter 21 funds? (Be sure to explain what an efficient use of funds would entail.) Why did more people not oppose funding this project? ANSWER: It may have been an efficient use of government funds. It would be an efficient use of government funds if the benefits outweigh the costs. The costs would have been spread out over so many people, however, that even if costs were, in total, more than benefits, people may not have found it worthwhile to learn about and oppose the project.
330. Explain the formula for political success. Provide an example. ANSWER: Diffuse costs and concentrated benefits: The costs of the sugar quota are diffused over millions of consumers, so no consumer has much of an incentive to oppose the quota. The benefits of the quota are concentrated on a handful of producers. They have strong incentives to support the quota.
331. How are elections correlated to economic business cycles in the United States? ANSWER: Rational ignorance and voter myopia can encourage politicians to boost the economy before an election to increase their chances of reelection. Historically, the incumbent party wins elections when personal disposable income is growing, when the inflation rate in the election year is low, and when the incumbent party has not been in power too many terms in a row.
332. Do "good politics" and "good economics" always coincide? Explain why or why not. ANSWER: No. Rational ignorance means that special interests can dominate the political process. By concentrating benefits and diffusing costs, politicians can often build support for themselves even when their policies generate more costs than benefits. Special interests can also block good policies when costs are concentrated and benefits are diffused.
333. Explain why candidates with extreme views do not tend to get elected. What economic theorem is this MOST closely tied to? ANSWER: The median voter theorem says that when voters vote for the policy that is closest to their ideal point on a line, then the ideal point of the median voter will beat any other policy in a majority rule election.
334. Explain the assumptions behind the median voter theorem. In which cases will the median voter theorem NOT apply? ANSWER: The most important assumption for the median voter theorem is that voters will vote for the policy that is closest to their ideal point. This is not necessarily true. The median voter theorem also assumes that there is just one major dimension over which voting takes place. This is also not necessarily true.
335. Figure: Median Voter 3
Suppose this figure represents defense spending preferences for seven voters and two candidates. Which candidate is more likely to win the election and why? If the losing candidate knows these preferences BEFORE the election, will that candidate be likely to change their public stance on defense spending? How? ANSWER: Candidate A is likely to win. If Candidate B knows these preferences before the election, they would be likely to change their public stance in favor of less defense spending.
336. Explain why political candidates—even those from different parties—seem to have very similar viewpoints on important political issues such as Medicare, Social Security, and education spending. Copyright Macmillan Learning. Powered by Cognero.
Page 63
Name:
Class:
Date:
Chapter 21 ANSWER: This is because of the median voter theorem. The median voter theorem says that when voters vote for the policy that is closest to their ideal point on a line, then the ideal point of the median voter will beat any other policy in a majority rule election.
337. Explain why there may be a bicausal (causation in both directions) relationship between democracy and wealth. ANSWER: In part, there is an association between democracy and the standard of living because greater wealth creates a greater demand for democracy. It is not just that wealth brings democracy. Democracy also seems to bring wealth and favorable institutions.
338. Nobel Prize–winning economist Amartya Sen indicated that hunger is caused by a lack of exchange entitlements. In other words, food may be plentiful but people starve because they are unable to access it. Can you explain how this is possible even if markets are well functioning? ANSWER: Mass starvation can occur not because of a lack of food, but because a poor group of people lack both economic and political power. Lack of political power means that the elites running the country are not compelled to avert a famine. In general, higher political competition is associated with higher levels of public food distribution, especially in election years.
Copyright Macmillan Learning. Powered by Cognero.
Page 64